Coordination of Multi-Prime Contracts

Coordination of Multi-Prime Contracts

November 1, 1999

Introduction

Traditionally, on large construction projects, an owner contracted with a general contractor for the construction of the entire project. The owner had a single contract with the general contractor. As a result, the owner depended entirely on the general contractor for the project’s success.

Rather than employ a general contractor to assume responsibility for an entire construction project, an owner might choose to divide the work by contracting directly with several contractors. This practice is commonly referred to as multi-prime contracting (a/k/a multiple prime, separate prime, and parallel prime).

Advocates of multi-prime contracting contend that this method of project delivery promotes increased competition and participation among contractors, and results in lower costs on bid day. Opponents, however, suggest that multi-prime bidding inherently leads to management or coordination failures. Accordingly, owners often seek a construction methodology that will achieve the cost-savings of multi-prime contracting while simultaneously reaping the benefits of increased coordination and accountability.

The Duty to Coordinate: Multi-Prime Projects

Although providing owners with the opportunity to reduce project time and expense, as well as increase control, multi-prime contracting also presents a number of new risks and responsibilities. To date, coordination of prime contractors remains the most significant challenge to multi-prime contracting. The coordination difficulties accompanying construction projects have not gone unnoticed by the judiciary. Nearly twenty years ago, in Blake Construction, Inc. v. C.J. Coakley Co., Inc., the court stated that:

[e]xcept in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project. . . .

Most owners lack the expertise or resources necessary to successfully embrace the incredible coordination responsibilities involved with large construction projects. Nonetheless, it is generally accepted that the duty to coordinate the prime contractors rests with the owner in multi-prime construction projects. Accordingly, knowing they can be held accountable for damages created by any number of coordination problems, owners often look to limit, share, shift, or altogether avoid their duty to coordinate.

Some owners will require one or more design professionals (e.g., project architect) to supervise and coordinate the prime contractors through the designer’s contractual duty to administer the contract. More recently, with the growing popularity of construction management, owners have employed a professional construction management entity (“CM”) to provide project management expertise. A CM can provide project coordination and supervision for the owner under either an “at risk” or “not at risk” model. Under the “at risk” model, the CM (as an independent contractor) selects and contracts with the prime contractors. The “at risk” CM guarantees the full performance of the contract to the owner, as well as payments to the prime contractors. Conversely, when “not at risk,” there is neither a contractual relationship between the CM and any of the prime contractors — nor prime contractor performance guarantees inuring to the benefit of the owner.

A less popular option for owners is to shift certain coordination responsibilities to one or more of the project’s prime contractors through the express language of the parties’ contract. Courts, however, have been suspect of such coordination shifting contractual provisions.

For example, in Shea – S & M Ball v. Massman-Kiewit-Early, the court considered whether a contractual provision had shifted an owner’s coordination responsibilities to the project’s prime contractors. Initially, the court acknowledged that the contracts between the owner and each prime contractor required all of the primes to cooperate with each other throughout the project. Nonetheless, the court ultimately determined that the owner retained a contractual duty to compel such cooperation when required.

The Shea – S & M Ball decision highlights the practical flaw which accompanies an owner’s attempt to shift all coordination responsibilities to its prime contractors. How does one prime contractor force another prime contractor to act in the absence of a contractual relationship between them? Suppose a mechanical prime contractor’s ongoing delays begin to adversely impact the work schedule of the project’s electrical prime contractor. The electrical contractor has no mechanism to force the mechanical contractor to accelerate or otherwise perform. The electrical contractor cannot threaten to withhold payment or terminate the mechanical contractor’s contract. Without the power of the purse, the electrical contractor has no leverage to compel project coordination. As indicated, the court in Shea – S & M Ball resolved this dilemma by ruling that the owner had a continuing obligation to flex its contractual muscle to compel contractor cooperation.

Measuring and Recovering the Costs of Coordination Failures

Failure to properly coordinate a construction project can severely impact the contractor. Coordination failures often require contractors to re-sequence work — leading to a marked decrease in labor productivity. As a result of the decreased labor productivity, the contractor often falls behind schedule — requiring a costly period of work acceleration. Damages attributable to both of these measurable impacts can be recovered from the owner.

 

Re-sequencing Work = Labor Inefficiency

Coordination problems can infect an entire project. Typically, coordination problems which adversely impact the project contractor may hinder the architect or engineer as well. For example, lagging design changes in a limited area can quickly escalate into large scale project alterations if the initial changes are not properly coordinated. Equipment and materials to be furnished by other contractors often arrive early, later, or in error. Such problems are often traced to the contractor’s failure to receive accurate design and/or scheduling information. Regardless of the type or nature of the construction coordination problem, the end result is always the same: idle and unproductive workers.

Even on a small construction project, it is inevitable that the project design will include inconsistencies. Typically, contractors resolve these inconsistencies by submitting requests for clarification to the project designers. A large number of inconsistencies and/or a slow response from the design team all but guarantees labor inefficiencies for the contractor.

