In an average year, construction activity represents approximately 10 percent of the American gross national product. Given its size and diversity, one might therefore conclude that the industry would be both stable and profitable. This is hardly the case however, as the construction business is instead known for its volatility and slender profit margins. The reasons for this are easy to understand: fierce competition and cut-rate pricing exists within all sectors, tiers and geographies of the industry; and in addition, the technical, managerial and administrative components that characterize today's development process have grown concurrently more elaborate and expensive. These trends are particularly pronounced in the housing and apartment sectors where there are more competitors and fewer barriers to entry.
In spite of these challenging macro-dynamics, it is important to recognize that each construction project begins with the best of intentions. Unfortunately, in a highly competitive and complex climate that is fraught with risk, unfavorable outcomes often plague these projects and their participants. Such outcomes might include cost overruns, budget shortfalls, compromised quality, schedule delays, third-party meddling, heightened regulatory burden, confusion about scope of work, smeared reputations, bruised relationships, bankruptcy and increased underwriting expenses. Troubling situations frequently surface because owners, developers, contractors, architects, engineers, oversight agencies, and vendors cannot reliably predict the future, and so are rarely able to assess the true impacts of their decisions until late in the construction program. By then it is often difficult - if not too late - to recover.
This overview describes the various risks and common mishaps that are inherent in today's complex construction process. Once identified, they can be both monitored and mitigated in a manner that is distinctive to the circumstance, and thereby increase the probability that each project will achieve its respective schedule, budget, and quality criteria.
The Construction Cycle
In most cases a project contains four distinct phases which together constitute the construction cycle: programming, design, construction and close-out. Although they can be viewed as discrete stages of the process, they are, in fact, interdependent and often overlap. Moreover, at fast-track or design/build projects, the degree of dependence and overlap is much more pronounced than in traditional design-bid-build scenarios. On any project there exists the potential for many other issues to surface - and in various combinations - during the course of the construction cycle. These issues can introduce substantial risk. As a consequence, it is critical that project personnel recognize these interdependencies so that the salient risks in each phase of construction can be identified, monitored and mitigated to avoid costly mistakes.
The first phase of any construction project defines how the facility will be used, what appearance it may take, and whether it is financially viable. During the programming period a variety of preliminary studies are performed, which are then commonly summarized and packaged for a variety of constituencies such as owner groups, investors, financial institutions, potential occupants, neighborhood groups, municipal review boards, third-party oversight groups and political agencies. Since the programming phase serves to justify the project, it is critical that its underlying assumptions be as carefully considered and appropriately factored as possible. It is equally important to then weave this complex - and abstract - vision into a message that is clear and concise, so to gain needed consensus and approval. In today's construction climate, it is not uncommon for the time horizon needed to adequately program a project to be as long as - or perhaps even exceed - the time needed to build it.
During the programming phase, issues tend to surface that require iterative study, analysis, discussion and resolution among the involved parties. This, in turn, often requires more time, effort and money than initially anticipated, and can introduce added frustration within the project team. Several other issues during the programming phase can also lead to costly downstream mishaps during construction. To avoid them, the following guidelines are suggested:
- Gather programming intelligence and baseline assumptions from as many relevant sources and constituencies as practicable. Construction is a complex process for which no single individual can anticipate every project issue or contingency.
- Understand the impacts of project siting. An urban site will often entail more permitting, third-party input, as well as elaborate staging and traffic detours; while a more remote site poses more challenges in terms of equipment procurement along with workforce mobilization and retention.
- Establish realistic expectations and contingencies with regard to project budgets, cost estimates, cash flows and revenue streams. These expectations and contingencies would consider activity in other sectors of the construction industry, inflation and interest rates, commodity trends, and availability of credit. This consideration is paramount, of course, given the need for accurate pricing and to procure adequate financing from reliable and trustworthy sources.
- Develop and communicate firm (yet realistic) project schedules and milestones at the outset. While likely to change and shift with time, these will nevertheless serve as the initial guideposts for the project.
