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 25 the contractor was unsuccessful on this claim; however, the airport representative interviewed noted that the airport’s key lesson learned from that claim was that it is imperative that the airport closely supervise and document hazardous mate- rials management activities in order to avoid additional and unmeritorious claims. XII. PROJECT INCENTIVES AND DISINCENTIVES While not intended to be comprehensive, this section ad- dresses key incentive/disincentive provisions that airport owners use during the procurement and construction phases of their projects to encourage contractors to accomplish the owner’s goals (e.g., timely project completion) or otherwise allo- cate risks between the contractor and the owner. In airport proj- ects delivered using various PDMs, disincentives, in the form of liquidated damages, are very common. However, the use of incentives to complete a project under budget or schedule are generally not used in DBB projects. To this point, the AIA 201A- 2017 form of General Conditions of the Construction Contract does not explicitly discuss such clauses. Value engineering clauses are typical incentive-based clauses used in alternative PDM contracts. Under such clauses, the con- tractor is permitted to propose potential modifications to the baseline contract requirements, subject to owner approval and discretion. If approved by the owner, the contractor is entitled to a predetermined share of the cost savings that the parties have determined the change would create. For CMAR projects, another typical incentive-based clause is a clause entitling the owner and CM to share a predetermined percentage of any sav- ings in the event the CM completes the work under the estab- lished GMP. To address schedule risks and related impacts on project users and the surrounding community, owners may use liqui- dated damage provisions that assess deductions—typically daily deductions—for delays in project completion beyond either a date set in the contractor’s bid or a date set by the owner. Such schedule disincentive provisions may or may not be coupled with schedule incentive provisions that encourage schedule ef- ficiency by giving contractors a bonus for early completion of all or a key component of a project (e.g., a specified amount for each day a project is finished ahead of schedule). Although there is no requirement that schedule incentive/ disincentive provisions be coupled together, evidence suggests that courts will be more amenable to uphold a disincentive pro- vision if they are coupled together, because the owner’s willing- ness to pay a bonus indicates that the disincentive is not an ar- bitrary penalty (see discussion below for calculation of damages and general limitations on disincentive provisions). Further- more, an owner’s use of cost-plus-time bidding in conjunction with its incentive/disincentive clause may further increase the enforceability of such a provision. Under cost-plus-time bidding the owner does not set the completion date. Instead, the con- tractor separately bids and justifies the applicable completion date, making it more difficult for the contractor to claim that the plan that is approved by the owner, with the goal of expediting the assessment and potential remediation work. Following ap- proval of a remediation plan, the PPP developer must obtain a minimum of two bids to complete the remediation work de- scribed in the plan and either instruct the low bidder to per- form the work or get the owner’s approval to use the non-low bidder. A. CMAR Case Study Results All the case study projects used the standard clause of haz- ardous materials from AIA 207-2007, General Condition of the Construction Contract. The participants in these projects stated that there was no difference in handling hazardous materials encountered on site for either CMAR or DBB projects. All of the CMAR case study airports followed the standard method of identifying and remediating hazardous materials from con- struction sites. If any hazardous materials were found at the site, the contractors informed the CM, and the CM informed the owner about the existence of these materials. The CM assisted in identifying a laboratory consultant to conduct testing of the materials to determine whether they were harmful to workers’ safety. According to case study participants, the only identified difference between the CMAR projects and typical DBB proj- ects was that on DBB projects the owner had to conduct this work, while for a CMAR project, the CM assisted in perform- ing these services. None of the airports encountered significant hazardous materials during construction. B. Progressive DB Case Study Results The progressive DB project for terminal expansion was located on a former landfill, and that prior usage resulted in a significant amount of hazardous material on the project site, in- cluding burnt ash deposits (from burning garbage). The airport owner had previously spent millions of dollars cleaning up these hazardous materials. The airport disclosed these conditions to the designer–builder, who performed all the further remedia- tion work related to the project. The airport’s process to identify, disclose, and require remediation of hazardous materials for this project was no different from the process it followed for any other project. C. Lump-Sum DB Case Study Results The lump-sum DB case study project involved the re- mediation of a significant amount of hazardous material. In anticipation of this work, the airport established an allowance covering the remediation of any hazardous materials that the designer–builder would encounter, provided that the designer– builder was not responsible for either causing or exacerbating the release. The designer–builder was entitled to justifiable re- mediation costs up to the amount of this allowance, but would be responsible for any costs above that amount. By the end of the project, the airport used the full amount of this allowance. During the course of the case study project, one of the claims submitted by the contractor was for remediation work that was only necessary due to the contractor’s own actions. Ultimately,

Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. 26 ACRP LRD 38 a punishment “has no justification on either economic or other grounds and a term providing such a penalty is unenforceable on grounds of public policy” (Restatement (Second) of Con- tracts § 356(a)). To determine whether a payment adjustment is a “penalty” and therefore unenforceable, courts generally apply a two-factor test. The first factor looks at whether the amount is reasonable in light of either the anticipated or actual loss caused by the breach. The second factor is the level of difficulty of proof of loss; not- ing that if “the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of the anticipated or actual harm” (Id. § 356(a)). In addition to reviewing applicable case law, when developing disincentive provisions, it is recom- mended that airports also review applicable statutes and regula- tions because some jurisdictions have imposed legal restrictions on their use (Loulakis 2013). Though not directly tied to construction, another form of incentive payment that airport owners can use is a stipend paid to unsuccessful proposers. Owners may put conditions on these payments, including a requirement that the unsuccessful pro- poser submit a responsive bid. Another common condition to such payments is a requirement that the unsuccessful proposers agree that the owner has the right to use work product in the unsuccessful proposer’s proposal, including the right to incor- porate ideas from the losing proposer into the winning bidder’s design. This condition arguably helps address potential legal concerns regarding the stipend (also known as a “payment for work product”) possibly constituting a gift of public funds. Such concerns are also addressed by the owner and the short-listed proposer entering into a proposal agreement (stipend agree- ment) that clearly sets forth the terms and considerations asso- ciated with these payments. While stipends usually only cover a fraction of the proposer’s pursuit costs, they nevertheless serve as an incentive for proposers to stay in the procurement. This increased participation can lead to greater competitive tension and better ultimate bid prices for the owner. Los Angeles World Airports used stipends for both its automated people mover and consolidated rent-a-car facility PPP procurements. These were the first stipends that the City of Los Angeles had used in relation to participation in the procurement of a construction contract. The stipends for unsuccessful proposers were set at a maximum of $2 million. Pursuit costs for the unsuccessful pro- posers on these projects were estimated to be multiples of the stipend amount. A. CMAR Case Study Results Two of the three CMAR projects in this case study included incentive-based clauses in their contracts. In one project, the CM firm received a share (30%) of the cost savings if the con- tractor completed the work under the GMP. On another of the CMAR case study projects, the CM firm’s share of any such sav- ings was 50%. The airport owner for this project was satisfied with this level of sharing of savings and said that this provision was effective in encouraging the CM firm to conduct value engi- neering and constructability reviews in order to reduce project completion date associated with the assessment of liquidated damages was unreasonable. Incentive payments, including incentive payments for early completion, can take various forms and be calculated in differ- ent ways (Kessler 2003). For example, provided the airport does not otherwise violate any legal requirements or restrictions, in- stead of simply stipulating a daily bonus amount for early com- pletion as described above, the owner could base the bonus on a percentage of any net revenues generated during the period of early completion. Owners may also base incentive payments on contractors meeting or exceeding predetermined performance criteria, including criteria related to quality, timely delivery of submittals, site safety, and environmental sustainability (Kessler 2003). PPP projects routinely include a greater degree of provi- sions for incentives and disincentives than do typical construc- tion contracts. For example, PPP projects, where the developer takes responsibility for some or all of terminal/airport opera- tions, may include provisions that entitle the developer to a pre- determined portion of revenues generated by airport conces- sions. Under this framework, the developer has an incentive to design, build, operate, and/or maintain the airport in a fashion that would maximize these revenues, which is—at least in theory—in alignment with the owner’s interests. On availability-payment PPP projects, the contract docu- ments include additional incentive and disincentive clauses, including clauses that track the number of “noncompliance points” (points that track the developer’s failure to meet cer- tain contract requirements), which can lead to increased proj- ect oversight at the developer’s cost, as well as contract default. In addition, these contracts set out predetermined deductions from payments otherwise owed to the developer for the devel- oper’s failure to comply with certain contract requirements (e.g., failure of a heating, ventilation, air-conditioning (HVAC) sys- tem to be operational) during the operation and maintenance phase. Additionally, these contracts often provide for a fixed term, which means that if the developer delays completing the project and commencing operations (which also commences the owner’s payment of “availability payments”), the developer is not entitled to any relief for the “availability payments” it misses due to the delay. Similarly, if the developer expedites construc- tion and completes the project early, it may be entitled—within some limitations—to additional availability payments because the project is open and available for use. Ideally, the airport owner uses each of these incentive and disincentive provi- sions as needed to bring the developer’s actions in line with the owner’s goals for the project. Though disincentive clauses that result in specified payment adjustments can take many different forms and have different names, it is arguable that all such provisions can generally be deemed “liquidated damages.” Consequently, airports should consider the legal limitations that case law has set for liquidated- damage provisions. Specifically, because the “central objective behind the system of contract remedies is compensatory, not punitive,” courts generally find that a provision that functions as