What Are You Really Going to do About Change Orders?

What Are You Really Going to do About Change Orders?

For most tenants or owners the answer is: surprisingly little. Buy why?  The answer lies in an inconspicuous, often overlooked spot in the real property design & construction supply chain: the contract.

The reason is deceptively simple.  Once a contract for architectural or general construction services is signed, the scope and body of the agreement either avoids change orders, controls them, or ignores them and optimistically assumes the best.  The latter position relinquishes control and creates the environment that puts change orders in motion. And this puts the tenant at a disadvantage.

Too little attention is paid to the power of the procurement process.  Consider what Barry Lapatner, in Broken Buildings, Busted Budgets, says:

“[B]uilding contractors [and architects] have at their fingertips all the critical information to establish the business terms with their buyers [owners], but the buyers do not [emphasis added]. That is, the contractor possesses far superior technical and operational knowledge of the industry then all owners,…”

So what does this mean? Specifically, what can you really do to prevent change ordersConsider these five tactics.

Change your mindset. Start by considering what hasn’t worked in the past; or has at least been ineffective. This means to deemphasize project backend beat downs intended to curtail change orders by brute force. Hammering the general contractor for the costs, or even the existence, of change orders is unfair. A general contractor, however clever, doesn’t have the exclusive ability to create change orders.

Let go of liquidated damages.  This seems to be the old school, go-to solution for many tenants and owners.  My view? It’s just mutually assured litigation and unnecessary, ineffective mountains of paperwork. LDs suggest a damaged relationship with key professionals right from the start. It’s the design and construction equivalent of a prenuptial agreement. If you need one, maybe it’s not such a great match. Instead, the root cause is further up the real property improvement supply chain. And that’s where we need to set our sights.

Prevention versus prediction. I remember a colleague of mine commenting this way about the attitude he was seeking in his team members, “I want news makers, not news reporters.” Similarly, reports like risk registers that indicate the likelihood of change orders or the potential impact only deliver the news. The iceberg is already dead ahead. Instead, the solution is to navigate further back in the project improvement supply chain timeline.

Procurement process and not project delivery. Design-bid-build, construction management at risk, and integrated project delivery are all often referred to as a project delivery methodologies. This isn’t an entirely accurate description. They are procurement approaches. They are contractual purchasing mechanisms. Because they are procurement processes at the core, they necessarily happen at the very earliest spot in the real property improvement supply chain. This is the origins and the opportunity for improvement for most change orders.

The power of the procurement process.  Change orders are ensured or avoided the minute the ink dries on the architectural/engineering or construction contract. Or put another way, if the contract, specifications and scope of the contract with your professionals doesn’t exclude and or control change orders, what will?

The solution isn’t your garden-variety legal terms and conditions. I’m not talking about fill-in-the-blank template. And I’m certainly not referring to the vendor’s form of contract. If you’re not emphasizing the power of the procurement process and utilizing a refined services agreement, brace yourself or bolster your budget.

Remember the words of Barry LaPatner.

The contractors’ [and architects’] superior knowledge and informational advantage coupled with the knowledge that [design] errors equal change orders.”

A sophisticated agreement is the most powerful and overlooked advantage in the toolkit of the right project manager – to head off change orders, reduce risks, and control the effects of substandard design and construction.

So before wading into this complex arena, give yourself an advantage and a project management ally up front. Do this simple step and you’ll be able to maximize the value of the vendors you hire, minimize change orders, and enjoy peace of mind along with substantial cost savings.

 

 

Apex Project Consulting, Inc., (www.apexpjm.com) based in with California with offices in the San Francisco and Orange County areas, provides one-of-a-kind, full-spectrum project management leadership across a wide variety of project types, including both ground-up and tenant improvements, throughout the U.S. as well as internationally.  Apex has managed over eleven hundred projects, from due diligence and design through construction, including commercial, industrial, office, clean rooms, life science, labs, manufacturing, and specialized environments.

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No Change Orders-Guaranteed!tm

Can You Tell Which Contract Cost the Client an Additional $1.2 million?

Can you tell which of the contracts above cost the client $1.2 million in additional change orders and which one didn’t? Here’s a hint: both agreements were touched by the same attorney. Thus, it’s not the legal Terms & Conditions.

Give up?

As a tenant or occupier of real property, your core business is something other than the hiring of professionals for the architectural design, engineering and/or construction of your new facilities or tenant improvements. It’s completely understandable that you can’t tell the difference. But how about your project management firm?  Surely, their size and global reach would include ways of protecting you…yes?

With millions of dollars at stake, and change orders growing as a percentage of design and construction costs, shouldn’t your Fortune 1000 project management firm be able to tell the difference? Shouldn’t they have a solution? What about a guarantee?

