Panel orders University of Iowa to pay millions in Children’s Hospital dispute

IOWA CITY - The University of Iowa has been ordered to pay a Cedar Rapids contractor nearly $21.5 million following a yearslong legal battle over its work on the new Stead Family Children's Hospital and Hancher Auditorium.

Documents made public this week show an arbitration panel issued the final award March 5 in Modern Piping Inc.'s favor, noting the contractor 'incurred substantial expense in performing additional work for which Iowa was clearly responsible to pay.”

More than $4.6 million of the award relates to the UI's project of building a new Hancher after the original was damaged in the 2008 floods.

Should the total amount stand, it would further balloon the $360 million price tag on the Children's Hospital.

That cost far exceeded the project's original $270.8 million budget due in part to the UI's ill-advised choice for project delivery and contracting strategy, according to a 2015 internal audit reviewed by The Gazette.

The university is fighting the award while its health care operation struggles to cut costs and increase revenue after reporting a $7.2 million budget deficit last year, and as the UI faces millions in budget cuts over the next three months.

Iowa Assistant Attorney General George Carroll argued earlier this month that the awards are unlawful because the UI never agreed to arbitrate the Children's Hospital disputes.

'The panel had no authority to proceed,” according to the UI motion. 'The award should be vacated because the panel acted in manifest disregard of the law.”

In a statement, UI officials said they disagree with the decision and are 'challenging the award in court” but still working 'in good faith with Modern Piping to resolve the matter.”

That UI court request could delay any payout, and Modern Piping is pushing back against it.

Arbitration genesis

The Modern Piping arbitration started with a complaint from the firm that mismanagement left the university owing it $8.4 million on the Children's Hospital and another $65,000 on Hancher. The UI in April 2016 sought a temporary injunction to keep the American Arbitration Association from letting Modern Piping include the hospital dispute in its Hancher arbitration.

UI attorney Carroll in a motion said the institution would suffer 'irreparable harm” if forced to send staffers to arbitration hearings when they should be focused on finishing the hospital.

Rod Lehnertz, UI senior vice president of finance and operations, said immediate attention on the dispute would impact care for one of Iowa's 'most vulnerable patient populations.”

A judge granted the temporary injunction, which later was dissolved by a different judge - prompting the UI to vow to appeal 'each and every adverse ruling and order” to the Iowa Supreme Court. But the justices declined to get involved in the dispute.

The UI remains embroiled in arbitration with another contractor on its 14-story Children's Hospital, which began treating patients in February 2017, months later than expected.

In that case, UI attorneys initiated the litigation by filing in October 2017 a lawsuit accusing Merit Construction Company of Cedar Rapids of failing to complete in a 'timely and proper manner” work outlined in four contracts valued at $35 million. Merit countersued, denying the allegations and requesting arbitration. A judge last month granted Merit's request to arbitrate.

‘Not ideal' strategy

The legal fights exemplify issues an internal audit highlighted back in March 2015 - nearly three years after construction on the hospital started in 2012 and two years before the it opened. That audit, conducted by Navigant Consulting, determined the UI chose an uncommon and 'not ideal” contract structure and delivery method that would drive up the project cost and delay its schedule.

Board of Regents officials don't know if a copy of that report was provided to board members, although auditor Todd Stewart mentioned it briefly during an April 2015 meeting.

Stewart at the time said hospital officials were 'pleased” with the audit and its findings, and no regent asked questions. Five months later, the university asked for board approval to increase the Children's Hospital project budget more than $68 million to $360.2 million - pointing to a need for new design changes in the areas of safety, programmatic and environmental enhancements.

In its September 2015 request for more money, which regents unanimously approved, UI officials mentioned tornado events requiring stronger windows; an Ebola outbreak requiring specialized infrastructure; and environmental features to facilitate hospital wayfinding.

The request, which also asked to push the opening date from July 2016 to December 2016, mentioned a challenging construction market had ramped up competition for skilled labor.

The internal audit, while noting market challenges, indicated a different project delivery method could have curtailed some of the expenses, delays and disputes, and limited risk.

Instead of using a traditional method of having a construction manager accept risk, the UI coordinated a 'multi-prime contracting arrangement” with more than 25 different bid packages and trade contracts.

'This contracting strategy is not ideal for fast-track projects such as the Children's Hospital and level of anticipated change orders,” the audit said.

No firm dates

Because the project was fast-tracked - meaning construction started before the design was completed - design changes requiring approval were rampant, according to the audit.

The size of the building increased from 371,600 to 507,200 square feet. The Gazette reported in February 2017 - about the time the hospital opened - the project had seen 868 approved change orders worth $55.5 million. More than a fourth of those by dollar amount were for work by Modern Piping.

The audit also criticized the UI's handling of its project schedule. The project's 'substantial completion date” at the time was projected for Jan. 15, 2016, though a construction manager indicated '0 percent confidence in this date unless changes are made to current progress and schedule approach.”

Auditors noted bid documents with the contractors included only milestone dates and no specific schedule. Thus contractors were 'not contractually bound” to the UI's schedule.

In response to the findings, according to a follow-up audit in August 2016, the university aligned its budget, scope and schedule; improved collaboration and communication; and made staffing changes.

Although the university did request extra time, as its December 2016 opening deadline neared, administrators insisted the project was on schedule and spent undocumented sums to erect temporary facades for an open house, only to later tear them down.

The opening was delayed at the last minute, and the hospital welcomed its first patients at the end of February 2017.

l Comments: (319) 339-3158; vanessa.miller@thegazette.com