Open-Book Construction Procurement

The Myth of “Open-Book” Construction Contracts

The “open-book” construction contracting method is at best a false choice and at worst a fraud.  The reason? The “open-book” construction process promises value but fails to deliver any rational business benefits.

Only myth, misunderstanding, or meme, explain away this procurement process shortcut. But why is it irrational? Let’s start by defining terms.

Most everyone has a working definition of what it means to solicit bids. It’s simply comparison-shopping. Whether it’s a new car, a kitchen remodel or carpet, buyers seek competitive alternatives before making a purchase. Comparison-shopping creates information about “value” that the buyer can analyze. “Value” is another way of expressing the ratio of performance to cost. It’s getting the most benefits for the buck. It’s letting the competitive, free-market, work to identify the best value. However it only “works” if money matters – that is, if “value” is valued.

If Money Doesn’t Matter

In some circumstances, the price or value of an object or service doesn’t matter. Other factors are more important. Personal preference is one example. You’re probably not going to solicit bids before changing your doctor. Politics is another. If your boss is golfing buddies with the president of a supplier or vendor, self-preservation or career continuity might control who gets your business. Bias and graft make the list too. But in business, with shareholders to answer to and bottom lines to bolster, getting value is fundamental or at least rational. Then what’s the problem with the open-book bid?

The open-book bid process masquerades as delivering value. It doesn’t. Its currency is supposedly its transparency. But that’s a shiny object distraction.

Transparency Translates to Value?

The open-book construction process trades on the belief that if you can “peak behind the curtain” and see the contractor’s “actual” price, then value is ensured. Imagine buying a new car. Instead of shopping, you negotiate with only one dealer. The dealer offers you a car at “actual” cost, plus a modest mark-up over the Manufacturer’s Suggested Retail Price. The dealer shows you the MSRP and voilà, value is documented and no further negotiations are necessary. Right? Wrong. It’s no different with the open-book construction process.

The open-book construction contract starts with the owner picking the contractor. The owner and the contractor then negotiate a fixed mark-up percentage (profit and overhead). The contractor then produces a total contract price, based-on and supported by, the “actual” subcontractors’ costs. Thus transparency serves as a substitute for market-rate competition and value. The “logic” behind this process gets thinner when examined more closely.

Extending the car-buying analogy; what can we learn about the competitiveness of a car price by examining the MSRP? Nothing. It’s just a number. Maybe the car manufacturer set an unrealistic retail price. What if the MSRP is offset by manufacturer rebates? Or the manufacturer provides incentives that offset the actual cost? How would you know? You wouldn’t. It’s no different with the open-book construction contract. But the similarities don’t end there.

Construction Estimating

Are you a construction estimating expert? In the design and construction business, an expert construction estimator is invaluable. Even a modest construction project involves an enormous amount of moving parts. Each part of which has to be assigned a cost and a labor component. Understanding each part and labor requirement, specifications, variations, cost, and quality, takes an enormous amount of experience. Every sizable construction firm has individuals – if not entire departments – dedicated only to preparing estimates. So why does the average client or tenant think they can glance at subcontractor costs and determine value? The answer is they can’t.

It takes good estimators years and years to be proficient. Even then mistakes are made. And sometimes the mistakes cost the business everything. Anyone who thinks they can do this themselves is either an estimating genius or blissfully unaware.

Numbers Are Numbers

Comparisons create context – and allow for the user to draw meaningful conclusions. Consider this: is $1.2ML a better value than $600,000?   Is two-for-the-price-of-one better than half-off? You correctly reply, “I would need more information.” Of course! That’s the point and the illusion of the “transparency” of the open-book process. You’re just looking at numbers!

The numbers don’t tell you anything about quality. They’re indifferent to project schedule. There’s no measurable dimension of the bid process focused on the superintendent’s experience. Numbers can’t inform you of a contractor’s track record – or their subcontractor’s.  Numbers alone have no intrinsic value. Thus, looking at subcontractor “costs” doesn’t allow for any meaningful conclusions. For that matter, a buyer won’t be able tell if the “numbers” include all subcontractors and trades needed to complete the work.

No Market Forces

We’d all love to avoid competition – or at least the low-bid-only psychosis. It’s a tired, but true cliché; competition makes for better results. Without a modicum of competition, prices can (and often are) unbounded. Consider for example public utilities. No competition equals no price controls. How about the $500 NASA toilet seat?

