Construction clash: Long-simmering criticism of Puetz boils over

Talk about it

Puetz Corp. calls it innovation. Critics call it a conflict of interest.

At issue is “construction management,” in which a company provides oversight of a project and a single point of accountability to the client, but does none of the physical construction work. A suddenly public dispute over the previously common practice has local construction and design firms scrambling for a shot at big-money government contracts.

When the Mitchell City Council appeared ready last fall to offer contracts for both the design and construction management of a $2.5 million expansion of the Mitchell ice arena to Puetz Corp., nothing about the deal seemed extraordinary. Puetz Corp. has struck similar deals on numerous other public projects and has become a leader in construction management, a relatively new but seemingly well-established aspect of the construction business.

Then, a group of competing local construction professionals objected. By allowing Puetz Corp. to serve both the design and construction management roles, the objectors said, city officials were eliminating critical checks and balances in the construction process and possibly even breaking the law. Some hinted at filing lawsuits if Puetz Corp. was awarded both contracts. The group of objectors met in private with city officials at first, apparently wary of speaking out in public. But they have since emerged and have made their positions clear in recent interviews with The Daily Republic.

“The right thing to do there is not to have the construction manager and the architect from the same firm,” said Steve Otterby, co-owner of Palace Builders. “I don’t think that’s in the best interest of any public entity.”

But Mark Puetz, of Puetz Corp., argues his company has served as designer and manager for many large, public projects in recent years and is acting appropriately and legally by doing so. “It’s a proven, successful delivery system,” Puetz said.

‘How these things are done’

When Larry Jirsa, a local architect, addressed the Mitchell City Council at its Nov. 19 meeting and questioned whether Puetz Corp. should be allowed to serve two roles in the expansion of the ice arena, known as the Mitchell Activities Center, it sparked months of debate in and out of City Hall.

“I just wanted to raise a red flag,” Jirsa said in a later interview with The Daily Republic. “Just because I have certain knowledge about how these things are done, I felt it was my responsibility.”

The council has pledged $2 million of public funding for the ice arena project with the remaining $500,000 to be raised by the Mitchell Skating and Hockey Association. A second ice rink will be added in the expansion of the city-owned building.

Jirsa stressed he has no interest in becoming involved in the ice arena project. The city asked Jirsa to put together a proposal, but he declined.

“I’ve never done a hockey arena in my life,” he said. “I wasn’t even interested in that job.”

Months earlier, Palace Builders, which built the existing ice arena structure years ago, was asked by the Mitchell Skating and Hockey Association to prepare an estimate for the ice arena project so the association could present a budget to the City Council, according to Otterby.

“We actually designed the project and received estimates on doing the work,” Otterby said.

Palace Builders prepared the estimate to help the association, anticipating that the project would eventually be subject to bidding, Otterby added.

Palace Builders soon received a letter from the city requesting proposals for both the design and construction management of the ice arena expansion, which the company submitted in mid-August.

In the letter, Palace Builders was asked to provide a variety of information, such as its history and workload. But the letter also asked the company not to submit a price for any of the work — an unusual request, Otterby said.

“If it’s a public project,” he said, “(price) probably should be a consideration.”

Once the proposals were reviewed, the letter said qualified firms would be contacted for an interview, Otterby said.

As time went on without further communications from the city, Palace Builders called Mitchell Parks, Recreation and Forestry Department Director Dusty Rodiek and asked about the project. According to Otterby, Rodiek said Puetz Corp. had been selected to act as both architect and construction manager.

“There was no interview of any of the parties involved,” Otterby said. “It was just done.”

Brad Ciavarella, a local architect, also submitted a proposal for the ice arena project and, like Palace Builders, was told there would be interviews.

“They just never called,” Ciavarella said. “We were just off the map. So, I just don’t know what happened with it.”

Meanwhile, Puetz Corp. was also contacted about the ice arena project and also submitted its proposal, which included design and construction management services, in mid-August.

“We were selected then,” said Mark Puetz.

Otterby, along with several other local contractors and architects, eventually met privately with City Attorney Carl Koch to discuss the situation.

Following those meetings, Koch informed the City Council that giving Puetz both contracts could lead to a legal battle.

