THE OWNER’S DUTIES IN CONSTRUCTION

The owner's failure to understand and perform his duties can seriously affect a project.

Two years ago, a 26-story condominium was completed in South Florida. At the initial contract signing, the owner stated that the next time he wanted to see the contractor was when he received the keys to the building. The project was completed six months late. The contractor then filed a claim for an extension of time and the associated general conditions costs. The claim was based on the owner's failure to perform his duties as stated in the contract, often causing project delays. In fact, the owner had not appointed an authorized representative to oversee the project and had reserved all authority for project decisions to himself. To make matters worse, the owner would sometimes leave the country for 6 weeks at a time.

Upon receipt of the contractor's claim, the owner filed a counter claim for $1 million in liquidated damages. A distinguished panel of three arbitrators decided the matter. They not only denied the owner's claim, but they awarded the contractor 6 months of general conditions and home office overhead, cost of acceleration, interest, and lost profits totaling almost $2 million - all directly resulting from the owner's failure to perform his duties during construction.

A favorite analogy that is often used to describe the parties involved in a construction project is a "ladder." The two legs represent the owner and the contractor. Using this analogy, it is easy to visualize what happens when one of the legs fails to support its share of the weight on the ladder. It can be embarrassing and painful.

Our society has created institutions to educate, certify, license, and regulate contractors. However, no license or certification is required to be an owner. For this reason, the owner's leg of the ladder is the one to be the most concerned about. The owner is responsible, by law, for certain duties to the contractor and the public. To the designer, the owner must furnish the background information and services needed for the designer's work and must reasonably compensate the designer. To the contractor, the owner must provide sufficient information and services in a continuous and timely manner, to enable the contractor to perform according to the construction contract. To the public, the owner must provide a building that is safe for its intended use, while complying with codes and zoning laws.

The following is a summary of the many tasks that must be performed by the owner during the successful development of any building project.

PRE-DESIGN PHASE

• Development of the program - This is the project's cornerstone. The owner must clearly state the project objectives, develop a master schedule, and prepare a budget. Many things must be considered including space requirements, adjacency of functions, expendability, constraints, and equipment.

• Selection of the site - A favorite saying in real estate is "location, location, location". There are other considerations in selecting a site such as constructability, zoning, access, environmental contamination and of course, cost.

• Site analysis - It is the owner's responsibility to have the property surveyed to identify set backs, easements, boundaries, and elevations. In addition the owner must have the site tested and certified for contaminates. Geotechnical borings are required to determine the structural and drainage capabilities of the soil.

• Selection of consultants - The owner needs not only a design/build general contractor, but also consultants for accounting, legal and insurance requirements for the project. Engineers are usually selected by, and work for, the designer. Once these consultants are selected, the owner must negotiate contracts with each of them.

• Appointment of an owner's representative for the project – Although the designer typically has broad authority during the project, the owner must appoint someone as his general agent to represent him in all matters relative to the project, including oversight of the designer.

DESIGN PHASE

• Design approval - As the designer proceeds with the plans and specifications for the project, the owner must review and approve them at different stages of completion. At least four formal approvals are typical.

• Budget approval - With the last formal review of the plans and specifications, the owner needs to have a professional cost estimate prepared to ascertain whether the proposed design will be within the original budget.

• Development of an FF&E plan - For the building to be functional it will have to have furniture, fixtures, and equipment. This includes desks, chairs, artwork, process equipment, and computers. An FF&E plan must include selection, space coordination, pricing, procurement, storage, and installation.

• Making decisions on design options - The designer will provide design options to the owner for final determination. This includes selecting colors and textures, as well as making tough value engineering decisions.

• Creation of a project communications system - Many individuals are involved in every project. Timely communications among the parties are necessary for a successful project.

• Development of a project financing and insurance program - The owner must be able to pay for the work and make sure the proper insurance coverage’s are in place before construction begins.

• Establishment of allowances - For items of work that are not clearly defined at the start of the work, the owner must establish cost allowances to be included in the construction contract.

