Wednesday, September 03, 2014

Skanska, Forest City, file dueling lawsuits over modular delay, $50M (?) cost overrun; history of disputes revealed (updated)

Updated 9 pm after seeing Skanska lawsuit.

Yesterday morning, following a last-ditch meeting, Skanska USA Building and Forest City Ratner (in the guise of Atlantic Yards B2 Owner) filed dueling lawsuits, blaming each other for the delays that stopped work last week at the planned B2 tower, touted as the world's tallest modular building, and delayed it from an 18-month schedule to one that may take twice as long.

At least $50 million in damages from cost overruns is at stake (a 40% increase in construction cost), as well as the future of Forest City's ambitious modular project, which, when resurrected, may have to involve a new partner. B2 stands at ten of 32 floors.

Essentially, Forest City says it "cracked the code" to build modular towers, and blames Skanska for being unable to effectively run the modular factory--co-owned by the two companies--to implement the plans. Skanska says Forest City's plans were defective, and seeks more than $50 million in damages.

What is clear for now is that, despite Forest City's typically effective effort to promote modular--remember those articles last year in publications like Gizmodo and FastCo.Exist?--the project was way behind from the start. And it sounds like the partners are burning bridges.

According to Forest City's lawsuit:
From the start, Skanska mismanaged the Project through gross incompetence, causing it to be riddled with delays and cost overruns. Skanska has stumbled through every step of the Project, and has repeatedly and routinely failed to meet any self- imposed or contractual deadlines, goals, or targets.... when Skanska and its subcontractors proved incapable of producing or assembling the modules in accordance with the pre-agreed schedule and cost, Skanska belatedly – and falsely – claimed the modular design was defective and required modification.
Co-Chief Operating Officer for Skanska USA Building Richard Kennedy, by contrast, said:
The work at the B2 Project is currently stopped because Forest City Ratner has steadfastly refused over many months to engage in an honest dialogue about the serious commercial and design issues facing the project. Forest City Ratner represented with great confidence they had developed the high-rise modular solution. According to Forest City, they had 'cracked the code.' That turned out not to be true. Now, rather than acknowledging their problems, they are slinging mud at Skanska. But slinging mud at Skanska in the press and in legal documents that misstate the actual facts is not going to get the B2 Project moving again or put the modular factory workers back to work. Skanska prides itself on its ability to work through challenges in a way that is timely, effective and respects the commercial interests of all parties involved. Unfortunately Forest City Ratner operates by a different standard and so we find ourselves in this current situation. Despite the rhetoric from Forest City Ratner, we remain hopeful commercial and economic sensibilities will prevail and these matters will be resolved so we can get back to building the B2 Project and get the factory workers back to work.”
Skanska's lawsuit suggests that the company was wounded and blindsided by the news that Forest City was selling 70% of the project going forward to the Chinese government-owned Greenland Group, and the next buildings would be built conventionally.

Major delays

Consider the chart below, from Forest City's lawsuit, which shows a significant lag in getting the modules erected on site and, consequently, a significant lag in projected "substantial completion."



Even that completion date is in question, as is the future of this modular partnership, and the future of Forest City's ambitious plans to build more of the additional 15 towers using modular technology. Forest City's lawsuit notes that the project's "construction lender temporarily stopped advancing funds on its loan until it received a new anticipated substantial completion date."

The lawsuit says Skanska has refused to provide a new date--it's not clear if that Sept. 9, 2015 is Forest City's projection--thus requiring B2 Owner to come up with its own funds.

“Our priority is to reopen our factory and put the employees that Skanska wrongfully furloughed back to work so we can resume construction on B2," Forest City CEO MaryAnne Gilmartin said in a statement. "Skanska’s unilateral action has barred construction from continuing, and this lawsuit is the first of many steps we intend to take to get this building moving again.”

