United States: The Legality and Advantages of Construction Management

Introduction

Historically, governmental entities in Mississippi have followed the traditional procedure of awarding a public construction project to a general contractor who submits the "lowest and best" bid through the public bidding process set forth by Mississippi Code §31-7-1, et seq. Under this process, the public entity solicits bids for a public project, receives and accepts bids from a number of general contractors, and then awards the contract to the general contractor that is the "lowest and best" bidder. The public entity enters into a contract with the general contractor, who then contracts with suppliers and subcontractors of its own choice to complete the project. In recent years however, more and more public entities have decided to hire construction managers instead of using the traditional public bidding process. By doing so, the public entity pays the construction manager a set fee in exchange for the construction manager's expertise in overseeing the work of subcontractors and suppliers. The specific work on the project is performed by subcontractors and suppliers, who are hired through the public bidding process set forth by §31-7-1, et seq. The public entity enters into separate contracts with each subcontractor and supplier.

The use of a construction manager by the public entity is not only legal, but also has several advantages as compared to the traditional method of bidding the project to a general contractor.

The Traditional Process of Soliciting Bids for Public Construction Projects

With very limited exceptions, Mississippi's public procurement law (Miss. Code Ann. §31-7-1, et seq. (1972)) applies to all public construction projects. See Miss. Code Ann. §31-7-13 (1972). Under §31-7-13, any public construction project involving an expenditure in excess of $50,000 must be made from the "lowest and best bidder after advertising for competitive bids once each week for two consecutive weeks...." (This statute also requires contract awards to the lowest and best bidder selected from at least two written bids when the contracts exceed $5,000 but are less than $50,000 in amount and requires all American Recovery and Reinvestment Act projects in excess of $25,000 to be bid). The traditional public procurement method in our state for construction projects has been described as a "design-bid-build" means of project delivery with a design professional retained to prepare plans and specifications that are then published for bids with a contract awarded to the lowest and best bidder, followed by construction.

The Development of Construction Management as a Legal Alternative to Bidding

In the past several years, the concept of construction management and, more recently, the use of a construction manager at risk and the design-build method of project delivery, have become a part of public procurement law in the state. With a construction manager ("CM"), the CM is considered a professional service provider along with the design professional, and the two form a team with the public entity. The CM provides preconstruction and design management services and oversees the work performed under the construction contracts. However, in Mississippi, the CM may not contract to perform any of the construction work itself and all of the construction contracts are bid out by the public entity with the assistance of the CM and awarded pursuant to §31-7-13. The evolution of the CM's role in public procurement in Mississippi has developed by way of formal Mississippi Attorney General Opinions.

As the private sector began utilizing CMs on construction projects, our Attorney General was asked to opine as to whether CMs could be used in public procurement. In a series of opinions, the Attorney General determined that CMs performed only services and could be hired by public entities just as architects and attorneys were hired, without the use of any formal procurement method, if desired, since §31-7-13 applies only to the purchase of commodities and public construction. See Miss. Atty Gen. Ops. Trapp, 2004 WL 308530, No. 2003-0662 (Jan. 30, 2004); Potter, 2003 WL 22536076, No. 2003-0562 (Oct. 17, 2003); and Michael, 2000 WL 530406, No. 2000-0110 (Mar. 10, 2000). In the 2004 Trapp Opinion, the Attorney General, citing the 2003 Potter Opinion, approved a county's hiring of a CM firm without soliciting bids for the CM's hiring. The Opinion went on to add, however, that "of course, the advertising and award of contract requirements of Section 31-7-13, the bonding requirements of Section 31-5-1 et seq. [sic], and all other statutory requirements governing public construction would be applicable to the various construction contracts entered into by the [county] board of supervisors." In terms of payment for the CM's services, the Attorney General approved a contract providing for payments of the CM firm of a fixed fee based on a percentage of the total construction price of the project "so long as it is determined by the board to be reasonable compensation for the management services performed."

