Legal Issues Related to Large-Scale Airport Construction Projects (2020)

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Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. ACRP LRD 38 21 or, for PPPs, during the operations and maintenance phase. The owner or contractor typically buys insurance or develops other strategies to avoid some or all of the liability associated with these risks. In traditional DBB construction projects, the owner will ask the contractors to have insurance to cover certain identi- fied risks. If all such risks are transferred to the contractor, the contractor’s bid for the project will likely increase sig nificantly. However, if some risks are retained by the owner, the bid amount may be reduced. Considering this relationship, ahead of procuring a project, owners should identify project-related risks and develop a risk management program so that a bal- anced approach to risk allocation can be achieved. It is advisable that the owner coordinate with the proposer teams to confirm what risks can be efficiently shifted in order to mitigate these risks properly. General liability insurance for construction contracts pro- tects against lawsuits that arise out of an accidental occurrence of bodily injury or property damage during construction. This liability insurance has minimum limits for each occurrence and general aggregates with dedicated limits per project. Some of the factors affecting the limits of liability are project cost, type, and complexity; types of services provided and associated risks; chances of third-party claims; and possibility of catastrophic loss. Liability insurance will not cover faulty workmanship on the project, warranties of products, liabilities for architects and engineers, liquidated damage, or breach of contract (i.e., failure to perform) (Muse and Kneisel 2018). To cover all of these lia- bilities, the owner needs to have the contractor furnish builder’s risk insurance, professional liability insurance, environmental liability insurance, and surety bonds. Without having individual insurance programs to cover risks during design and construction, one single insurance program can be used. Various types of insurance programs are used in construction projects to cover design and construc- tion risks. The major insurance programs used currently are owner- controlled insurance programs (OCIPs) and contractor- controlled insurance programs (CCIPs). An OCIP is a single project-driven insurance program covering all the job-site risks of the owner, construction man- ager, contractors, and subcontractors involved in the project. The OCIP generally covers workers’ compensation, employer’s liability, general liability, and excess liability insurance (Gilbert and Wells 2018). Additional coverage includes builder’s risk in- surance, contractor’s pollution liability, and owner’s protective professional indemnity insurance. The OCIP does not cover off- site activities, architects’ or engineers’ liability, suppliers, ven- dors, material haulers, etc. With this type of insurance program, the owner purchases the above-mentioned insurance with high coverage and limits for the construction manager, general con- tractors, and subcontractors. Some of the potential benefits of OCIPs for airports are (a) it is a single consolidated insurance program that avoids admin- istrative costs associated with maintaining separate programs, (b) construction and operation risks are coordinated, and project, such subcontractors would often come to the airport authority’s staff members to complain about the length of time they needed to wait for retention to be released. Such visits put pressure on the airport to release retainage early, so that prime contractors could then release retainage to their subcontractors. However, the owner felt that early release of retainage dimin- ished the effectiveness of the retainage requirements. C. Lump-Sum DB Case Study Results The central utility plant project involved the use of bridging documents that were more extensive and used further along in design development than is typically seen on a lump-sum DB project. Nevertheless, the airport authority paid particular at- tention to training its staff about how to implement a lump-sum DB contract appropriately, including maintaining the appropri- ate level of design review to avoid overreaching and potential change orders. In addition, despite the extensive bridging docu- ments, the owner felt that the lump-sum DB process gave it the flexibility it needed to address unforeseen conditions encoun- tered during construction, without incurring significant in- creased costs and delays. For example, the designer–builder was able to perform a significant redesign of the facility after it dis- covered underground utilities that prevented building the plant as previously planned. Furthermore, this flexibility allowed the designer–builder to manage the design and coordination of 21 project-related equipment rooms located in various locations throughout the airport. The airport owner felt that it would not have been able to coordinate such complicated design and con- struction efforts if had used DBB, and its use of DB ultimately helped it to avoid significant claims related to these equipment rooms. The airport felt that its most significant lesson learned from the lump-sum DB case study was the importance of involving executive management in key design issues and educating them as to which party is legally responsible for design risk on lump- sum DB contracts. Specifically, the airport noted that in contrast to a DBB project, where the executive management can change the design during the design phase with limited effects, except for increases (or decreases) to initial construction costs, similar changes under a lump-sum DB (or PPP) contract, after the proj- ect has commenced, can lead to significant cost and schedule impacts. IX. INSURANCE PROGRAMS Insurance for any project during the design and construc- tion phases is necessary to protect the owner from unnecessary liability stemming from various risks inherent in the project. Before providing insurance, the risks in the project need to be identified and a risk management plan developed to cover them (Muse and Kneisel 2018). Various types of risks include injuries to workers or the general public, physical damage to the proj- ect during and after construction, physical damage to adjacent property, damage to equipment, damage caused by delays, and construction defects, as well as damage caused by hazardous materials discovered or released during the construction phase

Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. 22 ACRP LRD 38 of credit, guarantees, or other forms of security. Airport owners should always consult legal counsel to confirm applicable secu- rity requirements. For DBB projects, the required bonds or other security must be furnished by the construction contractors. In contrast, for CMAR projects, applicable bonds or other security may be ob- tained from the contractors through the CM, and the cost of that security is included in the CM’s cost of the work. For DB projects, this security is furnished by the designer–builder en- tity. Generally, this security must be delivered to the owner at least 10 days before commencing work at the project site, and it should be in effect until 1 year after the project completion date. The information about insurance and bonding in this section is illustrative and not intended to be comprehensive. In addition to insurance requirements, construction con- tracts will generally include an indemnification clause, in which the designer or contractor will be the indemnitor and the owner will act as indemnitee. The indemnitor will be responsible for the indemnitee’s losses within the scope of the indemnity provi- sion. Typically, there are three different forms of indemnifica- tion used by owners, depending on the extent of liability that the owner is shifting to the indemnitor (Muse and Kneisel 2018): limited form, intermediate form, and broad form. In the limited form of indemnification, the indemnitor (de- signer or contractor) will assume liability only if it is the indem- nitor’s fault. The intermediate form is the most common form used by designers and contractors. In this case, the indemnitor will assume all liability arising from contract performance, except when the underlying event is caused by the indemni- tee (owner). The American Institute of Architects (AIA) has a sample of this form in its contract documents. On the other end of the spectrum, a broad indemnification form holds the indemnitee (owner) harmless from all risks, regardless of which party was actually at fault. Under such forms, even if the damage or injury was due to the owner’s negligence, the contractor will cover this loss. Airport owners should always consult with their legal counsel regarding the extent to which the owner can use a more aggressive form of indemnification, because there are often applicable statutes preventing the owner from requiring indemnification for certain owner actions (e.g., no indemnifi- cation for events resulting from the owner’s gross negligence). A. CMAR Case Study Results Participants in the case study projects stated that the insur- ance requirements they used for their CMAR projects were similar to the requirements used for traditional DBB projects. In these case study projects, states, local jurisdictions, and air- ports had minimum liability requirements for insurance pur- poses, which were similar for both CMAR and DBB projects. For the case study projects, the airport owners required indem- nification clauses and liability requirements for the designer in order to protect the airports from unnecessary lawsuits origi- nating from design faults by the architects. They also required contractors to buy workers’ compensation and public liability property damage policies, as well as requiring the contractors to (c) there is potential for more efficient pricing if the OCIP is used on larger capital projects/programs. Some airport projects that have used an OCIP are the Dallas/Fort Worth International Airport; main terminal expansion, airside additions, and reno- vations to the Tampa International Airport; and the Hartsfield- Jackson Atlanta International Airport. In contrast to an OCIP, a CCIP is a single insurance program purchased by the contractor instead of the owner (Gilbert and Wells 2018). In this type of program, the contractor is respon- sible for site risks. Recently, there has been an increase in the use of CCIPs. Many large contractors use this type of insurance because perceived financial loss is included. One potential ben- efit of this insurance is that it can reduce the overall project costs (Gilbert and Wells 2018) because the airport does not have to be involved in any construction-related insurance claims. However, a CCIP may be risky to use for small or medium- sized airport projects. Some potential disadvantages of using a CCIP are that the coverage can be lost if the contractor leaves the site permanently in the middle of the project. In addition, it is hard for airports to determine how much savings they may realize by using a CCIP because any savings are kept by the contractor. The type of insurance program used for a particular project is not dependent on the type of PDM selected by the owner; however, it can depend on the size and complexity of the project. In AIA (2017), General Conditions for the Contract of Con- struction, Exhibit A shows new requirements of insurance and bonds. One of the new provisions requires contactors to procure additional insurance related to professional liability, pollution liability, maritime liability, and manned or unmanned aircraft li- ability if the work involves those activities. Professional liability insurance, which is also known as errors and omission insur- ance, is a type of coverage that protects professional companies against claims resulting from mistakes (errors) by the company or because the company failed to perform some service (omis- sions) (The Hartford 2018). Professional liability insurance forms vary significantly, in part because “there is no standard form as basis for insurers to start with when composing their policies” (Schultz 2018). It is important that architects review their professional services and make sure that all of their pro- fessional functions are included in the definition, because this definition is a critical item in a professional liability policy. According to AIA (2017), General Conditions for the Con- tract Construction, contractors are required to furnish all bonds required by state or local law on public projects. For airport projects, owners generally require contractors to furnish pay- ment and performance bonds covering 100% of the contract amount, but the airport may have flexibility on setting this amount based on applicable statutes and regulations. While performance bonds provide security for airport owners in the event a contractor does not satisfactorily complete a project, a payment bond provides an airport with additional security that the contractor will faithfully pay suppliers and subcontractors (Alfert and Starcher 2016). In lieu of bonding requirements, de- pending on applicable law, airports may be able to utilize letters