Given the bitterness, it's questionable that Forest City and Skanska can resurrect this relationship to get the project done, and what the other "many steps" will be. Will a new or replacement partner--the obvious candidate is Forest City's new Atlantic Yards/Pacific Park partner, the Greenland Group--step in?

Note that, while Forest City manages Atlantic Yards B2 Owner, 75% of the ownership is held by the Arizona State Retirement System. Greenland does not have a stake. Greenland has announced that the next few towers will be built via conventional construction.

Skanska's lawsuit notes that, on 8/4/14, Forest City told the media (MaryAnne Gilmartin's interview in Curbed), but not Skanska, that modular construction is an "ongoing experiment" that "needs to be validated with a standing building," which contradicts previous representations that it had "cracked the code." (Emphases added by Skanska.)

Forest City's credibility gap

Given the contrast between Forest City's promotional efforts and the reality of the lawsuits, it's another reminder that the developer--whether or not it is the wounded party in the Skanska dispute--often suffers from a credibility gap.

And that should shadow the presumably lower-octane Atlantic Yards Quality of Life meeting planned for tomorrow, where Forest City is supposed to discuss plans for new towers, infrastructure work like the west portal and the arena's new green roof.

Remember, as I wrote 9/27/13, when it was revealed that the B2 completion date was pushed back from the summer of 2014 to the last quarter of the year, Forest City Ratner executive Jane Marshall said at a Quality of Life Committee meeting that it was for "all good reasons."

"In starting up the factory, we thought that there were certain kinds of equipment and money that would need to be invested," Marshall said, "and it turned out that, as we were doing the fit-out with our partner, Skanska, we identified ways of making the modular factory work better, by purchasing different equipment, like gantries and other kinds of things to move the mods around and to plan out where modular--different pieces of the mods, where those activities would happen and then travel to other sections of the factory."

Actually, Forest City was furious with Skanska for allegedly messing up the factory with incompetence, according to Forest City's lawsuit.

"So, that took about six months," Marshall added at the time. "And so we think that the mods are going to start to arrive in the winter sometime--at the end of the year, beginning of the year."

As the press lapped up Forest City Ratner's modular strategy, I observed 11/3/13 that it may be an important technological innovation, but even innovations come with costs, controversies, and questions.

Skanska too was quite positive. “Construction is by definition about building,” said Bill Flemming, Skanska USA Building’s president and CEO, in a promotional article posted 12/5/12. “With this project, however, and with our partnership with Forest City and the construction trades, we are also building a new industry that has potential to become New York City’s newest export, a product and process that can transform how construction is done in this century. We are proud to bring our expertise in prefabrication – which we have used extensively on our healthcare and data center facility projects – to the residential market for the first time in New York City.”

Skanska lawsuit: Forest City's "Opportunity Brief"

The Skanska lawsuit says that, prior to January 2012, Forest City CEO Bruce Ratner solicited it as an "innovative, progressive, and world class company" to participate in a new modular business venture involving a pipeline of future work.

Skanska was given a document titled "Opportunity Brief, NYC Modular Factory, by Bruce Ratner, CEO, dated January 6, 2012." The Opportunity Brief represented that Forest City's team possessed the modular "solution," a "revolutionary methodology" based on "innovative intellectual property." It promised a "built-in local pipeline of project" to ensure the project would be a success.

The Opportunity Brief represented that Forest City affiliates would provide the modular factory, a secured factory lease with excellent terms, a labor agreement, intellectual property, factory operations expertise, and a "Factory Operations and Management Team."

That Opportunity Brief made "continuous representations" regarding the "breakthroughs," the "innovative " and "revolutionary" intellectual property and technological solutions developed "to create a business opportunity that provides an unparalleled competitive advantage."

Forest City's lawsuit says partnership flawed from start

The lawsuit filed by Atlantic Yards B2 Owner cites Skanska's "numerous prior breaches, its recent anticipatory breach, and its repudiation of the parties’ Construction Management and Fabrication Services Agreement [CM Agreement], dated October 31, 2012."