In the 2000 Michael Opinion, the Attorney General called the requestor's attention to a statute requiring that construction contracts involving the practice of engineering or architecture be supervised by a registered professional engineer or architect. See Miss. Code Ann. §73-13-45 (1972). In addition, the Opinion expressly provides that in all public construction, "all advertisements for bids must be made by the (public entity/owner) pursuant to the provisions of Section 31-7-13." In a 2000 Opinion addressing the CM role with more specificity, the Attorney General opined that "the construction manager cannot hold trade contracts or contract with the sub-contractors. The (public entity/owner) would have to let bids for the various aspects of the particular contract and would have to follow the public bid laws in doing so. These individual contractors would be required to post bond as required by law...." Finally the Opinion requires that in the CM scenario, all purchases of materials to be used on the project must be made in compliance with Section 31-7-1, et seq. See Miss. Atty Gen. Op. Guice, 2000 WL 192260, No. 1999-0710. This concept was reiterated and explained in a 2006 opinion in which the Attorney General wrote that a construction company owned by the same entity as the CM firm may not bid on any aspect of a public construction project when the CM was involved in approving revisions to the project's specifications. Such a dual role was determined to result in the CM firm's obtaining an unfair advantage over other potential bidders. In addition, the Attorney General wrote that the CM on a public construction project acts as the owner's agent and, therefore, may be considered a "public servant" under our state's ethics in government laws (§25-4-101, et seq.) In such a situation, the Attorney General suggested that such a proposed dual role could be considered a conflict of interest. See Miss. Atty Gen. Op White, 2006 WL 3824176, No. 2006-00496 (Oct. 6, 2006).

In accordance with pertinent opinions, those actually performing the construction services will be required to comply with Miss. Code Ann. §31-5-51, et seq. Under this statutory bond scheme,

See Miss. Code Ann §31-5-51 (1). As such, it is the subcontractors on a project using a CM that are required to furnish bonds to the public entity.

Therefore, through the aforementioned Attorney General's Opinions, construction management has been recognized and accepted as a legal alternative to the design-bid-build process.

Construction Manager at Risk

The construction manager at risk ("CMAR") is a type of construction management in which the construction manager agrees to complete the project at a guaranteed maximum price ("GMP"). A public entity which decides to use a CMAR will know the GMP for the project once the project has been designed and the CMAR has been retained; therefore, the perceived advantage to this method as compared to the use of a regular CM is greater predictability of the project's cost.

In 2007, Mississippi adopted statutes authorizing both the design-build (§31-7-13.1) and CMAR (§31-7-13.2) methods of project delivery for the public entity.¹ With design-build, the law specifies that it may only be used "when the legislature has specifically required or authorized the use of this method in the legislation authorizing a project." In accordance with §31-7-13.2, the public entity must procure the design professional services pursuant to a "qualifications-based" selection process. Prior to substantial completion of design work, the public entity may hire a construction manager at risk. The construction manager at risk must also be retained in accordance with a "qualifications-based" selection process. See Miss. Code Ann. §31-7-13.2 (5). The selection process to be used must either be that contained in §31-7-13.2(10) or in accordance with the competitive sealed proposal procedures of §31-7-13. (Miss. Code Ann. §31-7-13(5)). Finally, in order for the public entity to use the construction manager at risk method of project delivery, a project must involve a minimum construction cost of $25,000,000. See Miss. Code Ann. §31-7-13.2 (7) (a).

With regard to the CMAR law, the Attorney General has issued an opinion that requires that there be separate contracts for design professional services and CMAR services under the statute. It further requires that the public body must advertise for sealed competitive bids for all portions of the construction work, make all bid award decisions and be the contracting party with all successful bidders. See Miss. Atty Gen. Op., Dukes, 2000 WL 5218324, No. 2008-00580 (Nov. 7, 2008). Under both the design-build and CMAR methods of project delivery, the law requires the design-build firm or the CMAR to supply the bonds required by §31-5-51. See Miss. Code Ann. §31-5-52 (1972).

