Throughout my procurement career I have encountered a number of Clients with differing points of view. Their perspectives vary from the just-get-it-done guy who is more interested in a one-throat-to-choke approach to the hands-on every-decision-needs-to-flow-through-me guy that wants to multi-prime each project.
It can be difficult to balance all of these varying preferences, but I have done my best to suit them all.
Recently, a discussion on the pros and cons of multi-prime contracts led me to do some specific research on the risks and legal implications of an Owner acting as General Contractor.
Of course, when this discussion came up I was already armed with a perspective on the general risks an Owner must be willing to accept to take on the GC role, but admittedly I was not prepared with specifics examples of these risks.
After a bit of research, I was surprised to find a number of specific cases which further reinforce arguments against acting as GC. Today, I want to share the general guidance I have often provided against an Owner acting as GC and also convey some of the notable additional reasons why this may not be the right approach for you.
General Guidance
In general, when Owners expressed interest in acting as GC, I have shared with them, that if they take on the role of General Contractor, they are also taking on the responsibilities and the risks of the GC. In general this means being ultimately responsible for the project’s scope, schedule, and budget. This responsibility includes performing a series of specific tasks.
Here are a few of the specific tasks that are typically in the scope of a GC that would need to be performed by an Owner attempting to act as GC:
Sourcing
General Contractors earn their fees by sourcing and contracting all of the various trades that must come together to complete a project. This is not a small feat and often imparts many additional man-hours of effort onto the Owner as he proceeds to identify, qualify, and contract with several trades.
Coordination
A big part of the responsibility of a General Contractor is to coordinate the work of all of the trades. This means scheduling trades to be on site at just the right moment. Painters can’t begin painting until the spackling crew is done spackling, plumbers cant install sinks until the cabinet maker sets his cabinets, carpenters can’t close up walls until the plumbers and electricians are done installing their pipes and cable, etc. Of course each of these require their own inspections and approvals from local inspectors and those inspections needs to be coordinated with the work. It take a great amount of skill and practice to coordinate these activities seamlessly.
Material and Equipment Expediting
Coordinating trades can be challenging enough without also needing to coordinate the fabrication and delivery of special equipment. Complex commercial projects often include the installation of equipment. One of the added responsibilities of the GC is to expedite equipment to coincide with the coordination of other trades. For larger projects, this could be a responsibility handled by an entirely separate team of people. Without a GC, this responsibility falls on the Owner.
Insurance
Construction projects are fraught with risks. To protect against these risks, both Owners and Contractors should have a set of specific insurances to protect themselves and the property. When an Owner acts as the GC, the burden of carrying these insurances falls entirely on the Owner.
Builder’s Risk Insurance to protect from damage to new work during construction is still required even if you are an Owner acting as a builder. Additionally, if you plan to act as GC, you must also carry General Commercial Liability insurance. These policies are in addition to the policies you carry as an Owner, such as general property insurance, liability insurance for your primary business, and flood insurance if you are in a flood zone. On top of all of these insurances, my research uncovered another form of insurance that you would need. More on that later.
Failing to perform any of these duties or not carrying these additional insurances could elevate your risks, delay your project, and increase your costs. In addition, if you are unskilled in these tasks, the added frustration and potential for cost and schedule over-runs are simply too high.
Beyond this general guidance, my research has turned up a number of other issues that may be even more impactful than the ones I’ve already shared.
State Laws
One of the facts that I learned in my research is that certain states specifically legislate who can act as a General Contractor. At first glance, this did not seem to be a surprise. I was well-aware that certain states required GC’s to be licensed, but I was surprised to find that these same states also limit an Owner’s right to act as GC.
Regulations vary widely, but some of the restrictions I saw say an Owner may act as GC ONLY if they are doing so on their primary residence and plan to keep the property as their primary residence for 12 months or more.
Other restrictions limit the value of the work to no more than $25,000.
These regulations are in place to protect the public from shoddy work performed by unlicensed individuals or unskilled house flippers, but they have impacted even professionals acting as Construction Managers.
