Construction Management at Risk Contracts a Risky Move for Cities

If it Walks Like a Duck
Construction Management at Risk Contracts a Risky Move for Cities


By Bob Huber

A growing number of Minnesota cities may be violating the competitive bidding laws by awarding construction management at risk (CM at risk) contracts for new facilities.

With few exceptions, cities and other public owners in Minnesota must publicly bid all construction contracts. On these jobs, owners publicly advertise for bids and general contractors submit bids that incorporate all of the work. The general contractor's bid includes subcontractor and supplier quotes, which are incorporated into the general's bid, and the owner awards to the "lowest responsible bidder" or to the bidder whose bid provides the "best value" to the owner.

Cities and other public owners are also allowed to use multiple prime bids for a job. On a "multi-prime" job, the owner accepts bids from the different trade subcontractors and awards separate contracts to the lowest responsible bidders in each category. The owner holds all the contracts and usually hires a construction manager to manage the job for an hourly rate. These CMs are known as "agency CMs" because they are not at risk of losing money on the job. Public owners can select agency CMs without public bidding.

The legislature recently passed a statute, Minn. Stat. §16C.34, which authorizes the State of Minnesota and its agencies to use another type of construction manager, a CM at risk. A CM at risk advises the owner during the design phase, holds all subcontracts, and agrees to build the project for a Guaranteed Maximum Price, which includes the cost of construction and a fee. Like any other contractor, a CM at risk may lose money on the project. To protect the public from fraud and favoritism, the CM at risk law requires a public request for proposals that lists the selection criteria, the relative weight of the selection criteria, and "procedures for making an award in an open, competitive, and objective manner, and according to the stated criteria." The law also requires the appointment of a three-person selection committee that includes at least one member with construction industry experience.

The CM at risk law does not apply to cities. The statute governing municipal bidding, Minn. Stat. §429.041, requires either low-bid or best-value construction contracting. Despite the absence of express authority, some cities are now using CM at risk contracts. They typically hire a contractor as an agency CM without pubic bidding; publicly bid and award the separate trade contracts; assign all of the trade contracts to the CM; negotiate a fee with the CM; and amend the agency CM contract into a CM at risk contract. Voilà! The agency CM becomes a CM at risk and acts no differently than a general contractor except that the CM does not perform any of the work. By transforming an agency CM to a CM at risk, cities may violate competitive bidding laws by in effect selecting their general contractors without public bidding and without any of the safeguards that apply to the selection of CMs at risk by the State of Minnesota.

Cities that award CM at risk contracts are jeopardizing their projects. If challenged and found to violate the public bidding laws, the contracts could be deemed illegal and void as a matter of law. The CM at risk contractor may forfeit its right to receive any payment and, if Minnesota adopts some of the remedies adopted by courts in other states, the contractor might even be required to disgorge all payments previously received. As far as this author is aware, no municipality has exercised its right to request an attorney general's opinion on the legality of CM at risk contracting.

The time for cities to use CM at risk may be at hand, but, to be fair to everyone, its proponents should lobby for a statute that specifically authorizes CM at risk contracting, provides clear guidance on its use, and imposes safeguards against abuse.