Chapter 6
Project management agreements
Summary:
The negotiation of the project management agreement is a crucial hurdle for the project. The agency seeks to acquire key personnel yet maintain overall control of the scope of services. The public entity expects commitments on the quality of work and may provide incentives to achieve on time and on budget performance. The project manager seeks to maintain its independence of business judgment and limit its liability to those aspects of the project that it can reasonably manage and control. Both parties seek to secure adequate insurance coverages, waivers and indemnities to provide for their own protection from major project risks.
§ 6.1 Types of Project Management (PM) Services
The vast majority of public agencies do not have sufficient staff to manage a large and complex construction project. In many cases, an airport, civic center, interceptor roadway or sports arena is a “once in a generation” experience for the community. As such, the modern trend is for the agency to hire an outside Project Manager (PM).
There are a wide variety of ways this can be done, such as:
1. Augmenting Staff - the outside firm supplies temporary personnel.
2. Administrative Support - the outside firm takes over aspects of the project administration such as community outreach, grant compliance, contracts management, and accounting functions.
3. Program Management - the outside firm takes responsibility for the organizational and technical aspects of numerous ongoing projects, reporting to the lead agencies’ top staff and brass.
4. Project Management - the outside firm takes management responsibility for a specific project from inception to completion and litigation support. It will generally manage the outside consultants, design firms and construction companies engaged in the project.
As previously stated, a public owner will often limit the scope of the Project Manager’s services to managing those design and construction contracts and prohibit the Project Manager from engaging in design, engineering or construction activities. This is intended to minimize “scope creep” and keep the Project Manager firmly on the side of the owner with respect to design or construction problems. However, this artificial barrier can become a slippery slope and the Project Manager can often become enmeshed in solving problems on a “hands on” or “Tiger Team” basis.
5. Engineering, Construction Management and Procurement (EPC) - the outside firm takes on the responsibility to design, engineer, manage the construction and procure materials and equipment for the entire project. This is rare in the public sector but common in heavy industry and foreign projects. It is becoming more prevalent in municipal/industrial projects such as co-generation plants, transmission lines, power plants, alternative energy, rail facilities, water and waste treatment plants, data centers and other technically challenging endeavors.
There are two Major Legal Variations in project management engagements:
1. Where the Project Manager acts as the agent of the owner and does not have independent contractual obligation to the various project participants, other than the owner. In such case, the Project Manager is often viewed as a fiduciary of the owner with full disclosure of project costs and activities.
2. Where the Project Manager is acting as an independent contractor (usually under a general contractor’s license) and takes legal responsibility for project subcontracts and deals with the owner on an arms-length basis. The PM will generally report on progress, the basis of billings and schedule, but otherwise act as a profit seeking enterprise with its primary duties to its shareholders.
These agreements also vary in degrees of Risk Sharing:
1. In the Agency Relationship, the Project Manager is expected to carry out the directions of the owner and execute both general policy directives and specific instructions regarding methods of approaching and managing the work. As such, Project Managers in that situation have limited control over the results of the project and seek extremely limited liability exposure to the owner and third parties.
2. In the Independent Contractor relationship, the Project Manager assumes greater control of the project, including subcontractor and vendor management and is often “at risk” to some degree with regard to the project budget and schedule. The Project Manager is generally expected to meet schedule and budget requirements and will suffer a loss of fee or a sharing of losses if the project encounters overruns or delays attributable to the Project Manager. On the other hand, the “at risk” Project Manager expects a substantial profit incentive if those goals are met — and often acts more like a general contractor, including an adversarial component related to negotiation of increases in the project budget or the schedule for performance, often on the same grounds that a general contractor asks for such relief.
§ 6.2 Selection of Project Manager
The selection of the actual individual who will serve as the Project Manager is perhaps the most significant decision in a major project. It is crucial that the Project Manager have substantial experience in the management of projects and a keen understanding of the breadth and scope of issues that will be presented during the course of the job.
While a national project management company may have great depth of “historical experience,” it is really the actual experience of those individuals with their boots on the ground that will make or break a particular project. The most important step in selecting the Project Manager is an in depth interview and verification by satisfied clients.
The Project Manager should have management and technical skills as well as the ability to communicate effectively orally and in writing, both in small groups and before large audiences of project stakeholders.
