Millions under dispute as UI Children's Hospital costs go to court

Hospital saw first patients in 2017, but budget still unsettled

The University of Iowa Stead Family Children's Hospital is seen from Kinnick Stadium in Iowa City on Friday, Apr. 21, 20
The University of Iowa Stead Family Children’s Hospital is seen from Kinnick Stadium in Iowa City on Friday, Apr. 21, 2017. (Stephen Mally/The Gazette)

IOWA CITY — In a court hearing Wednesday that could help determine if — or by how much — construction of the University of Iowa Stead Family Children’s Hospital blows it budget, a university attorney asked the judge to overrule a peer and an attorney for a contractor warned the university “just makes up untruths” to win its case.

A central question of the case in Johnson County District Court is whether an American Arbitration Association panel was right to consider contractor Modern Piping’s gripes over payment on the children’s hospital simultaneously with ones of construction of Hancher Auditorium.

The arbitration panel ruled in February that the UI owes the Cedar Rapids contractor $21.5 million — most of it for work on the 14-story Children’s Hospital, which began treating patients in February 2017.

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If that again is confirmed, the payout would further balloon a Children’s Hospital budget that started at $270.8 million in 2011 and swelled with thousands of design changes to $360.2 million in 2015 — and now standing at $370 million worth of commitments.

That $370 million doesn’t include legal fees, as the university also is fighting over millions with contractor Merit Construction, also of Cedar Rapids.

In court Wednesday. a UI attorney insisted arbitrators never should have considered a dispute over payment on the children’s hospital along with one involving Hancher Auditorium.

And the judge insisted he had no authority to overrule a peer’s decision that had allowed it.

“Do you agree with me that I don’t have any authority to overrule judge (Lars) Anderson’s ruling on the Hancher order to arbitrate?” Judge Ian Thornhill asked UI attorney George Carroll.

“I do not agree,” Carroll replied. “I think the court at any time may correct things at the lower court level before it goes potentially on appeal.”

“He’s a district court judge. I’m a district court judge,” Thornhill responded. “I don’t have any authority to overrule his orders unless something new comes up.”

A construction manager on the hospital project in April 2017 noted in an email obtained by The Gazette as part of an earlier investigation that the Modern Piping ruling would be key in other contract disputes.

“Whether or not they have a budget problem will probably not be known until later this year, depending on Modern arbitration outcome and how they choose to closeout with the trades,” according to an internal email among executives from the Gilbane Building Company.

“It may depend on the budget status,” according to the email. “We have really only talked about them withholding money from Merit and potentially suing Merit.”

The university did sue Merit, which countersued and received a court order to arbitrate later this year. Similarities between that pending case and the Modern Piping dispute make stakes in the latter higher — not to mention that any award could be growing daily.

At a rate outlined in the February award, interest on the outstanding amount comes to $308,803.39 — with $2,321.83 added daily.

UI officials have said they expect to shave enough off their cost commitments to bring the project under the budget that was authorized by the Board of Regents. The officials haven’t disclosed how much they’re pursing in contractor backcharges.

Contractor attorneys have argued the university, as a strategy to make the budget, is intentionally delaying payment through litigation.

UI attorney Carroll said evidence is lacking to support the contractor’s claim to the money.

“There were multiple design changes, there’s no doubt about that, on the children’s hospital,” Carroll said. “But the bulk of the damages against the University of Iowa was labor inefficiency. And the record clearly lacks any evidence of it actually happening.”

He also accused Modern Piping of failing to meet obligations, noting the university still doesn’t have documents outlining how the hospital was built.

“That’s just unacceptable,” he said. “Iowa is due the ‘as builts.’ … The significance is so we know where things were put and how they were put. Things vary from shop drawings and architect drawings. But ‘as builts’ are exactly what it says. It’s how the building was built. Where is this? Because we don’t have those, the contract hasn’t even been filled by Modern Piping.”

In the last week Carroll alleged arbitrators were partial to the contractor, calling Modern Piping representatives by their first names and even attending a conference together.

Wednesday, Carroll retracted his allegations the two sides had attended the conference.

In a written response, Modern Piping attorney Jeffrey Stone ripped the university for making “factually incorrect and untruthful” statements to the court.

“Iowa has consistently and intentionally misrepresented the record of the proceedings,” according to Stone. “Iowa just makes up untruths to try to mischaracterize the proceedings.”

In the months before Wednesday’s hearing, the university appeared headed toward resolution with Modern Piping, with records indicating UI President Bruce Harreld had agreed to an $18.5 million settlement. But those negotiations fell apart, leading to the court showdown.

If the judge confirms the arbitration award, UI Health Care would be on the hook for the payment, according to Board of Regents spokesman Josh Lehman. That would require the university to return to the board to request a budget increase for the project, which has been funded entirely by donations, clinical revenue and bond sales.

Thornhill said he hoped to rule soon.

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