In an interview Thursday with The Daily Republic, Mayor Ken Tracy took part of the blame for the confusion surrounding the initial selection process.

The Mitchell Skating and Hockey Association, which is a private entity, and the city’s Parks, Recreation and Forestry Board reviewed the proposals together and chose to select Puetz Corp. based on the proposals rather than doing interviews, Tracy explained.

Although the city was within its rights to make its selection based on the proposals alone, Tracy said, the situation could have been handled better.

“I maybe should have been a little bit more involved from the onset, but I wasn’t,” he said.

Construction management is considered a professional service, which makes it exempt from South Dakota’s competitive bidding laws. Because of that exemption, the city was not legally required to seek competitive proposals for the ice arena project.

The bidding exemption has benefitted Puetz Corp., which has delved more fully into construction management than any other firm in the Mitchell area. Without having to bid, Puetz Corp. has scored construction management contracts for public projects that are sometimes worth hundreds of thousands of dollars. When Puetz Corp. was awarded the design and construction management contract for the 2009 Mitchell School District football stadium project, for example, no other firms were interviewed or considered and Puetz’s total 10 percent fee on the $2.5 million project amounted to $250,000.

“Things are just being handed to (Puetz Corp.) without there being any competition,” Otterby said.

Otterby thinks construction management should be subject to public bidding, and Jirsa agrees. But that would take a change in state law.

“Those people all need licenses,” Otterby said, comparing construction management to other professional services such as lawyers, doctors and accountants. “They all need to be registered and all are held accountable by organizations. A construction manager is not required to have any of those things.”

Puetz argues a construction manager’s role in advising an owner as well as monitoring a project to ensure it stays within budget and on schedule makes it a professional service.

“All of those things are services,” he said. “I don’t know how you would call it anything other than that.”

‘The construction guy’

Put simply, there are traditionally three parties involved in a construction project: an architect to design it, a contractor to build it and an owner to pay for it.

Alternatively, an owner can hire a construction manager who does none of the physical construction work but, as the name implies, manages the project on the owner’s behalf.

In 2003, the Legislature unanimously passed House Bill 1111, which authorized the use of a construction manager on public projects.

Construction management can be divided into two categories: “at-risk” and “agency.”

According to descriptions in a document Puetz Corp. provided to The Daily Republic, both types of construction managers work alongside the architect in the design phase and create a construction schedule and estimate costs. Both will also assist the architect in the bidding process for construction work and recommend low-bid contractors for the owner to choose.

Once bids are accepted, a construction manager at-risk holds the contracts and has “sole responsibility over the quality and performance” of all the contractors, the document says. Conversely, the owner holds the contracts and takes on the risk when working with a construction manager agency, the document says.

Fees run between 2 and 5 percent for a construction manager agency and, because of the increased liability, between 4 and 6 percent for a construction manager at-risk, Puetz said. Design fees are extra.

“The construction management process better ensures the success of the project, no questions asked,” said Puetz Corp. Senior Project Manager Jon Schmitz.

As long as a company performs none of the actual construction, it can serve as both construction manager and architect, Puetz said, interpreting state law.

But not everyone sees it that way.

Local architect Larry Jirsa claims “construction manager” is really just another name for “contractor.”

“He’s the construction guy,” Jirsa said. “He might not have a hammer in his hand, but he is the construction guy.”

Checks and balances

Critics say a conflict of interest can occur when a construction manager and an architect from the same company work together on a public project, especially when costly problems arise.

“If we as architects work for the construction manager,” Ciavarella said, “it could compromise our ability to make impartial decisions for the public.”

Jirsa worries it is easier to disguise problems with a project when the architect and construction manager work for the same company.

“Do you think the construction manager is going to squeal on his own company?” Jirsa said. “Probably not, because he’s going to lose his job.”

Otterby agrees that a potential conflict of interest exists.

“Maybe (the construction manager) doesn’t look out for the owner’s interest,” Otterby said. “Maybe they look out for their own company’s interest. That could be the conflict.”

Otterby asserts that when an architect and contractor are independent from one another, they keep a closer and more critical eye on each other and therefore better serve the public interest.

But for some private projects, hiring an architect and a construction manager from the same company may be a more efficient way to work, Jirsa admitted.

