Firm Protects Hotel Owner Retaining Construction Manager “Not at Risk” for Renovation Project

Situation

Our client, the owner of a boutique hotel in New York City, intended to renovate all of its guest rooms and certain public spaces of the hotel.  Several years prior, we worked with the client to retain a contractor to complete the renovation of a single floor of the hotel as model rooms. The expectation was that this contractor would thereafter be retained to perform the entire renovation. Unfortunately, the owner was not pleased with the performance of the contractor’s work, which was extensively delayed, and was forced to bid out the project to alternative contractors. 

Zeidel & Associates was asked to help the owner structure a construction agreement for the hotel renovation project with the owner’s selected replacement contractor. 

Approach

The firm prepared an owner protective contract form for the project which addressed numerous issues of importance to the owner. As the hotel would be open and operating during the construction, the project was to be performed in phases on a floor-by-floor basis. And as the model room floor was extensively delayed, protective language regarding the schedule and completion dates were of particular significance to the owner. The owner also included a savings split and an early completion bonus to incentivize the contractor. Unfortunately, despite extensive efforts, the owner was unable to complete the contract with its chosen contractor, who chose to cease negotiations due to the phasing structure. This was very frustrating for the owner.  

After careful consideration of next steps, the owner decided to retain a contractor it had worked with successfully in the past. We suggested different alternative structures for this agreement that would protect the owner. The contractor insisted on a construction manager (CM) not at risk arrangement, whereby the CM refused to guaranty any price or limit on the cost of the work or that the work would be completed within the project schedule. The owner was willing to accept this structure in order to retain this contractor. The firm’s challenge was to protect the owner as much as possible within these parameters. We negotiated that once 85% of the subcontractors had been selected and hired, the CM would provide the owner with its estimate of the cost of the work plus the CM’s fee, which would be subject to the owner’s approval. There were very limited increases allowed to this estimate once approved. Further, as the CM refused to bear direct responsibility for the timeliness of completion of the work, we modified the CM’s form of subcontract in order to strengthen the owner’s ability to hold the subcontractors directly responsible for the schedule. We also strengthened the terms of the subcontract form in favor of the owner with regard to indemnity, insurance, and coordination with the CM agreement. 

Result

Although a CM not at risk contract structure was not this owner’s first choice, we successfully strengthened the owner’s position within this structure. We were able to include creative contract drafting to provide as much protection as possible on cost and delays. The owner was very pleased with the result and that renovations would be finally underway.