Because construction projects are highly complex, collaborative, interdependent and long-lasting team efforts, the exact final cost is impossible to estimate. It has never been a matter of skullduggery or incompetence that leads to contentious extras, cost overruns or busted schedules, as many industry patrons have come to believe. It’s actually the nature of the construction project. The high risk of those projects is exacerbated when the owner and contractor enter into a one-way, fixed-price contract designed to protect the owner from the presumably unscrupulous, incompetent contractor.
This insanity must stop.
Originally, low-bid, fixed-price contracts were invented to keep public servants honest. What has evolved is an industry-standard contracting system that leads to overestimated costs, underperformance and catastrophic failures of otherwise hard-working, competent contractors. The underpinning beliefs that support fixed-price contracting have never been truly reexamined, and these same beliefs are now being renamed and reaffirmed as new and improved contracting methods.
The new methods take the form of owners trying to keep contractors “honest” by designing “tougher” contracts. I recently asked Tom Soles, the member services executive director of the Sheet Metal & Air Conditioning Contractors’ National Association, if his members are seeing any changes in the risks they face. His response echoes what I hear from others.
“Owners of construction projects are focused on compressing schedules for their projects,” Soles said. “They are also pressing for earlier cost certainty.
As a result, contractors are often pressured to commit to a contract cost as early as schematic design, with little negotiation for addressing late changes. This has also led to cuts in design budgets and schedules, leading to the delegation of design to the HVAC and sheet metal contractor, who are now in the position of owning more risk than they have in the past.”
Then, too, there are crazy government contracting policies. And I say they are still crazy after all these years.
Look at how the New York Daily News reported Gov. Andrew Cuomo’s approval of legislation granting the city the power to streamline capital projects and cut costs through a contracting method known as design-build. Cuomo has actively promoted design-build and credits it for success on the Tappan Zee Bridge replacement.
“The much-heralded technique allows city agencies to issue a single request for proposal and contract for the engineering and construction of capital projects,” the newspaper stated. “The bill also forces contractors to cover any extra costs that come with unexpected changes or delays.”
We must stop letting politicians and lawyers manage our industry. Collectively, we are at fault if we continue to play along with a one-sided contracting tradition that puts every contractor at greater risk.
The design-build method of contracting puts total control of a project in the hands of the team, and for that reason alone, is a positive advance. But, in the owner’s mind, and Cuomo’s, design-build holds the team fast to an agreed upon total cost without consideration of any variable risk factors like owner changes and unavoidable schedule delays.
“What we call design-build or alternative procurement is actually a risk-transfer tool for owners, whose challenge has been to deliver schedule and price certainty,” says Guy Gast, Iowa division president of The Waldinger Corp.
“The only time contractors really have control is the day they sold the job,” Gast told me. After that, he says, price and schedule uncertainty can ruin “your best efforts.”
Don’t be fooled. If you are flattered by being given “total control” of your project by the State of New York (or any other owner), consider this. They don’t necessarily believe you are a better designer; they are just trying to get you to assume more risk. And contractors cannot assume any more risk in a highly complex, collaborative, interdependent, long-lasting team effort whose exact final cost is, in point of fact, impossible to estimate.
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