The point is that everyone understands and appreciates that some level of price comparison is required to produce value. It’s no different with procuring the services of professional contactor(s). Price should never be the sole determinant of a purchase unless the product is a true commodity. Contractors are not commodities.

Others Need Not Apply

If word gets out that you’re only going to use XYZ contractor, sooner or later the other professionals are going to stop working to get your business. And that’s bad for your business. Contractors will eventually get the message if you never allow them to bid – or never give them a shot. Whether they deserve your business or not, you can be sure that at some point the good guys will stop trying. And that’s bad for you.

We all probably know several firms or procurement executives that – for one reason or another – always choose the same vendors. Eventually, when you need a competitive bid, you’re not going to get their best effort; if they decide to bid at all.

Remember, preparing a complicated bid is a high risk/reward proposition. Contractors must be treated evenhandedly. They must know that they’ve got a shot. More so, they need to know you’ll consider more than just the price (more about the perils of low-bid-only processes here).

Lastly, do you think that general contractors are using an open-book method with their subcontractors? Not likely. If general contractors are experts at procuring construction subcontractor services, then why wouldn’t they use the open-book-bid process with their subs? The answer is they don’t.

Here is What I Recommend

Buy value only. Value is the ratio of “performance” characteristics to cost. The better the performance quotient, the better the value.

Have a process implemented by a project professional that lets the best vendors shine! The low-bid-only procurement process is a flawed, 20th century purchasing model. Instead, implement a procurement process that is proven to test bidders on a multi-dimensional level. Ensure that the dimensions measured are actually correlates of success (on-time, on-budget, no change orders, minimizing risk etc.).

Eliminate Bias. Trust is great. It’s essential for meaningful relationships. But it’s meaningless in the context of an objective procurement process.

Relationships matter. But relationships are often unrelated to achieving value. We all have vendors that have achieved “most-favored-nation status”. It’s not entirely illogical to steer work their way. But without a process to separate the familiar from the truly fantastic, you can’t argue that relationships are related to value.

So, if money, profits and ensuring on-time, on-budget performance matters, break with the familiar we’ve-always-done-it-that-way approach and embrace a methodology that is changing the way design and construction services are purchased. And it’s doing so at a lower total cost.

Again, it’s your money.

 

Copyright 2014.

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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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Stopping change orders

How Will You Protect Yourself From Change Orders?

When your company moves, expands or designs and constructs its next facility, how will you protect yourself and your company from change orders caused by poor architectural design?

Hint: The answer is not, “There’s nothing we can do about it”.

So, if you don’t have an answer, may we suggest you connect with a firm that does?

We’re Apex Project Consulting, Inc. Our promise – No Change Orders. Guaranteed. TM

Watch this video to discover the key to minimizing the unfortunate impact of change orders on your project – before it’s too late.

Stopping change orders

Change orders threaten to overwhelm any project budget.

 

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Apex Introduction Video

Apex Project Consulting, Inc. Introduction to No Change Orders-Guaranteed!

In this video, Tom Conzelman, President, Apex Project Consulting, Inc. shakes-up and challenges the status quo by declaring that for design, engineering, construction and real estate development project leadership, the value proposition must include a Return On Investment. See how Apex Project Consulting has saved clients millions of dollars in hard and soft design, engineering and construction costs.

Apex Introduction Video

Return on Investment is one of the most important value propositions for project leaders.

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Use your law degree to further your career

Five Ways to Make Your Law Degree Pay – Without Practicing Law

So you graduated from law school. Now what?

You may think that there are plenty of lucrative opportunities created by having a law degree – and general speaking you’d be right. It’s just that actually practicing law isn’t always one.

If you aren’t leaping out of the starting blocks from an elite school, turning the sheepskin into cash flow is challenging. You might be better off as a barista than as a member of the bar.

There is anecdotal evidence (no pun intended) that a Juris Doctorate (JD) isn’t always the springboard to upper-middle-class land.  According to a quick search of indeed.com, the average California attorney makes about $53,000 per year.

But before you conclude you’ve made the educational investment equivalent of buying-high and selling-low, consider just a few of the alternatives for which a JD is an advantage.

1. Capitalize on Your Versatility And Talents

A law degree makes you more versatile in the marketplace. Versatility translates into more money. It works in the business world the same way it works in sports. The greater the combination of skills, the more valued the athlete.  The same principle applies to a JD – particularly when used outside of the legal field.

