Quality Control Best Practices For Commercial And Industrial Capital Improvement Projects

Saturday, May 25, 2013 - 12:04

The Editor interviews Frank T. Araps, a Partner of Norris McLaughlin & Morris, P.A.’s Construction Law Group.

Editor: Please describe your background and your practice area.

Araps: I am a business and construction lawyer with construction and development experience and a B.S., cum laude, in Civil and Environmental Engineering, 1974, from Rutgers University College of Engineering.  I have served as a construction arbitrator and mediator.  I represent businesses and their principals, public and private owners, developers, architect/engineers, contractors, subcontractors, suppliers and surveyors before state and federal courts, federal boards of contract appeals, and the U.S. Court of Federal Claims.  I assist clients in developing and constructing public and private projects; analyze, negotiate and resolve construction claims and disputes; and have litigated and arbitrated hundreds of trial and hearing days recovering and defending multi-million-dollar disputes. I also represent business owners and operators in sales and acquisitions, leases and property management, OSHA, surety, labor, union, employment, and shareholder disputes.  I have written, lectured and presented seminars for the legal, architecture/engineering and construction industries.  I have authored the following construction publications: “Construction Claims and Law,” published by NJ ICLE (2009, 2012), and “Highway Construction Claims – A Comparison of Rights, Remedies and Procedures in New Jersey, New York, Pennsylvania and the Southeastern States,” 12 Public Contract Law Journal 225 (1982).  

Editor: What are some guidelines for handling remedial construction projects in a still-tight money environment? 

Araps:  The owner or its design consultant should accurately estimate the cost of the remedial work and the time to complete it, and should determine whether the owner’s business can sustain the cost to complete.  If the owner does not have the financial capacity to permit all of the remedial work to be performed, critical decisions need be made at the outset as to what repairs can and must be made to permit the owner to occupy the facility or site.  A qualified design consultant – or team of experts if that is what it takes – should be engaged to develop remedial design plans and specifications for local building department review and approval, and a construction progress schedule for abating the defective conditions within the established budget and time parameters.  If the non-conforming or defective conditions requiring remediation were due to defective construction or design and recourse is available from the potentially responsible contractor, material supplier, manufacturer or design consultant, formal notice of the defective conditions in compliance with applicable contract, statutory, common law and industry standards and requirements must be complied with.  Consideration must be given to spoliation of evidence, and potential responsible parties must be given formal notice, access and opportunity to inspect the defective conditions. 

Editor: In large projects, is a comprehensive claims and risk management program recommended at the outset of a project? 

Araps:  All projects, especially large or complex, would benefit from a comprehensive claims and risk management program (“CRMP”) being incorporated into the project delivery documents. The CRMP should identify and manage from the owner’s perspective the type of risks associated with the project, express a philosophy of risk allocation, and include a Risk of Occurrence Analysis.  The CRMP should permit the owner’s professional consultant to define and clearly allocate the risks assigned to each of the three categories of project participants: (1) owner, (2) architect/engineer, and (3) contractor/subcontractor.  The CRMP terms should be written into the design and construction contracts’ general and special conditions such that at the outset the risks associated with the design and construction phases of the project are allocated favorably and fairly from the owner’s perspective. The design and construction contracts, together with the CRMP, should be included in a project manual that contains the plans and specifications and other construction-phase documents that implement the CRMP. The project manual should be included with the owner’s request for proposal that solicits competitive bid proposals from contractors.  This will ensure that contractors submitting bids are aware of and prepared to accept the owner’s design and contract documents and incorporated CRMP. 

Editor: When making capital improvements to existing structures, what measures should be followed for the strict control and oversight of payments to design consultant(s) and contractor(s) and a quality control and assurance program to ensure that work and material comply with plans, specifications, codes and industry standards and procedures?

Araps: The same best practices employed for new construction work should be followed for the remedial project. The owner should have its construction attorney prepare from standard industry project delivery documents the appropriate design and construction contracts that will identify and allocate responsibility and risks to each project participant.  The owner should engage a qualified design consultant to perform construction-phase inspection, testing and oversight of the remediation work to assure quality control and compliance with the remediation plans and specifications.  The capital improvement, repair or replacement of defective work should  be monitored closely to assure that the remedial design concept defined in the plans and specifications prepared by the owner’s remedial design consultant are met and that the completed work is fit and suitable for the owner’s requirements. The objective of diligent oversight and inspection is to insure quality control and essentially that the owner is getting what it is paying for in terms of the material and caliber of the work in place. Diaries and daily reports should be required to be maintained by designated design consultant personnel responsible for construction-phase inspection and by the contractors performing work on-site from inception through the last day of site work.

Editor: How do you suggest to clients that risks in a construction project should be distributed?