If not, and saving money matters to you and your business, expect more. Get away from the global real estate behemoths and the project management posers. Get Apex Project Consulting, Inc. – the Change Order Champions

 

Tom Conzelman is President of Apex Project Consulting, Inc., a one-of-a-kind,  full spectrum project design, engineering and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, and a California Real Estate Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™

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Scope is more important than terms and conditions

Attorneys Are Overrated

Thank you, Captain obvious.

In all seriousness, when it comes to drafting contracts, for design, engineering and construction services, the input of attorneys is extremely overrated.

Not too long ago I was catching up over drinks with a friend of mine from law school. The conversation gravitated to various legal topics. At some point in our chat, he mentioned to me that he had recently helped a client with a construction contract. In retrospect, I should’ve simply nodded appreciatively and moved on to a different topic. However, I didn’t.

Instead, I offered, from my years of experience, that he probably didn’t help his client as much as he thought. I assumed, erroneously, that all attorneys would acknowledge that maximizing profits, or more importantly minimizing risks of change orders and other budget busting surprises, was NOT related to legal craftsmanship.

After all, isn’t the point of all business transactions to generate profits and minimize risk? Maybe not, if you’re on the attorney side of it. I started the defense of my position with something I thought we both could agree to.

Money matters. If money matters, then the measuring stick for success or failure of contracts for architectural, engineering and or general construction has to be money — the money saved by avoiding change orders.

It’s all well and good that contracts for design and construction satisfy the necessary legal standards. However, doing so is an expenditure that is essentially overhead. It doesn’t generate the lion share of savings.

The finest and most sophisticated contract will never do more for a client to save money and or prevent risks than a well crafted scope of work. An insufficient, sloppy, incomplete, or worst-case, a vendor-drafted scope of work will result in an almost boundless amount of change orders. It doesn’t matter how much fancy word-smithing you wrap around a crappy deal, it’s still a crappy deal. That’s why the legal part doesn’t mean jack.

It doesn’t matter if you correctly articulate or memorialize the indemnification provision, the waiver of subrogation, choice of law, insurance, and/or arbitration provision, etc. While all of these are swell, clients in this industry don’t lose money necessarily because the parties agreed to arbitration versus litigation. It’s all about the scope.

To paraphrase Bill Murray’s famous line in Meatballs, “IT JUST DOESN’T MATTER” how cleverly you drafted the indemnification clause – or any other provision – if you screw up the scope.

To no one’s surprise but my own, this argument had little affect on my attorney friend’s position. A little anxious that I might be challenging his abilities, I pressed ahead nonetheless.

Change orders are the most expensive “repeat offender” in the real estate improvement process. The uninitiated or unrepresented client or tenant can “bank” on change orders generating hundreds of thousands in additional costs (BTW: your vendors are counting on this, too).

I’m sure that the design and construction industry generates plenty of litigation. However, whether a client is hit with change orders from the architect, engineer or contractor, is almost exclusively a function of the scope. A poorly drafted scope (or worse, use of the vendor’s agreement) guarantees change orders. Change orders equal money. Big money.

Again, if the agreement doesn’t operate to anticipate and mitigate design errors in the construction documents or block (non-owner requested) change orders from the contractor – then none of the legal jargon matters.

They don’t teach scope-writing in law school. Yes, it helps to be able to write and talk like an attorney. I get that. But again, there is no course or class in how to describe the architectural, engineering and construction specifications and requirements for a tenant improvement project. It strictly comes from on-the-job training, YEARS of on-the-job training.

I don’t know if I’ve had more luck convincing you than I did my good friend from law school. But I will offer you this, before you consider laying out millions of dollars on your next project, carefully consider who’s helping you with the scope of work.

If the global Fortune 1000 real estate behemoth and the project management chaperone you’ve engaged to deliver your next project doesn’t demonstrate their ability to save you money through stopping change orders, then you might want to reconsider. Start by using an experienced project management professional with both design and construction contract drafting skills as well as CM experience that will maximize your profits while minimizing your exposure to risks.

Tom Conzelman is President of Apex Project Consulting, Inc., a one-of-a-kind,  full spectrum project design, engineering and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, and a California Real Estate Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™

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Higher Total Costs from Low Bid

Think Low-Bid Delivers the Lowest Cost? Think Again.

Think Low Bids Deliver the Lowest Cost? You’d be Wrong.

It never ceases to surprise me when a procurement executive insists on selecting professional engineers or contractors exclusively on the lowest bid. This often repeated process never saves money in the long run. In fact, it’s only correlated with a higher risk of defects, delays and overall total costs.