§ 6.3 Substitution of Key Personnel
It is not unusual for the Project Management Agreement to contain provisions regarding notice of a potential substitution of the Project Manager. In order to prevent “bait and switch” of the project manager candidate, that individual, or project team, should be included as key personnel in the scope of work and either incentives or penalties imposed if the PM does nothing to ensure that replacement personnel are of the same caliber.
Furthermore, the agency will often require the Project Manager to pay for bringing substituted key personnel up to speed on the project — a cost that would not be incurred absent the need for a substitution. However, it is expected that there will be normal attrition on projects and staff personnel are generally not subject to these rules.
§ 6.4 Key Clauses in Project Management Agreements
The legal category of a Project Management Agreement is that of a personal services contract and contains general terms much like those of a design agreement with an architect or engineer (covered in depth in Chapter 7). As such, the Project Management Agreement generally uses the term “Services” with respect to these efforts. (This is in contrast to the use of the term “Work” for the tangible work of the contractor. There is another variation of this terminology, the term “Works,” which generally refers to the physical progress of the building or facility itself.)
The specific terms of the Project Management Agreement will vary depending upon the scope of services provided and the risk sharing agreed upon by the parties. In many cases, they may be simple consulting agreements with a statement of hourly rates and little else. However, where the Project Manager is taking on greater responsibility and risk, the Project Management Agreement may contain clauses and issues typically found in both design agreements and general contractor agreements. In any case, the development of those contracts is both an art and science.
There are key clauses that must be addressed in any Project Management Agreement. The agreed terms will often set the tone and style of the entire project. Specifically, terms may range from where the public agency has absolute and complete control over the project and its daily activities to where the Project Manager has significant attitude to manage the work and deal with the challenges inherent in the construction process.
The following is a brief overview of these issues:
1. Parties - The typical parties are the public agency and the project management entity. The agency must verify that the Project Manager is properly licensed, qualified to business and has local business and related licenses in place. As joint ventures are common in project management arrangements, the joint venture must be further qualified on this basis. Typically, the agency will require signatures from both the joint venture and its individual members.
Many large engineering and construction companies have numerous subsidiaries. In that case, the subsidiary in question may not be particularly well capitalized or insured. As such, the agency may wish to discuss a parent company guarantee so that the full faith and credit of the parent organization are pledged to the faithful completion of the project.
2. Scope of Services - As previously discussed, there is a wide variety of services that may be required under a project management agreement. The scope may be described in terms of personnel (e.g. supply a project manager, schedulers, etc.) or in terms of the ultimate work that is going to be accomplished (e.g. provide project leadership, create and update project schedules, advise the agency of variations in the expected scope, budget and schedule for the project). A good scope of work will include both the staff and procedures for obtaining the project management services.
The scope of work should scrupulously list those services that are excluded or outright prohibited from being performed by the Project Manager (e.g. the Project Manager will not handle press relations, participate in any political fundraising activities or election efforts in support of the project, hire lobbyists or contact board members). An example (abbreviated) scope of project management services is included at the end of this Chapter 6.
3. Compensation - The compensation for most Project Managers is based upon: 1) the hours expended by the employees of the project management firm; 2) reimbursable expenses; and 3) a fixed fee or percentage fee that compensates the Project Manager for its general overhead and profit. In addition, there may be a variety of incentive fees or penalties. As mentioned before, these may include those tied to specific and detailed budgets, schedule compliance, reporting frequency, performance reviews, achievement of specific milestones, obtaining specific permits, or other methods. Generally, any such triggers should be determined by bright line tests where possible.
The overall project cost may be expressed in a Target Budget, containing the general elements of the project, including soft and hard costs. In such a case, there will be budgets for both the project management services (part of the soft costs of the Project) and a budget for the project as a whole (including management, design, testing and other costs), as well as the construction costs (hard costs).
Furthermore, the incentives should be carefully drafted so that the Project Manager’s interests align with and complement, not conflict with those of the agency and its project objectives. The typical project management agreement may also include a “not to exceed” price or services during specific time periods, or an overall cap on the Project Manager’s Fee (typical) or overall compensation for the Project (less common).
4. Terms of Payment - There is a strong desire for project management firms to be paid within 30 days of their invoices being submitted. As a practical matter, this often means they provide services for a period of 45-60 days before being paid. Typically, Project Managers will not be responsible for paying the design firms or contractors. On extremely large projects, a zero balance account may be established. This payment fund allows the PM to obtain draws for payment of payroll and expenses so that the Project Manager does not need to carry the interest or bear payment risk.