Essentially, Skanska was hired to construct B2 for a fixed price, nearly $117 million ($116,875,078) and according to an agreed-on schedule. Not only was Skanska responsible for the delays, according to the suit, it could not blame delays because it had failed to give proper notice of problems.
The relationship has been breaking down since the beginning. The design for the tower, using 930 steel modules fabricated at an off-site factory, "was conceived by B2 Owner and its design team, which included Ove Arup and Partners, P.C., as engineer, and SHoP Architects P.C., as architect, and was reflected in drawings and specifications... reviewed and approved by Skanska."

Forest City (aka FCRC) searched for a partner to establish a modular factory business, and for "prospective partners with experience in modular design, manufacturing and construction." Skanska said it had "experience in modular building and manufacturing know-how," and then the parties pursued "information sharing, due diligence and negotiation" for some ten months.

"Critically," says Forest City, "Skanska had approximately 10 months to review and verify this information, engage its own consultants, and raise any concerns it had with the design, factory organization, or any other aspect of the modular process."

After that, Skanska "confirmed in writing that there were no flaws in the design or constructability of the modular units that would have caused a material increase in the price of fabricating modular units in connection with the Project," according to Forest City.

Then came a legal structure, under which Skanska Modular would enter into a joint venture with FCRC Modular to form FC+Skanska Modular), the new modular business, managed by Skanska. The intellectual property would be contributed by FCRC and FCRC Modular. Skanska would be hired to build the project, including module fabrication and on-site work. FCS Modular was a subcontractor to Skanska under the CM Agreement.

Background to the agreement

Forest City's lawsuit notes that three categories of changes could alter the schedule. One would be a “Force Majeure Event,” including labor unrest, acts of war and acts of God. Also, there could be “Owner-Caused Events.” The third is a “Contractor-Caused Delay.” The Contractor cannot get a Time Extension for "delays that do not adversely impact activities on the critical path of the Contractor’s Schedule or for Contractor-Caused Delays."

Even where a Time Extension is potentially available, it is not automatic, the lawsuit says, because the Owner must first get notice from the Contractor. The CM Agreement allows for increased compensation to Skanska from Force Majeure Events or Owner-Caused Events, but that requires a series of notices and a “Change Order” issued by B2 Owner.

If there are delays from the first two categories of events, the Owner can seek, and pay for acceleration of the work, but if the Contractor caused the delay, the Owner can demand acceleration at the Contractor's expense, including extra shifts and additional manpower, equipment and facilities

If Skanska was at fault for not reaching the Scheduled Date for Substantial Completion, the Owner would get $3,300,000 in damages. If more is due, the Owner would then get to terminate the agreement.

Moving slowly

According to the lawsuit, B2 Owner closed on construction financing in December 2012, and on 12/14/12, issued to Skanska a notice to proceed with the work, effective 12/21/12, setting the milestones noted in the chart above.

However, as noted above, Forest City charges "gross incompetence":
This mismanagement began with the initial startup of the modular factory. Before the actual work of fabricating modules could commence, the factory where the modules would be fabricated needed to be “fitted out”, i.e., renovated such that it could be equipped for fabrication. Though FCS Modular was responsible for the fit-out of its own factory, Skanska Modular, as manager of the factory, and Skanska employees engaged all the design professionals and managed all aspects of the design, construction, permitting, purchasing and execution of the fit-out work. But from the beginning, this process was delayed due to Skanska’s mismanagement. For example, Skanska employed three different project managers over the course of a fit-out process that was supposed to take approximately five months.
Ultimately, due to Skanska’s mismanagement, the factory fit out was delayed by seven months, significantly delaying the production of modules, and in turn, the entire Project.
Once fabrication of modules finally began, the Project continued to suffer significant delays resulting from Skanska Modular’s inability to successfully purchase essential building materials, such as doors, frames, hardware, flooring, and items needed for painting, roofing and insulation. Due to procurement delays, by the time production of the first modular floor began, Skanska Modular had secured less than 20% of the materials needed to fabricate those modules. These problems were undoubtedly compounded by the apparent revolving door within Skanska Modular’s factory management ranks, which deprived this nascent business of consistent leadership. Skanska, which is responsible under the CM Agreement for the performance of its subcontractors, took insufficient steps, if any, to address Skanska Modular’s failures.
While B2 Owner on 1/15/14 met with Skanska’s Bill Flemming to discuss the delays and proposed a written recovery plan, Skanska failed to respond, prompting B2 Owner to issue a notice of default on 2/21/14.

