Apr 15 2013

OPINION: Risk Management Errors Cost Piedmonters

Resident Urges City Council  to Reconsider Risk Management Policies – 

The following is an open letter to the Piedmont City Council.

Re: Risk Management Policies

To the Piedmont City Council:

I urge you to reconsider some of your members’ stated opposition to reviewing the risk management oversights which were made in connection with the City’s consideration of the Moraga Canyon project, as understanding how and why they occurred will help guide your review and consideration of the recently proposed risk management policies.

As a preface, these issues are independent of the political wisdom for or against the Moraga Canyon project. They deal solely with the project risks presented, some of which were similar to the risks which surfaced in the Piedmont Hills Undergrounding project. I will confine my comments to three principal aspects of the project: 1) The contracting arrangement was not legal because Blair Park LLC was not properly licensed; 2) design responsibility and liability was omitted from the agreements; and 3) the bond requested was not required to be posted by the proper party and so would have not protected against the appropriate risks.

First, while creating a new entity – Blair Park LLC – to be the contracting party was apparently done in an attempt to insulate the City from potential construction cost overruns, because Blair Park LLC was agreeing to cause to have the complex constructed, it was required to be a licensed contractor, but was not. It was immaterial that all the actual construction work was to be performed by Webcor, a licensed contractor. Vallejo Development Company v. Beck Development (1994) 24 Cal.App.4th 929, 941 (“The fact that [the developer] subcontracted with licensed contractors to provide the actual labor, equipment and materials to construct the infrastructure improvements is irrelevant. [Business & Professions Code] Section 7026 plainly states that both the person who provides construction services himself and one who does so ‘through others’ qualifies as a ‘contractor’. The California courts also long held that those who enter into construction contracts must be licensed, even when they themselves do not do the actual work under the contract.”) Because Blair Park LLC was the contracting party with the City, it was obligated under California Business & Professions Code Section 7028 to be licensed.

Indeed, under Business & Professions Code Section 7028.7, the City itself could have been issued a citation and fine by the State Contractors License Board Registrar for entering into a contract with an unlicensed contractor. A contract with an unlicensed contractor is considered to be illegal and unenforceable. I brought this issue up with the City staff and the project proponents prior to the Council meeting at which the project was approved.

Second, notwithstanding the fact that Blair Park LLC had design/build responsibilities, because the City’s proposed agreement with Blair Park LLC, and Blair Park LLC’s conditions of contract with Webcor were apparently modeled on the Webcor-Havens School contract model (under which the school district owner provided the design, unlike here where Blair Park LLC was obligated to provide the design), the agreements and conditions for approval and site Lease completely omitted any reference to design liability and professional liability insurance. Public owners are used to providing the design, and being responsible for it, so it is perhaps easy to understand how this important risk factor would get completely overlooked when the City was contemplating the use of a different contract delivery model (i.e., design/build), but it also highlights why a risk management assessment of not just the detailed procedures but also more importantly, the big picture items, is so important.

Lastly, although the contract required Webcor to obtain a performance bond (and there was to be a further requirement to provide unspecified neighboring property damage security regarding potential future damage to houses), the exact risk which was at the center of Piedmont Hills Undergrounding – unforeseen subsurface conditions requiring extra work – was a Blair Park LLC risk, not a contractor risk, and would therefore not be covered under Webcor’s performance bond. Blair Park LLC was responsible for providing the design of the significant retaining walls, which design was necessarily dependent on unknown subsurface conditions.

Webcor was to be responsible for constructing what was depicted in the design and shown on the plans. If the subsurface conditions actually encountered were different than what was shown on the plans, and the design had to be modified and required extra work, those extra work claims – that cost over $2.5 million on the Piedmont Hills Undergrounding project – would not have been covered by Webcor’s performance bond (nor any damage security bond). Blair Park LLC was the only party to have design responsibility, and it was not required to post any performance bond. By analogy, requiring the undergrounding contractor on Piedmont Hills to post a performance bond did not mitigate its $2.5 million in extra work claims. The City had to pay for the extra work to complete the undergrounding because it could not leave the streets with open trenches. So too on Moraga Canyon, if the contractor encountered unknown subsurface conditions requiring extra work in the middle of constructing the retaining walls and re-routing sewers, somebody would be required to pay for the extra work because the work would have had to have been completed for safety reasons. Blair Park LLC was not required to provide any security demonstrating any ability to pay beyond the agreed upon contract construction costs. As occurred on Piedmont Hills, the City, as owner, would have been responsible to cover the extra costs to allow the construction to be completed. However, the City has demonstrated that it cannot even recover from the project proponents its out of pocket consultant costs under the Indemnification Agreement. There was no agreement to cover this real risk. Thus, while the Moraga Canyon project called for a bond, it was the wrong party being required to post the bond, and so the City remained at risk if the project required extra work to deal with unforeseen subsurface conditions. This was a repeat of the same exact risk as on Piedmont Hills.

These risk issues could have and should have been caught and addressed in a risk management analysis. The presently proposed Risk Management Procedures did not, and would not have caught these material oversights. As the old cliché provides, those who cannot remember the past are condemned to repeat it. If these types of risks were not addressed on the Piedmont Hills Undergrounding project, or on the proposed agreements for the Moraga Canyon project, on what basis does the Council think the present City project team, procedures and proposed risk management policies will catch them in the future? A change in paradigm is needed if one wants a different result. Learning from past mistakes is more productive than simply trying to ignore them, and focusing on minutiae to the exclusion of understanding the big picture is bad policy.

Respectfully submitted,

Rob Hendrickson

cc: Piedmont Civic Association

Piedmont Patch

Piedmont Post



Editors Note: The opinions expressed are those of the author and not necessarily those of the Piedmont Civic Association.

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