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Opinion No. 6789

March 3, 1994


Assignment of construction contracts to construction manager

A construction manager employed by the board of education of a local school district may not be the assignee of contractors' construction contracts with the school district.

Honorable Lyn Bankes

State Representative

The Capitol

Lansing, Michigan

You have asked a question which may be stated as follows:

May a construction manager employed by the board of education of a local school district be the assignee of contractors' construction contracts with the school district?

OAG, 1991-1992, No 6734, p 185 (October 12, 1992), concluded that, under MCL 380.1267; MSA 15.41267, a board of education of a school district may employ a construction manager for certain purposes relating to the construction or renovation of school facilities provided that the board retain and exercise its statutory authority and duties. That opinion described some of the services that a construction manager may perform for the school district, including rendering advice on the project, supervising construction and contracting directly with trade contractors on behalf of the school district. Thus, the construction manager serves the interests of the governmental unit and acts as the representative of the governmental unit in its dealings with trade contractors in order to facilitate the orderly progress of the entire construction project. The construction manager does not perform any construction services.

The nature of the relationship between the local school district and the construction manager is an agency relationship, in which the construction manager derives its authority from its contract with the school district and acts on behalf of the school district as its designated representative. It is a fiduciary relationship similar to the relationship between an architect or design professional and the school district that employs the architect.

In order to respond to this request, a description of the altered contracting procedure proposed by the school district that prompted this opinion request is necessary. In addition to its other duties, prior to the award of contracts by the school district to successful bidders, the construction manager would post a performance bond and payment bond to cover all of the work to be performed on the project. During the bid process, bidders would be required to submit bids in accordance with the requirements of MCL 380.1267; MSA 15.41267, and would include, as part of their bids, the cost of performance bonds and payment bonds as required by MCL 129.202; MSA 5.2321(2), and MCL 129.203; MSA 5.2321(3). Following the award of contracts by the school district, each successful bidder would have the option of voluntarily assigning its contract to the construction manager. The assignment would be subject to the written approval of the board of education. The construction manager would then enter into a subcontract with the successful bidder for the amount of the bidder's contract with the school district. The cost of the performance bond and payment bond included in the bid proposal would be deducted from the price of the subcontract by a change order because the performance and payment bonds furnished by the construction manager would be available to cover the work to be performed under the contracts. It is anticipated that the payment and performance bonds provided by the construction manager to cover the work to be performed under all the contracts would be less costly to the school district than the sum of the individual contractors' bonds.

Section 1 of 1963 PA 213, MCL 129.201; MSA 5.2321(1), provides that before any contract exceeding $50,000.00 for the construction, alteration or repair of any public building or public work or improvement of a school district (referred to as a governmental unit) is awarded:

[T]he proposed contractor, hereinafter referred to as the "principal contractor", shall furnish at his or her own cost to the governmental unit a performance bond and a payment bond which shall become binding upon the award of the contract to the principal contractor.

The purpose of the performance bond is to protect the governmental unit by assuring that the contractor will faithfully perform and complete the construction contract.

The payment bond serves to protect those who supply labor and materials against non-payment by contractors. The remedy provided by the payment bond is similar to that afforded by the mechanics' lien law which does not apply to the construction of public buildings or public works. See Adamo Equipment Rental Co v Mack Development Co, Inc, 122 Mich App 233, 236; 333 NW2d 40 (1982); 17 Am Jur 2d, Contractors' Bonds, Sec. 54, p 787.

The term "principal contractor" is not defined in the statute but has been interpreted by the Michigan Court of Appeals to mean "the contractor who has the primary responsibility for performing the terms of the contract." Adamo Equipment Rental Co, supra, 122 Mich App, at 237.

A similar situation was addressed in 1 OAG, 1957, No 3028, p 555 (December 27, 1957). That opinion addressed the question of whether a local school district, after the plans and specifications for construction of a school building had been prepared and approved by a registered architect or engineer, could dispense with the services of this architect or engineer because the contractor who had been awarded the construction contract employed its own architect or engineer who could supervise construction. That opinion described the nature of the fiduciary relationship that existed between the school district and the architect as one in which the architect acted for the board as its designated representative and agent whose job was to see that the terms of construction contracts were complied with, that plans and specifications were followed and that payments to contractors were made. Because these duties required a relationship of trust and confidence, the opinion concluded that the architect or engineer had to be employed by the school district and could not be the representative of the contractor or a member of the contracting firm. This requirement that the agent of the school district not be encumbered by conflicting loyalties was expressed as follows:

It is axiomatic that no man can serve two masters. This forbiddance was pointed out in the scriptures. It is a common law doctrine or principle of public policy,

"that no person can, at one and the same time, faithfully serve two masters representing diverse or inconsistent interests with respect to the service to be performed." [ Stockton Plumbing & Supply Co. v. Wheeler, 229 P. 1020, 1024 (Cal.).]

OAG, No 3028, supra, p 556.

Under the proposed procedure, if contractors choose to assign their contracts with the local school district to the construction manager, the construction manager, as assignee of the contracts, would furnish the statutory bond and become contractually responsible for performance of the construction contracts. The construction manager would then be supervising its own performance of the construction contracts.

At this point, the construction manager has assumed two conflicting roles. On the one hand, the construction manager would be the agent of the school district to supervise the construction to make sure that each contractor's work conforms to its contract. On the other hand, the construction manager would also be contractually responsible for the performance of each of the construction contracts assigned to it.

It is the duty of the construction manager, as agent for the school district, to advise the school district when a construction contractor has breached its contract to the extent that all or a portion of the the performance bond should be paid to the school district. Yet, as assignee of the construction contracts, who has put up the performance bond, it is not in the interest of the construction manager that all or a part of its performance bond be paid to the school district.

The primary duty of an agent is loyalty to his principal. Stephenson v Golden, 279 Mich 710, 735; 276 NW 849 (1937). Here, by becoming the assignee of the construction contracts, the construction manager would place itself in the position of having interests that conflict with the interests of its principal, the school district.

It is my opinion, therefore, that a construction manager employed by the board of education of a local school district may not be the assignee of contractors' construction contracts with the school district.

Frank J. Kelley

Attorney General