Advantages of the Construction Manager on a Public Project

There are five primary advantages to the use of a construction manager on a public construction project as compared to the public bidding to a general contractor:

• With the use of a CM the public entity will usually receive a better price;

• The public entity will be able to select the CM with the expertise and experience for the specific project at hand (referred to as qualifications-based selection);

• By selecting the CM in the earliest stages of the project, the public entity will benefit from its expertise in design team selection, as well as managing the design process to maintain budgets and schedules; creative input will also be received on value engineering decisions as those relate to the quality of the facility and its long term serviceability;

• The public entity will hire the "lowest and best" subcontractor and supplier for each trade, because there are not different contractors using different subcontractors and suppliers when putting together separate bids; and

• The public entity's employees, who most likely will not have much expertise in construction, do not have to devote as much time themselves to the project with the use of a CM, as the public entity can rely on the experience and expertise of the CM for oversight of the construction work.

As to the economic advantage of a CM, a better price is usually obtained because the public entity can negotiate directly with the CM as opposed to relying on the general contractors that will bid for a project. In other words, the public entity has no control over the companies that will submit bids during the traditional bidding process and the public entity is obligated with certain exceptions to use the lowest bidder.² The process of direct negotiations with the companies being considered to serve as the CM will lead in most cases to a better price for the public entity. The same direct negotiation process will allow the public entity to select a CM with the expertise or experience for the appropriate project—as compared to competitive bidding where there is no guarantee that the company with experience and expertise for the specific project will be the low bidder. This qualifications-based selection process is a major difference between the public bidding to a general contractor and the hiring of a construction manager.

The third primary advantage noted above is one that results from the nature of the bidding process. In the traditional process, different general contractors will have different subcontractors and suppliers as part of their bid. As such, one general contractor may have the more experienced and/or less expensive site work subcontractor, another may have the more experienced and/or less expensive mechanical subcontractor, and so on. In short, the lowest and best bid from subcontractors and suppliers in each trade does not always go to each general contractor. It usually goes to the "favorite" general contractor of the particular subcontractor or supplier. Competitive bidding in essence creates an uneven distribution of subcontractor and supplier pricing. With the use of a CM, the public entity is soliciting bids directly to all subcontractors and suppliers; as such, the lowest and best bid from each trade is actually received by the public entity.

Finally, with the CM looking out for the public entity's interests, the public entity's employees typically have to spend less time overseeing the project. Quite simply, the public entity is relying on the expertise and experience of the CM for management, scheduling, and organization with respect to the project. In most instances, the public entity's employees do not have much, if any, experience in construction. By hiring a CM, the public entity is hiring a company with the experience and expertise for overseeing and managing the specific project at hand. The CM becomes a temporary extension of staff for the public entity; the public entity does not need to hire additional employees to oversee the project.

Conclusion

The hiring of a construction manager by a public entity in Mississippi is a legal and highly desirable alternative to the public bidding process. In most cases, the use of a CM, hired through qualifications-based selection as opposed to a general contractor hired through the public bidding process, will be advantageous to the public entity. A public entity faced with a construction project should strongly consider using a CM as opposed to the traditional bidding process to a general contractor. This approach provides the public entity access, on a temporary basis, to experienced personnel and well defined project management processes to execute its capital project or building program.³

Footnotes

1 Both of these statutes have language stating that they do not affect any procurement by the Mississippi Transportation Commission.

2 While there are situations in which a public entity may use the second lowest bidder due to the lowest bidder not being the "lowest and best" bidder, such a situation will usually result in the public entity being sued by the actual lowest bidder.

3 Program management (PM) is another delivery method that is often discussed and is a variation on the services offered by CM firms. A PM can provide the same set of services as the CM or only a portion of those services as may be requested by the public entity. PM is a way for a public entity to gain the benefit of the services of a CM over multiple projects (e.g. a building "program").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.