In the state of California the case Fifth Day LLC Vs Bolotin, the plaintiff, Fifth Day, was hired by the defendant, Industrial Real Estate Development Company (a company owned by James P Bolotin), to perform “industrial real estate development and construction project management services”.
Fifth Day performed the services, but Bolotin’s Company never paid them, so they sued for compensation.
The Courts ruled that in performing the services Fifth Day met the standard of a General Contractor but they were not licensed to perform the service. The Court ruled in favor of Bolotin stating that Fifth Day did not have basis for bringing the suit because it failed to meet licensing standards.
The state of California defines contractor under 7026.1 as such:
The facts of the case reveal that Fifth Day was in fact in a partnership with Bolotin. As part of the partnership, Fifth Day performed construction management in a plan to develop several parcels of land. Fifth Day appealed on the basis that it did not meet the standard of a GC because it was a partner of Owner and was merely acting as the Owner. The appellate court’s decision was not unanimous. The court overturned the initial ruling, but did so with dissenting opinions.
California Law provide exceptions to 7026.1 as follows:
For purposes of this paragraph, a consultant is a person, other than a public agency or an owner of privately owned real property to be improved
and
The term “contractor” or “consultant” does not include a common interest development manager, as defined in Section 11501, and a common interest development manager is not required to have a contractor’s license when performing management services,
“Common interest development manager” means an individual who for compensation, or in expectation of compensation, provides or contracts to provide management or financial services, or represents himself or herself to act in the capacity of providing management or financial services to an association.
This case was heard in 2009 and since then it has opened up many issues for firms performing Construction Management services and for property Owner’s acting as their own GC. The dissenting opinion leaves room for further interpretation and opens up the possibility that future cases may find that individual property owners (and their agents) may have little or no basis for claims if they fail to be licensed under the law.
Another good article on this is a piece written by Gordon Rees Scully Mansukhani in Lexology in June 2014. Mansukhani writes, “With the increased demand for CMs on public and private projects alike, the gap is quickly closing on “things a CM can do without a license.”
Of course every case differs and I am not a lawyer, so my best advice here is to seek legal advice if you live in a state that regulates General Contractors and you plan to act as your own GC.
My research turned up similar laws in California, New Jersey, and Florida, but I am sure there are many others.
Statute of Repose
Another item that is regulated by the law is the requirement for GC’s to carry specific forms of insurance. Not only does the law require specific insurances it also requires that the insurance be in place for a certain amount of time after the work has been completed.
This is called the statute of repose and could be as long as 10 years. Once again, laws vary by state, but if your state has a Statute of Repose for 10 years, it means that if you act as a GC on any project, you are required to carry general liability insurance for the full 10 years.
The cost of General Liability Insurance for a GC has been quoted by one online source as being as high as $10,000. This means that you could be required to pay $100,000 ($10,000 x 10 years) in insurance costs alone.
Workers Compensation Insurance
As I have written in previous articles, job-site safety is always strictly in the purview of the GC. When the Owner acts as GC, they become responsible for safety. This also includes insurance requirements for Worker Compensation Insurance.
This type of insurance is required by law and without it, you take on huge civil liability risks. Avoiding this insurance is not as simple as requiring that your subs carry their own insurance. If a sub happens to be underinsured your policy is expected to pick up that liability. Recognizing when a sub is underinsured is not as simple as looking at the value of the policy, the policy needs to cover all workers including those not specifically mentioned in the policy. Keeping track of this can be quite onerous and time consuming and requires quite a bit of experience.
Closing
With so many pitfalls and potential risks, Owner’s should not take the decision to act as their own GC lightly. In fact, I will be advising my Clients to seek legal advice before they proceed and so should you.
Insurance requirements alone are enough of a concern. Consult your insurance provider before you take this on and be sure that you have the proper protections before you begin.
What about you? Have you acted as your own GC? What insurances did you have in place? How much did you save? Tell me your stories.
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