A week later, according to the lawsuit, Skanska denied any responsibility for Project delays or breaches of the Agreement, blaming the owner. However, says Forest City, Skanska had not previously begun the contractually-mandated process to allege such blame.

Skanska's take

Skanska, by contrast, says the B2 Owner has breached the agreement, by:
  • providing an incomplete design
  • providing a design that contained errors and omissions
  • failing to issue change orders for additional work and increases in the contract price
  • failing to pay Skanska on time
  • failing to provide evidence funds were available to fulfill its obligations
  • failing to provide a proper factory and to provide factory labor with sufficient skills.
The CM agreement, Skanska notes, meant that it was not "responsible for errors, omissions or inconsistencies in the B2 Design."

The B2 Owner breached the agreement "as numerous design errors and omissions exist in the B2 design," according to the lawsuit, including the modules, the steel frames of the modules, the vertical alignment of modules in the field, the facade panels and their alignment, and/or the process of handling and assembling modules and other components.

Skanska said that Forest City sent nine design bulletins that added and revised work items, requiring numerous changes. Skanska was entitled to a Change Order providing compensation and time extension relief. There remain outstanding requests by Skanska for additional compensation, payments, and time extension, the suit says, but only $79,860 in change requests have been approved and paid.

Skanska says that Forest City was supposed to open and fund an Imprest Account to pass along payments to Skanska. Forest City, however, did not establish the account until July 2014 and, since then, have failed to "properly fund and administer" the account.

Skanska blames Forest City "for failing to deliver a sufficient factory" and "sufficiently skilled factory labor." It says that Atlantic Yards B2 Owner is the "alter ego or instrumentality" of Forest City, but has been used to shield the developer from liability.

Forest City's suit: increased cost, increased tension

In a 3/21/14 letter, according to Forest City's lawsuit, Skanska offered three alternative recovery plans to speed completion of the project, with cost estimates "vastly higher" than that in the CM Agreement. Skanska also threatened to terminate the agreement, blaming Forest City, "despite B2 Owner’s previous notices, and despite the fact that Skanska was not entitled to a Time Extension or an increase in the Contract Price for Contractor-Caused Delay under the terms of the CM Agreement."

Three days later, on 3/21/14, B2 Owner rejected Skanska’s positions and blamed Contractor-Caused Delays, "including delays in the procurement process; delays in the factory fit-out; and Skanska’s failure of leadership and management."

Ten days later, on 3/31/14, Skanska proposed a Change Order to extend the date for a Temporary Certificate of Occupancy to 8/18/15 and increase the contract by $28,427,465. However, according to Forest City, Skanska did not provide the required detailed explanation for the claim and supporting evidence, nor specific examples of design flaws.

On 4/4/14, B2 Owner denied the Change Order request. On 4/18/14, Forest City acknowledged a delay in the building. The Times reported that Gilmartin said it took longer than expected to set up the factory, train the work force and establish its supply line.
ENR notes:
Last April, when it announced B2's delayed completion,FCRC issued the following statement: "FC+S Modular's setbacks are due to slower factory ramp-up and fit-out, purchasing and supply-chain challenges and slower-than-expected workforce hires.
On 6/17/14, Skanska sent B2 Owner a notice, asking it to certify it could pay for the work, citing, among other things, the increased cost and a statement by FCRC's Chief Operating Officer that “the existence of delays have caused the Construction Lender for B2 to stop funding.”