5. Changes in Scope of Work - A changes clause is important in defining the scope of the work of the Project Manager. It becomes extremely important where there is a project budget incentive. It is important to provide a mechanism for adjusting the Target Budget to reflect increases and decreases in the scope of the project and third party events beyond the control of the Project Manager. The current scope of work and any adjustment to the Target Budget should be contained in the monthly update sent to the agency during the project.
6. Standard of Care - The standard of care of a Project Manager is established through expert testimony by those familiar with the standards and practices of this discipline. The standard of care is based upon those principles and practices of professional project management firms, the course work of construction management programs, and the professional literature.
Specific duties and responsibilities of Project Managers are reflective of the various roles undertaken by them in the course of the project. The duty to maintain accurate financial and accounting records derives from standards familiar to the accounting profession. The standard of care for design work, if undertaken, is well established as that of a reasonable design firm in the same discipline, performing similar work, in the same locale, at the same time. In certain areas of management, such as data centers, there is likely a national standard of practice. With regard to confidential information, the duty is similar to that of the legal profession or those companies that maintain trade secret information under non-disclosure agreements.
The standard of care may be expressed as the conduct of a reasonable Project Manager, undertaking similar projects, in the general geographic area as the project, during a reasonably similar time period. The standard of care often contains some limitation of the time that claims can be asserted.
7. Guarantees - The Project Manager may limit its guarantees to the standard of care mentioned above, or expand the description of its responsibility for guarantees to those services provided by others, as well as third-party vendors and subcontractors. Generally, a Project Manager will attempt to limit its liability to obtaining the best possible guarantees from those third parties, and acting diligently on the agencies behalf to enforce those guarantees for the good of the project.
8. Confidentiality - Confidentiality is an important aspect of the Project Manager’s responsibilities. This is especially important since many major strategic meetings and decisions during the course of the Project will be with the assistance of the agencies’ legal counsel. Confidentiality in this respect should go beyond the normal Non-Disclosure Agreement (NDA) format, which generally has numerous carveouts for information in the public domain, previously known to the parties, disclosed by third parties not under confidentiality restrictions, and so forth.
The requirement should also be tied to either a written statement inscribed on documents or meeting minute records explicitly stating they are confidential and must remain so. As a general matter, any proceeding in closed session under the Brown Act should be considered confidential by the parties.
On the other hand, the private employee and personnel information regarding the Project Manager and its employees should be kept confidential by the Agency. Such information poses substantial risk of identity theft to the employee and the employer. This should extend to any social security numbers, payroll data, tax, performance reviews, medical and health information kept by the Project Manager or Agency as these are subject to strict privacy requirements under state and federal law.
9. Limitations - A crucial area for the Project Manager is limitations of liability. The Project Manager will seek to limit its liability in several ways regardless of whether the agreement contains financial incentives or not. The principal one is excluding exposure to consequential damages. These damages may be catastrophic and disproportional to the Project Manager’s fee schedule or profit margin on the project. An example would be the monthly use of an airport or sports arena with all their associated revenue. Or a wastewater treatment plant with the potential for unlimited fines and damage to the environment.
Another common limitation is a carefully drafted guarantee that has specific remedies, such as re-performance of professional services at low or no cost to the agency. Similarly, a Project Manager may wish to limit its exposure to specific stated remedies, such as termination, or to an aggregate limit of liability.
In each of these cases, the agency should carefully look at what risks the Project Manager can reasonably anticipate, control, insure or absorb in its general business operations. In general, a risk sharing strategy with specific buckets of categories of project risks will work best for both parties.
10. Indemnity - The Project Manager should indemnify the agency against the bodily injury or death of the Project Manager’s employees on the project. The extent of further indemnification depends on the risk profile of the project and the degree the Project Manager assumes control of design or construction operations.
11. Insurance - The insurance provided by Project Managers is very similar to that of design professionals, as set forth in Section 7.2.
12. Termination and Cancellation Rights - In general, the agency should retain the right to terminate the Project Manager at any time without cause. In such case, a cure period is suggested, as the agency should have the ability to use a warning stick against the Project Manager short of termination. In the case of termination for default, there may be withholding of certain payments by the agency pending the securing of an alternative Project Manager. However, it is not typical for the agency to be able to claim enhanced project costs due to the termination of the Project Manager. Similarly, the agency should have the ability to cancel the project at any time with a relatively modest cancellation fee and demobilization costs for the Project Manager.
