Barry B. LePatner, Esq.
With needed construction projects proceeding despite the ongoing slowdown in the economy, negotiating construction that ensures completion on schedule and without avoidable cost overruns can be a considerable task for most owners, developers and lenders. Fortunately, a few carefully considered steps can be taken to ensure the financial health of your projects by following the Four Golden Rules of Construction Cost Certainty.
The U.S. population is poised to grow by 100 million through the year 2050. The net result is that we will be embarking on a $25 trillion building spree for new schools, hospitals, roads, offices and residences nationwide to accommodate this growth. But critical to this national endeavor is that we build anew without the recognized inefficiencies of our construction industry, where nearly 50 percent of all labor costs pay for waste and corruption, rather than completing a project. There is simply no reason for new construction projects to begin without cost certainties built into the contract.
To address the fact that contractors too often provide bids based on incomplete design documents and low-ball the contract price — only to subsequently seek profits on unwarranted change orders and delay claims — our firm has developed the LePatner C³ TM Method, a detailed program for ensuring cost certainty for construction projects of every type. Owners are still taking risky shortcuts in order to begin construction as quickly as possible, while their lenders are not aware of or ignore the potential consequences. As a result, many construction projects come in 20, 30 or even 50 percent over budget. What owners, developers and lenders must know is that now there are proven methods that will protect their investments.
However, there is a deceptively simple solution to the menace of hidden costs and unwarranted cost overruns: honest and accurate cost estimating by owners before contracting with the construction team; contracts negotiated with all project stakeholders which provide incentives for contactors to assume the risks of completing the work on time and on budget; and negotiations with contractors that identify and build in maximum pricings for all identified contingencies so that the accepted bid price plus all potential contingencies result in a TruFixedPrice™.
To help avoid commonplace, yet unnecessary construction problems, here are Four Golden Rules of Construction Cost Certainty:
1. Demand Complete Drawings.
Owners and lenders typically do not recognize the direct relationship between an incomplete set of construction documents and cost overruns. They should require the design team to produce a fully complete and coordinated set of construction documents for bidding on a project. Only when contractors can prepare bids based on full details of the owner’s project can the construction contract secure a TruFixedPrice™, which will ensure no change orders and delay claims for incomplete design information.
2. End Fast-Track Projects.
Despite the proliferation of “fast-track” projects — where construction starts “early” while design documents are being finalized — they rarely finish earlier than if construction had commenced after the design had been given the time to be fully developed. In fact, “fast-track” often extends construction schedules and increases construction costs by as much as 50 percent.
3. Say “No” to Low Bids, and “Yes” to Fixed-Price Contracts.
Owners and lenders should insist upon a fixed-price contract for all construction projects. Meaning, what you agree to pay contractually is what you end up paying.
Much to its own detriment, the construction industry has long accepted a process of low bids, in which the lowest bid offered by a contractor is often awarded the project. Under this system, construction managers (typically working from incomplete drawings) often reap their greatest profits by submitting costly claims and change orders — after construction has begun — leaving the owner little recourse but to agree to the changes and absorb the added expense. Fixed-price contracts will protect you from these often drastic price escalations.
4. Demand On Time and On Budget Project Completion.
As part of your contract, insist that projects be delivered on time and on budget. Contractors would be awarded extra compensation for doing so, or take a penalty for failing to meet those obligations. A contractor with “skin in the game” will be far more motivated to deliver the project they promised. Contractors need to assume risk.
You can either continue to allow the accepted, flawed industry practices to bust your budgets and jeopardize your investment, or you can insist upon a rational process that will keep you in the black. It is long past the time when owners can afford to cede 20 to 40 percent of their construction costs to contractors who refuse to assume the risks of doing their job properly with full transparency as to the actual costs of a project.
— Barry B. LePatner is founder of the New York City-based law firm LePatner & Associates LLP. For three decades, he has been prominent as an advisor on business and legal issues affecting the real estate, design, and construction industries.