“I don’t think it works for public projects,” he said. “With tax dollars, as a citizen, I like to see the most built with the least amount of money.”

Puetz argues his company’s method limits potential finger-pointing if something goes wrong on a project.

“From our perspective, it creates more checks and balances,” he said.

Because the construction manager works together with the owner and architect, the entire process is more open, Puetz argues.

“If we’re the architect and a construction manager and we do something unethical, the responsibility is pointed right back at us,” he said. “So why would we do that?”

Since 2001, Puetz Corp. has served as architect and construction manager at-risk on 31 public projects in South Dakota, according to company records provided to The Daily Republic. Project costs ranged from $300,000 for work on the Hanson County School District’s football stadium in 2010 to $18.5 million for the ongoing work on Mitchell Technical Institute’s Trades Center. Combined, all the projects total $127.36 million.

According to Puetz Corp., the total cost of construction, not including fees and some other costs, for the MTI Trades Center was $16,795,343. Puetz Corp. was paid a fee of 5.2 percent for architecture and 3.7 percent for management at-risk for the project. That equates to approximately $873,000 for the design and $621,000 for the management at-risk, for a total of about $1.49 million.

Given his company’s long history designing and managing public projects, Puetz said he wasn’t expecting the recent uproar.

“It kind of surprised us a little bit,” he said. “We went on good faith that we had, to date, served the city’s need and hoped that the process would continue.”

The conflict had been brewing behind the scenes for years, according to Otterby.

“It’s just time that it stops,” he said. “It should not be going on because it doesn’t follow what the law appears to say.”

But exactly what the law says is a matter of dispute.

A relevant state statute says “no person, firm, or corporation may act as architect or engineer and also contractor on any public improvement project” that costs more than $100,000.

In 2011, South Dakota Attorney General Marty Jackley issued an opinion on the subject.

“It is my opinion,” Jackley wrote, “that (the statute) prohibits a construction manager at-risk from performing architectural/engineering services, and also acting as a contractor.” That opinion does not carry the force of law.

Jackley’s interpretation of the law did little to clear up the confusion among the city’s officials, in part because of his use of the word “contractor.” Puetz Corp. claims a construction manager is not a contractor, and therefore can legally serve as both construction manager and designer, as long as it does not do any of the physical work of construction. Critics say a construction manager is just a contractor by a different name and should therefore be banned from also serving as designer on a project.

“There were conflicting opinions among the attorneys and many others that were looking at it,” Mayor Tracy said, referring to debates over Jackley’s opinion at council meetings.

Yet another opinion, this one informal, was issued this week. Puetz Corp. gave The Daily Republic an email from Assistant Attorney General Jeff Hallem, who was responding via email Thursday to a question from Rep. Tona Rozum, R-Mitchell. In the email, Hallem wrote, “in my opinion, nothing in (state statute) prohibits a construction manager at-risk from performing architectural services on a project as long as no work is performed.”

To clear up the dispute once and for all, a judge would need to rule on it or the Legislature would need to clarify it, said Koch, the city attorney. Koch is not aware of any judgments made on the issue in South Dakota or any other state.

Puetz agrees that the key word in the state law is “contractor.” Unlike a construction manager, a contractor is someone who performs physical construction work. Since a construction manager is not a contractor, at least in Puetz’s opinion, he thinks his firm is compliant with the law.

“In our minds the (construction managerarchitect) process is perfectly legal,” Puetz said. “It is completely legal.”

The law could be more clearly defined, Puetz acknowledged. Jirsa thinks the law forbids one company from being both an architect and construction manager on a public project, but he understands it could be interpreted differently.

“(Puetz) obviously wants to interpret the law in their favor,” he said. Jirsa thinks state law takes a naïve approach to the reality of the industry. “Whoever wrote the law doesn’t get the profession,” he said. Behind the scenes, Jirsa said, public projects are sometimes awarded based on relationships when they should be based on cost and other factors. “Nobody gets the relationships,” Jirsa said. “Nobody gets how things are done. Nobody gets the conversations.”

‘A safe interpretation’

After realizing a lawsuit was possible if both the design and construction manager contracts were awarded to Puetz Corp., the City Council offered the company a contract for architectural services, but not for construction manager, at its Jan. 21 meeting. Puetz Corp. accepted the offer and was awarded the contract at the Feb. 4 council meeting.