Araps: There have traditionally been two alternative philosophies regarding construction contract and project delivery that I ask an owner to consider: risk sharing versus risk shifting.  Depending on the owner’s legal and financial structure, one or the other philosophy is usually recommended.  For example, if an owner has a budget that cannot be exceeded by more than 10 percent, the risk-sharing philosophy may prove to be unacceptable. A risk-shifting philosophy would be more advisable. This would entail the tailoring of the construction documents to reflect that the design consultant and contractor must bear the risk of additional costs associated with deficiencies in design and unanticipated construction-phase conditions causing changes. If the predictable causes for cost escalation are shifted to the other project participants, the owner will improve its position and likelihood of completing the work within its budget and 10 percent contingency.  Factors to consider when advising an owner which contract philosophy to consider require my understanding of the following factors: type, quality and quantity of the work; design and construction schedule and time of completion; and the price and cost budgeted for the design and construction phases.  

Editor: Are lending institutions that you deal with quite adamant about adhering to “best practices” in construction? Are these standards higher than those imposed by regulators?

Araps: For private commercial or industrial applications or for local public contract projects, I would not expect the lending institution to require any special attention to project delivery best practices.  On the contrary, I have not encountered any lending institution that has ever asked for much more than the contract document to be used for the general contractor.  If we are talking about large, complex government-financed projects or projects financed by public or private stock or bond offerings, design and construction documents and best practices would be an issue and factor to satisfy. 

Editor: What are some of the warning signs of a troubled project? What should be done when they first surface?

Araps:  Typical warning signs of a troubled project include the owner learning of the existence or receiving notice of a contractor request for extension of time and/or additional compensation due to any one of a number of factors: as one example, a claim that there are errors or omissions in the construction plans and specifications causing changes in the scope or degree of difficulty of work and disruptions and delays to the work.  When a construction claim is asserted or suspected of  developing, the owner should consider taking preemptive measures with the assistance of its professional consultant or construction attorney to investigate and resolve the claim as  early as possible.  Record keeping by the design consultant and other owner representatives should be audited by the owner’s construction attorney or consultant and expanded to include photos and videos, daily reports and daily diary entries, as warranted.  If there is a claim of negligent design, the owner should consider engaging an independent consultant to ascertain if the claims are potentially attributable in part to the design consultant’s errors or omissions and what the owner need do to preserve the right to assert a claim for indemnification and contribution.  

Editor: What disputes are most speedily and equitably settled by use of ADR?

Araps: I have successfully employed many different types of ADR procedures to settle all types and amounts of construction claims.  One rather novel example that comes to mind was a non-binding one-day mini-trial that resulted in the favorable settlement of a complex claim against the Army Corps of Engineers that was before the Army Board of Contract Appeals.  The non-binding mini-trial proceeding was one of many ADR procedures offered by the Army Corps of Engineers. After participating in hundreds of arbitration and ADR disputes and hearing days, I can say that any dispute can be speedily and efficiently disposed by ADR if all of the involved project participants have an incentive and interest in resolving the dispute quickly and inexpensively. Absent all participants being similarly committed to disposing of a dispute by an expedited ADR proceeding, there is a potential that the cost and time to dispose of a dispute by binding ADR or arbitration can become more protracted and expensive than litigation.  Binding construction arbitration and ADR procedures require the highest level of diligence and care in organizing and managing.

Editor: You were engaged by one of the largest public sewage authorities to consult and coordinate over 125 coordinated water, stormwater and wastewater treatment and utility construction projects with a $2.5 billion budget. New Jersey’s need for infrastructure improvements has been highlighted by Facing Our Future, a group of former New Jersey officials from both parties who see the need for expenditures in New Jersey of $70 billion for critical infrastructure capital improvement projects.  Do you see any prospect that any of their proposed remedial projects relating to electric power, water systems and transportation will be accomplished?

Araps: I am not optimistic that our government will be able to raise the funds necessary to perform the critical infrastructure and capital improvement projects recommended in the April 2013 report  Infrastructure Investments Necessary for Economic Success.  I do see the potential for a joint venture of government and private industry groups working together to create a combination of government incentives and private investment to perform some of the recommended critical infrastructure projects. One of the victims of Superstorm Sandy was the Passaic Valley Sewerage Commission, one of the largest water and wastewater treatment facilities in the country. The Commission is looking to improve and expand its processing capacity to prevent raw and contaminated sewage from flowing into the river and coastal waterways, as it did during the storm. The Commission is working with state government and private industry to design and fund a $100 million project, which will expand the Commission’s sewage treatment capacity and incorporate a self-sufficient electric power generating plant in their facility. Collaborative projects like this are examples of the initiatives our public and private leaders must continue. 

 

Please email the interviewee at ftaraps@nmmlaw.com with questions about this interview.