B2 Owner on 7/7/14 responded that the request was groundless, noting it had complied with the CM Agreement, that Skanska "could not demonstrate that a change in the Work had materially increased the Contract Price," and that funds would be made available once a "credible Completion Date" was supplied.

Two days later, on 7/9/14, Skanska reiterated its Request for Assurance, using a different clause of the contract. On 8/1/14, B2 Owner pointed to mortgages filed and maintained by the New York City Housing Development Corporation and SEC filings of parent Forest City Enterprises.

(Skanska, in its lawsuit, says Forest City refused to provide evidence of financial arrangements sufficient to fulfill their obligations, though it doesn't mentioned the evidence Forest City cites. It also says that a bond is required, but Forest City has ignored a request to post a bond. Forest City on 7/24/14, according to Skanska, admitted that "the bond and/or undertaking required under Section 5 of the Lien Law were not provided.")

On 8/8/14, Skanska issued a Notice of Termination of the CM Agreement to B2 Owner, saying there'd been a delay of at least 180 days by Owner Caused Events, without a Change Order to grant Skanska a Time Extension and increase in the Contract Price. Skanska blamed Forest City, citing “identifiable root causes, including: (a) a delay in the factory fit out, (b) defective intellectual property, (c) design impacts, (d) failures of the Design Professionals and others for whom the Owner is responsible, and (e) Changes to the Work.”

Skanska forecasted that, as of July 1, 2014, it deserved at least $49,757,746 more.

Forest City's responses

Forest City says "each purported cause for delay... has been fabricated by Skanska to cover up its massive failures as construction manager" and that, even if they had validity, they were improperly presented.

Regarding the Factory Fit Out, "Skanska is responsible to B2 Owner for the performance of its subcontractors," responds Forest City.

Regarding Defective Intellectual Property, Forest City does not respond directly but says "Skanska essentially ignores the fact that B2 Owner is not a party to and has no obligations under the IP Transfer Agreement, and therefore, cannot be liable for any alleged defects in the IP." Also, Forest City says, "nothing in the IP Transfer Agreement absolved FCS Modular’s responsibility to adapt, refine and supplement the IP to the extent necessary to timely fulfill its obligations."

Regarding Design Impacts, while Skanska asserts that the CM Agreement warranted the design for the modules and the Project as “sufficient for the completion of the Work as of the Effective Date,” Forest City says that's not a warranty "within a projected budget, time frame, or without creative contribution from Skanska.

Regarding Failures of the Design Professionals, Forest City says "Skanska has failed to identify actual design errors in the drawings and specifications for the Project."

Forest City says that the 8/26/14 Stop Work Notice Skanska issued to B2 Owner was improper "because neither of the two specific events that could trigger the right to stop work under the CM Agreement had occurred, namely, (i) B2 Owner had not failed to make payments to Skanska and (ii) there had been no change in the Work that materially increased the Contract Price."

B2 Owner provided Skanska with assurances, in a latter from Forest City Enterprises affirming FCE’s access to $600,000,000 and its financial commitment to funding the completion of the Project, by B2 Owner, and advised that the company and its Board “are fully committed to funding the remaining, as well as completion guarantees FCE had previously made to the Empire State Development and the project lenders.

However, on 8/27/14, work ceased, with delays adding "substantial construction costs... If Skanska is determined not to complete the Project, and B2 Owner is required to contract with an alternate contractor, the costs of completing construction will increase substantially."

B2 Owner demanded that Skanska resume Work, but Skanska has refused. So, while Skanska is asking for more money, Forest City wants damages and a court order that Skanska go back to work.



1 comment:

  1. A truly remarkable bit of research and documentation here! I will be re-reading it all night.

    ReplyDelete