Based on case studies and my years of experience on literally hundreds of projects all over the U.S., there is no direct causal relationship between low cost and high performance. Let’s look at it more closely.

First, let me define what I mean by the low bid only procurement process. For purposes of this article I’m talking about the purchase of services involved in the real estate improvement supply chain—that means architects, engineers, general contractor or specialty subcontractors—regardless of the industry.

A low-bid-only procurement process is one in which the sole controlling determinant of which vendor is awarded the work is the one with the lowest price. Sometimes this is also called lowest responsible bid. The net of it is, if price is the sole reason for the selection, it doesn’t matter what you call it.

Low bid criteria sets up a whole series of circumstances, none of them good. For example:

Low Profit Margins. If profits aren’t high enough, contractors, subcontractors and designers risk going out of business. As a result, they don’t assign their principals, vice presidents or other senior level team members to your project. Those personnel are just too expensive. Margins in the construction and architectural industries/professions are normally under 2%. Slice those margins even further, and you get junior personnel assigned to your team. That means low-bid, low profit vendors are a serious risk.

Smaller Margins for Error. Every project has errors in it. You can plan meticulously, but inevitably a problem will crop up. The issue is how does one ensure that the errors are minimized or transferred? If there’s little profit for the vendors hired for the project, there’s less elbow room for fixes—and guess who those costs then come back to? That’s right, they come to you.

Unless you hit the expert-professional-lottery and get an exceptionally competent, experienced pro who just also happens to provide the lowest bid, then you’re setting your project up (and yourself) for more change orders. Additionally, motivation to perform will be low and/or (in extreme cases) your vendor may just make a business decision that continuing with the project is more costly than abandoning it. Or worse.  Consider just the problems connected to bankruptcy from this excerpt from Greg Daily and Amelia Valz, of XL Group, as reported in Engineering New-Record, February 2014.

“What can happen when contractors’ subs file for bankruptcy? For one, contractors can be left in a holding pattern as various bankruptcy rules may govern how a contractor can terminate and replace a subcontractor. There are also risks of additional project liens by previously paid second-tier suppliers and subcontractors.

When a subcontractor files for bankruptcy, all lower-tier payments made by the subcontractor within 90 days of the bankruptcy filing can be deemed a preference. Any payment that is considered a preference will have to be paid back to the bankruptcy court as an asset of the subcontractor. Preferences can lead to a second-tier supplier or subcontractor reimbursing the court for payments it has received from the subcontractor. In turn, the reimbursements will likely lead to second-tier supplier or subcontractor looking to the contractor for payment.”

Lower Performance Results. The statistics speak for themselves. One recent industry study looked at the impact of low bids upon outcomes and found that  only 56% of projects awarded on a low bid basis were completed on time. Only 41% were on budget, and there were claims and/or litigation on 13% of the projects. I would love to ask those execs who made the decision to go with low bid if they thought it was worth the delays, expense and headaches.

When you remove the reasonable expectation of a fair profit from a project, you also remove the incentive to do a better or even outstanding job.

“In the price based environment, price is the only recognizable and dominant factor…It is a confusing environment that depends on a relationship between the client expecting the highest performance and the contractor offering the lowest possible performance because of the price based award and pressure on profit.”[1]

An Eroding Workforce. Additional statistics show that more people are leaving the construction workforce than are entering it. Check these stats:

“By 2012, the number of workers ages 35 to 44 will decrease, causing a market-wide shortage of middle managers. The market for craft laborers will tighten due to the decline of individuals entering the workforce between the ages of 16 and 24. Finally, the availability of workers age 45 to 52 will shrink, creating a shortage of seasoned senior managers. About 2.5 million workers are needed between 2002 and 2012 to build tomorrow’s America, given one million new jobs added for workers in the construction industry coupled with those leaving due to retirement or to enter other careers (Jackson 2005).”

Contractors are having a hard time finding high level staff to keep pace with the increasing work volume. As a result, especially in low bid projects, less experienced staff are replacing the higher priced experts. A 2005 study showed that three out of four contractors are experiencing a labor shortage, and that on many crews, apprentices make up the majority of the team.

And that’s just part of the story. Check out our other post for even more details.

Then consider whether going with the lowest bidder will save you…or hurt you.

Tom Conzelman is President of Apex Project Consulting, Inc., a one-of-a-kind,  full spectrum project design, engineering and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, and a California RE Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors at the college level. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™


[1] Northern Arizona University, Flagstaff, AZ: 2007. CD 6:10. Kashiwagi D, Kashawagi J, Savicky J.  Industry Structure: Misunderstood by Industry and Researchers. NED University Journal of Research, Vol. VI No. 2 2009.

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