Koch, the city attorney, said the decision to split up design and management duties for the expansion was “a safe interpretation (of the law) from the city’s standpoint.”

“We don’t want our project tied up in a legal suit over an issue of law,” he said.

Puetz, who had initially considered withdrawing from the project entirely if his company wasn’t awarded both contracts, said he and the company feel an obligation to carry on with the project.

“We’re obviously vested in this project,” he said. “We want to see this project come to fruition.”

It is unfortunate the city was “held hostage” with the threat of a lawsuit, Puetz said.

“I don’t think I’d want to be involved in a business that had to sue or threaten to sue an entity because it didn’t go my way,” Puetz said.

Depending on which plan the city chooses, the final cost of the ice arena project will be between $2.6 and $3 million, Puetz said.

In the most likely scenario, Puetz said, the total cost of construction will be about $2.6 million, which, once taxes and fees are added, will bring the total project cost to $2.8 million.

Instead of a percentage, the contract stipulates Puetz Corp. will be paid a lump sum of $233,962 for the design of the ice arena expansion, Puetz said. That equates to 9 percent of the $2.6 million construction cost.

Had Puetz Corp. been awarded both contracts, Puetz said, its fee would have been 7 percent for architecture plus either 5 percent for construction manager at-risk, or 3.5 percent for construction manager agency.

Assuming a $2.6 million cost for construction, that means Puetz Corp. would have been paid $312,000 for design and management at-risk, or $273,000 for design and management agency. So, the breakup of the dual contract cost Puetz between $40,000 and $80,000 in potential fees.

The increase from 7 percent to 9 percent for design is to cover costs incurred as a result of the delay caused by the controversy and threat of a lawsuit against the city, Puetz said.

“It increased the cost to the taxpayers of Mitchell, unfortunately,” he said.

The ice arena project will now proceed without a construction manager, Mayor Tracy said, and will instead have a more traditional design, bid, build arrangement. None of the construction work has been bid yet.

Otterby said Palace Builders will most likely submit a bid for the project.

Why now?

Until the legality of Puetz’s method was questioned, opponents were hesitant to talk about the subject publicly, Otterby said.

“Until you can put your finger on things that actually have to do with following the law, what can you say?” he said. Jirsa agrees.

“Nobody complained,” he said, “but I don’t think anyone actually understood it.”

Opponents argue Puetz’s method leaves smaller companies unable to compete for public projects.

“It’s very attractive to the buyer to say ‘we’ll do everything,’” Ciavarella said. “I would just like to see everybody be given a chance to work for the public entities.”

Puetz argues work is still open because the physical construction work is still publicly bid, even when the company acts as both architect and construction manager. Those who win the construction bids work under the construction manager.

“If they want to do it, they can do it,” Puetz said of the physical construction work.

The Mitchell School District hired Puetz Corp. as both architect and construction manager at-risk when it built Longfellow Elementary School and a new stadium at Joe Quintal Field. Both projects were completed in 2010.

Mitchell School District Superintendent Joe Graves said he was happy with Puetz Corp.’s approach and would be comfortable using the method in the future.

“It’s a process,” Graves said, “that works extremely well in terms of getting things done in a timely fashion and in terms of getting someone to stand behind a project once it’s complete.”

City Council President Jeff Smith is on a committee working to raise $500,000 to add to the $2 million the city has pledged for the ice arena project. He said the committee has raised approximately $255,000 already.

“The most important thing, I think, is that we’re able to move forward,” he said. “That was the ultimate goal we wanted to get accomplished.”

Until action is taken in the courts or in the Legislature, Smith said, “there will be question marks on both sides” of the controversy.

“If other public entities wanted to move forward with a construction manager, I can see why they would want to do it,” Smith said.

But with so much controversy, Mitchell’s city officials agree moving ahead with Puetz Corp. as both manager and architect would only have caused unwanted delays for the ice arena project.

Puetz Corp. will continue to pursue public and private projects using the architectmanager method, despite the controversy.

“Just like any other business, we look to innovate in one way or another,” Puetz said. “That’s all we’ve done here.”

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