CONSTRUCTION PHASE

• Execution of the construction contract - Before work can begin, the contract with the contractor must be executed. In addition, the contractor should provide his bonds and evidence of insurance before mobilizing on the site. (If required)

• Approval of the construction schedule - The contractor should provide a comprehensive construction schedule soon after execution of the contract. It is the owner's responsibility to not only review and approve the schedule, but also to monitor the schedule during construction and to require periodic updates from the contractor.

• Reconciliation of allowances - In order not to impede the progress of the work, the owner must finalize the scope of the work for each cost allowance and provide a change order to the contractor reconciling each allowance as quickly as possible.

• Inspection and testing of the work - The designer and contractor have limited responsibility to inspect and approve the work as its being completed. It is the owner's responsibility to continuously and comprehensively inspect the work to insure compliance with the contract documents.

• Project safety - The owner is responsible to insure that the contractor has a safety plan in place at the site.

• Approval of changes - Designers do not warrant that their plans will be perfect. Conflicts in the plans may arise which will require change orders to the construction contract. It is the owner's responsibility to provide these change orders and to fund the cost of the changes. In addition, the owner's program may change during the construction, which may affect the design. Prompt preparation and execution of change orders is necessary to keep the project on schedule.

• Approval of colors and products - The contractor will ask the owner to make final decisions on colors, materials, and other design matters. Approval of these colors is very crucial to the outcome of the scheduled end date.

• Monitoring subcontractors' and suppliers' payments – In order to protect himself and to protect his rights under the contractor's bonds, the owner must have a program that enables him to insure that all subcontractors and suppliers are being paid in a timely manner by the contractor. (Lien waivers)

• Resolution of disputes - Differences of opinion will occur from time to time on every project. It is the owner's responsibility, and to his benefit, to resolve them quickly.

• Adjustment and administration of property insurance claims - In the event that the project suffers a casualty loss covered by property insurance, sometimes referred to as "builder's risk insurance", then it is the owner's responsibility to promptly administer the adjustment of the claim on behalf of all the covered parties.

• Procurement and installation of FF&E - As stated above, this function must be administered in a timely manner by the owner, if the final product is to be functional.

• Development of an operations and maintenance staff - Upon substantial completion of the project, the contractor will turn over to the owner the responsibility for operating and maintaining the facility. The owner needs to have a staff in place prior to this event.

• Coordination of separate contractors - Sometimes the owner decides to have more than one prime contractor involved in the project. Specialty contractors are a good example, such as kitchen equipment contractors or data processing contractors. It is the owner's responsibility - not the contractor's - to coordinate the various prime contractors on the site. If these contractors are part of main contract the general contractor will coordinate these contractors.

• Conduct project meetings - A system of periodic management meetings needs to be established at both the staff and executive levels. Agendas and minutes need to be prepared by the owner for these meetings, if they are to have value.

• Acceptance of the work. Once the work is completed, only the owner has the authority to accept it from the contractor.

• Establishment of a warranty program. Since the owner is the beneficiary of the construction and manufacturers' warranties, the owner must set up a program to manage and administer these warranties.

POST CONSTRUCTION PHASE

• Creation of "as built' records - The availability of a complete "as built" set of plans will be invaluable in the future for remodeling, additions, and repairs. They are also beneficial if the building is sold to another owner.

• Administration of the warranty program - Someone needs to oversee the warranty program after the building is finished.

• Determination that everyone was paid - In order to keep the property free of liens after completion of the construction phase, the owner must insure himself that the contractor has been paid in full and has provided final lien releases.

• Facility operations and maintenance - In order to protect the investment made in the building, the owner must have a comprehensive operations and maintenance program.

It is plain from the above list that the owner has a significant number of varied responsibilities in the development of a building construction program. He cannot simply hire a designer and a contractor and walk away expecting them to take care of the project on their own. The owner's failure to discharge his construction responsibilities can have major consequences.

In conclusion, the performance of the owner during a construction project has as much affect on the success of the project as the performance of the designer and contractor. Unfortunately, many owners do not understand their responsibilities and suffer the ultimate consequences. Owners who properly address their construction duties will enjoy the benefits of a successful project upon completion.

This article was copied from Southeast Real Estate Business

The article was written by John A. Jones, P. E.

John A. Jones is President and CEO of Dart Engineering, LLC.