Consider the following example. A project consists of work in two distinct areas. The initial construction schedule contemplates that the contractor’s work will be commenced and completed in the first area prior to any work in area two. This sequence, which minimizes mobilization and demobilization time, is an efficient use of labor. Suppose that halfway through area one, in the course of placing a fixture, the foreman of the contractor’s work crew identifies a conflict in the project’s design specifications. Further assume that work cannot proceed in the first area until the conflict is resolved.

If the project had been properly coordinated, the foreman would have both identified the conflict and obtained clarification from the project designers long before the arrival of the work crew. Conversely, if the design conflict is first discovered at the project site, the foreman is left with two undesirable options. First, the foreman and the work crew can sit idly by until the design team resolves the conflict. Second, the foreman can demobilize the work crew and move it to area two of the project (and re-mobilize upon arrival). Of course, the latter option will ultimately require the work crew to return to the first area once the design conflict is resolved. As illustrated by this simplistic example, even seemingly minor coordination problems can result in significant expense for the contractor.

 

Re-sequencing Work = Lost $$$$

As indicated, the re-sequencing of work impedes a contractor’s efficient use of labor. When bidding a job, the contractor fairly assumes that it will be able to perform its work at a reasonable progression within the parameters of the contract. For example, when an electrical contractor bids a job, it can assume that walls/ceilings will be sufficiently completed as to allow for the installation of fixtures when it arrives at the project site. If preliminary construction is incomplete, the electrical contractor simply cannot perform its work. Electrical work crews become idle. Time is also expended reassigning work crews to other areas or projects. Additional time is expended mobilizing and demobilizing crews.

Fortunately, it is possible to both capture and measure the sum impact of such re-sequencing and idle time on labor productivity. Typically, a contractor will rely on an expert in the field of construction labor productivity to quantify losses based on the project record (e.g., time cards, schedules, weather, quality of labor). The expert is ultimately able to calculate the contractor’s “baseline,” or standard, productivity rate (e.g., 1.0 hours of labor to install ten (10) feet of 1” electrical conduit). The expert subsequently compares the baseline productivity rate with the productivity rate achieved by contractor when impacted by re-sequencing and idle time. For example, a final comparison might appear as follows:
Expected
Expected Hours     Units of Production
100                 500 ft. 1” electrical conduit

 

Actual Units
Actual Hours          of Production

100                250 ft. 1” electrical conduit

 

In this oversimplified illustration, the expert has determined that re-sequencing and idle time cut the contractor’s labor productivity rate in half. Of course, a labor productivity expert’s calculations will always need to account for overtime, change orders, weather, learning curves, project characteristics affecting labor, and project management. By eliminating all project impacts unrelated to re-sequencing and idle time from the bottom line, the expert is able to fully and accurately identify the extent of the owner’s financial responsibility.

 

Acceleration

Labor inefficiency problems are further compounded if the project’s completion date is “carved in stone.” For each hour lost due to a lack of coordination, an hour must be recovered somewhere during the period of construction. Typically, the contractor has already scheduled its available crews for full-time work. Consequently, acceleration often requires the contractor to either pay overtime or hire additional help.

The acceleration of work will also lead to other substantial, but more inconspicuous, costs for the contractor. An accelerated, or compressed, project schedule forces the contractor to complete the same amount of work in a shorter period of time. As a result, the work of project contractors begins to overlap. This condition, called “trade stacking,” can dramatically affect labor productivity. In such circumstances, crews sit idle awaiting the completion of work which must precede their own. Further, necessary work space is limited by extra bodies, equipment, and materials. Stacking of trades becomes both a productivity and safety concern for the contractor.

Loss of worker productivity due to prolonged overtime is another unavoidable side-effect of acceleration. A job which one person can complete in two weeks at fifty hours per week cannot necessarily be performed in one week if the same person works one hundred hours. Labor performance and efficiency rates typically drop during periods of prolonged overtime. In fact, a study conducted by the Business Roundtable Construction Industry Cost Effectiveness Task Force revealed that a construction worker working fifty (50) hours per week for ten weeks is only 75% as productive per hour as a worker working forty (40) hours per week. The study also determined that if a construction worker works seventy (70) hours per week for ten weeks, the worker’s productivity rate shrinks to 50%. The obvious, but seemingly illogical, conclusion is that the worker performing forty (40) hours of work per week is actually more productive than the worker performing seventy (70) hours of work per week. In other words, the accelerating contractor relying on prolonged overtime may actually be paying its workers more money to produce less work.

 

Conclusion

When involved in a multi-prime contract plagued with coordination problems, the contractor should review its contract to ascertain its coordination responsibilities thereunder. If the contract contains language shifting coordination responsibilities from the owner to the contractor, the contractor must work with its fellow prime contractors to improve project coordination. If such efforts prove futile, the contractor can demand that the owner act on its contractual duty to compel the cooperation of the other prime contractors. Should the owner refuse to demand such cooperation, the contractor may possess a valid claim against the owner for any increased costs relating to labor inefficiencies and acceleration.

 

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

Fabyanske Westra Hart & Thomson
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