If you can run a 4.35 second 40-yard dash, can jump over 42 inches straight-up and can leap almost 12 feet in the broad jump, you’re pretty versatile. That kind of versatility and talent translates to money.

Those that can do more get paid more.

2. Sophisticated Consumer

A law degree makes you a more sophisticated consumer of legal services. You can speak the language of lawyers, adroitly discerning bloviating from real business. It’s a confidence booster too.

I admit it. I used to be intimidated by attorneys. Maybe that describes you as well. Certainly I was respectful of the what I-didn’t-know-I-didn’t-know blind spot. The good news is that absent the fear-factor you’ll feel more empowered to speak-up as well as mix it up; all to your client’s or company’s advantage.

Again, if you can do more you’ll get paid more.  This point was illustrated for a client of mine recently. They were in the process of negotiating a build-to-suit agreement with a developer.

The short story: Negotiations between my client and the prospective developer/landlord had slowed. The friction wasn’t necessarily about typical land development issues; storm water retention, traffic circulation, soils, available volume and pressure for fire suppression, etc.  It was about responsibility for risks.

Specifically, which party was responsible for issues and risks involved in the land development?

On the cross-country conference call between my client’s three attorneys (they always roam in packs) and their broker, debating the options, I jumped-in.

I suggested that they were looking at the issue from the wrong perspective. Whether our client, whose core business was not land development, could or should take on the various development challenges was not the question. Instead the only question was: Why weren’t we making this the responsibility of the developer through the real estate transaction?

An interminable pause followed.

The attorney from New York released the conversational parking brake and said, “That’s right. We should make these (issues) reps [representations] and warranties.”  The idea was seconded by the other pair of lawyers. The result? My client avoided hundreds of thousands – if not actually unbounded – risks and costs.

If you’ll think more broadly, you’ll find that the JD multiplies the applications and advantages of your natural business acumen.

3. Career opportunities

A quick Google search reveals a long list of career opportunities enhanced by a legal background. In fact, it’s probably easier (and shorter) to enumerate the things that aren’t improved with a law degree. Pastry chefs could probably do without. But not if they’re opening their own business.

From politicians to plumbers, a JD will help you be more effective and useful (assuming you’ll allow that using the word “politician” and “useful” in the same sentence is not an oxymoron).

If gives you an advantage in almost all aspects of business.

4. The Never-Ending Need for Contracts

Almost all human interactions are memorialized in some fashion. Whether they’re written or unwritten. This includes rental agreements, purchase agreements, factory warranties, prenuptials, and even waivers so your kids can enjoy the local skate park or participate in organized sports. You’re probably mentally adding to this list right now.

Consider the real estate industry. I can’t think of another industry so burdened by a morass of documents. All things real estate-related seem to have an agreement attached to them. Whether it’s an offer sheet, letter of intent, sale and leaseback, work letter, purchase and sale agreement easement, right-of-way, or lease agreement, the list goes on ad infinitum.

A friend of mine quoted one of his professors saying, “If people fully understood the impact of taxes on their lives, that’s all they would talk about.” This is also true of contracts.

In fact, the more saturated your industry is with legal agreements or attorneys the greater the advantage. Again, the point is you don’t have the practice law to get full-time, year round benefits.

There’s more to it than helping yourself, you can also help your neighbor.

5. Givers Get More Back – Volunteering

I’m not talking about the straight ahead pro bono stuff. That’s important. But there’s more.

You could teach. I did. There are a lot of people hungry for even just a little legal help. While I taught Contracts for Contractors, it could be a smaller commitment. Maybe you might help a neighbor draft a letter refuting an excessive medical bill. Or it might be providing some guidance to a single-parent navigating a Travel Consent Form.

In fact, anyone that interacts with the legal system or courts could use your help. Consider CASA.

Court Appointed Special Advocates (CASA) is a national association in the United States that supports and promotes court-appointed advocates for abused or neglected children in order to provide children with a safe and healthy environment in permanent homes.

It’s not required that you have legal training. But it helps.

Everyday opportunities to help are all around. Being more helpful feels great, and you’ll also benefit from the authentic networking that develops when you volunteer your time.

So, To Wrap Things Up

If after you’ve graduated, the 80 hour work weeks and the pedestrian salary aren’t what you had envisioned, don’t worry.  You’ll find that there are plenty of other opportunities to leverage your education, whether you graduated from Western State University, College of Law (my alma mater) or elsewhere.

Regardless of your profession or industry, in the long run, it will pay dividends your entire career.