13. Project Budget - At times, the Project Manager is “at risk” for Project Budget, while sometimes only to the extent of its fee. In such case, a clause should establish an initial budget and provide for a method of adjusting the budget due to circumstances beyond the reasonable control of the Project Manager.
14. Choice of Law and Venue - The commonly accepted choice is California law (without giving effect to the conflict of laws rules of the state courts) with venue in the county where the project resides.
Practice Pointer: If the PM is an out of state corporation, they may be entitled to go to Federal Court (diversity jurisdiction). However, the California legislature has largely prohibited the use of foreign forum selection where the project and the affected subcontractor resides in California. See: Code of Civil Procedure § 410.42.
15. Disputes - The typical modern clause provides for a meet and confer session with senior personnel, a formal mediation (or partnering) session, then a dispute resolution through Arbitration, Special Master or the civil courts. (These subjects are covered in depth in Chapter 19.)
16. General Provisions - Once again, these provisions are very similar to those of Design Agreements which are covered in detail in Chapter 7.
PROJECT MANAGEMENT AGREEMENTS
EXAMPLE
Exhibit A
SCOPE OF SERVICES (abbreviated)
PROJECT MANAGEMENT
1. Description of Work
Project Manager shall, in accordance with Exhibit “A” provide project management services for and construct the project.
2. Project Manager’s (PM) Responsibilities
Project Manager shall, subject to the terms and provisions of this Agreement: (a) Procure the services of all necessary supervisors, engineers, designers, draftsmen, and other personnel necessary for the preparation of drawings and specifications required for the Work; (b) Procure the services of buyers, inspectors, expediters, and other personnel necessary to procure on behalf of Owner all materials, supplies, and equipment necessary for the completion of the Work; (c) Provide construction management services and furnish the services of supervisors, foremen, skilled and unskilled labor, and other personnel necessary to construct the Work; (d) Procure on behalf of Owner all machinery, equipment, materials, and expendable construction items and supplies necessary for the Work; (e) Prepare and furnish a project schedule and cost estimate; (f ) Obtain the environmental permits and licenses required by the terms of Exhibit “A” to be obtained by Project Manager; (g) Supply the small tools described in Exhibit_ which are required for completion of the Work; (h) Furnish to the owner, to the extent possible, major construction tools and equipment and, where not available, procure on behalf of Owner such third party construction tools and equipment as may be necessary to complete the Work; (i) Provide owner with reports, monthly or at such intervals as are agreed upon, of the progress of each task, sufficient to apprise owner of instance where actual progress is not consistent with scheduled or anticipated progress; and (j) Appoint one or more individuals who shall be authorized to act on behalf of the Project Manager and with whom Owner may consult at all reasonable times, and whose instructions, requests, and decisions will be binding upon Project Manager as to all matters pertaining to this Agreement and the performance of the parties hereunder.
EXAMPLE
Exhibit B
SCOPE OF SERVICE (abbreviated )
AGENCY RESPONSIBILITIES
Agency shall at such times as may be required by Project Manager for the successful and expeditious completion of the Project, perform as follows: (a) Provide a site for the Work, suitable access thereto and an adequate area or areas adjoining such sites for Project Manager’s offices, warehouse, craft change rooms, shop buildings, welding facilities, materials storage, employee parking, and furnish necessary construction utilities to the extent provided in Exhibit “A”; (b) Provide Project Manager with any necessary governmental allocations or priorities and obtain all permits and licenses required to be taken out in the name of Owner which are necessary for the performance of the Work; (c) Obtain any environmental permits and other licenses which are required for the Work, except where such licenses are by the terms of Exhibit “A” the responsibility of Project Manager; (d) Start up the Project and provide all personnel and supplies necessary for start-up operation and maintenance thereof; (e) Pay or obtain exemptions for all property taxes assessed against the Project; and (f ) Appoint an individual who shall be authorized to act on behalf of Agency, with whom Project Manager may consult at all reasonable times, and whose instructions, requests, and decisions will be binding upon Owner as to all matters pertaining to this Agreement and the performance of the parties hereunder.