What got me pulled into the law school wood-chipper was the need to survive in the lawyer-dominated, wireless real estate development industry. But what I got out of it was more valuable and enriching – economically and otherwise.

You’ll get more too.

Now, I’ll have that no-foam latte please.

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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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Project management and contracts

What Your Project Manager Should Know (But May Not Tell You) About Your Contract

 

Businesses and property owners rarely begin projects with plans to fail. The fact is however that many projects do fail and many owners end up confused, looking around trying to figure out what happened and why. While there are many reasons for such failures most of these can be traced to a single problem: A lack of understanding of the contracts and contract drafting required to lock-in success.

Unfortunately this problem occurs not only with owners and contractors but with most Project Managers as well and this lack of understanding can lead to disastrous consequences.

Where the Problems Begin

There are two potential problems with poorly drafted project contracts and scopes:

• The contract is legally sufficient, but ignores critical performance criteria or specifications outside of the legal terms and conditions, or,

• The client took a ready-fire-aim approach. That is, the contract, and particularly the scope, was settled upon before an expert could make dramatic cost saving and risk prevention contributions.

A well crafted contract is, and should be, a very versatile tool. The details of the contract not should not only protect the legal interests of stakeholders but also contain expectations of performance of the service and/or the quality of the finished product. Without proper protections, the agreement might as well be written on the back of a napkin. Strong contracts the necessary scope and protections for the project’s and client’s success. Doing this right can mean hundreds of thousands of dollars; saved or lost.

Creating a Properly Crafted Contract

When a project begins, especially before the contracting phase, successful users, client and tenants should expect their project lead to protect them from what they-don’t-know-they- don’t know. Most users of real property are in a field or industry for which architectural and engineering administration is not a required or institutionalized skill set. It is especially important to have a professional PM review contracts before signing to ascertain that owners are properly protected. A good example of this is when there are unexpected and unpreventable delays in one or more phases of the project. Delays lead to costly change orders and, in the end, the user typically will have to shoulder the loss. Consider excerpts from this example.

The plaintiff commenced an action to recover damages for delays in the construction of a college library, which involved the renovation of two existing buildings and construction of an addition. The defendant…as agent for the owner, entered into a contract with the general contractor, whereby the general contractor agreed to act as construction manager, “[e]xpedite and coordinate the work of all Contractors,” and prepare a schedule for the project.

Pursuant to the “General Requirements” of the contract, the owner’s agent, was required to provide a “Critical Path Method” (hereinafter CPM) schedule, but plaintiff was obligated to cooperate with the contractor in the development, implementation, and updating of the CPM schedule.

The “General Conditions” section contained a no-damages-for-delay clause which stated: “No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner’s discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.” Further, “Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.” Provisions were made in the contract for changes and extra work.

Delays in the project were attributed to a number of causes.

The primary witness at the trial acknowledged that the schedule was updated four or five times but, in his opinion, the schedule was useless. He also acknowledged that there were weekly meetings of the prime contractors, the architect, and other representatives.

Updating the CPM schedule was abandoned in favor of two-week schedules, referred to as “look-a-heads,” because the updates were always behind what was actually happening as a result of deadlines not being met.

Among other things, the court held that the no-damages-for-delay clause exonerates the defendant for delays caused by inept administration or poor planning [poor project management].

How Properly Constructed Contracts Prevent Future Problems

A well crafted project contract should cover all aspects of the contract, including fine details like micro schedules for individual subcontractors, and most importantly outline expectations of each entity and the firms under their direct supervision.

A well drafted contract gives the PM powerful tool to keep the project running smoothly. Each of the terms of the contract, down to the smallest detail, can (and should) be expertly negotiated. An expert project leader should be expected to bring a broad set of skills to the effort and be able to foresee possible future problems and plan for them before they happen.

Fixing the Problem

The problem is that so few project management practitioners have the necessary credentials to carry this off and many in the community have basically decided that this type of involvement is simply not part of the job of a PM. They fail to recognize the very real fact that critical aspects of the project, such as contract details, are left out of the general structure it undermines the likelihood of meeting time and budget targets.

An expert project manager should have considerable design, engineering and construction experience to successfully complete the project. They should also possess sufficient contract drafting experience to handle and anticipate problems. Otherwise, without this potent combination of talents, users, tenants, purchasers and other occupiers and improvers of real property are just doing what they have always done, with the same unfortunate results.

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