- Discuss the project with pertinent political agencies early in the process and obtain their consensus as soon as possible.
- When possible, use public relations and media coverage to help to shape project perceptions among constituencies and non-participants.
- Control expectations. All participants must have a common and realistic understanding of project schedules, costs, and scope of work.
The Design Phase
Once the program has been approved, the design is prepared. Here, the owner's abstract and conceptual ideas are transformed into tangible drawings and specifications, from which the project can be built. This phase entails a thorough and detailed examination of the project's technical requirements, rigorous coordination among all design disciplines and external oversight agencies, as well as periodic meetings with the owner for directional concurrence. At this stage, constructibility reviews and "value engineering" input can be solicited from those familiar with the art and business of construction, to ensure optimal economy.
If the project follows a fast-track or design/build model, it is important to recognize that just a portion of the total project design will be completed before releasing contract documents for bid and/or construction. As a consequence, the designers may not have the opportunity to revisit issues or revise calculations at a later date. This places enormous risk on the owner to provide adequate programmatic information in a timely fashion to the architects and engineers, and for these design professionals to do it right the first time. The failure to do so, of course, exposes the project to changed conditions during construction and close-out, when it is most expensive.
Recommendations to reduce other potential mistakes, oversights and errors that occur during the design stage include:
- Choose design professionals who are familiar with the specific conditions and issues that will arise at your project. At the very least, consider the following criteria as the basis for selection: 1) industry reputation, 2) experience and performance record with projects similar to yours, 3) ability to meet deadlines and 4) pricing.
- Conduct third-party reviews of the programmatic input and design output, when practicable, to validate baseline assumptions, eliminate ambiguities, and assess incongruities within the design documents. Errors detected at this stage are relatively inexpensive to fix, when compared against having to pin them down during construction and close-out.
- Promote regular communication and coordination within the design team to insure that the various disciplines and documents (i.e., architectural, structural, geotechnical, mechanical, plumbing, and electrical) are well-integrated and do not contradict one other. This will increase the reliability of the contractor's cost estimate and reduce the probability for field errors and change orders.
A contractor can be chosen once the contract drawings and specifications are completed. At this point in the cycle, 1) bids for the project are solicited by the owner, 2) the construction contract is awarded, and 3) the necessary municipal permits, materials, equipment and labor are procured. It is important to recognize that the contractor is heavily dependent on the quality of the design documents; hence, the greater the precision and accuracy of these drawings and specifications, the higher the reliability of the contractors' pricing proposal and cost estimate.
With the contract awarded, the project can be built. In today's electronic culture of real-time reporting, anticipated construction schedules and budgets, project cash flows should be carefully analyzed in advance, and continually monitored and refreshed by the contractor and validated for concurrence by the owner. This may be a weekly, bi-weekly or monthly exercise, depending on the size and complexity of the project.
There are many other risks that must be addressed by the contractor and owner alike at time of construction. Recommendations to reduce potential mishaps include:
- Assure that the anticipated skilled labor, materials and equipment necessary for the project can be procured in adequate numbers, in timely fashion, and in a manner consistent with the bid price. Be sure to factor the presence and participation of union labor (i.e., hourly wages, number of working hours per day, potential for work stoppages).
- Monitor the schedule and cost impacts due to staff/management turnover and changes in field production.
- Insure that adequate project safety, supervision and financial control protocols are in place and are being followed.
- Minimize owner-directed changes. These tend to be after-the-fact, and can often be quite expensive to implement. When they occur, change directives and negotiated change orders must immediately follow.
- Verify the experience and track record of the field management team;
- Ensure that provisions are in place to accommodate medical emergencies, natural disasters, and evacuations;
- Ensure that proper safety training programs are in place for all superintendents and workers; and
- Ensure that adequate security provisions are in place to minimize theft of materials and equipment from the job site.
The close-out phase follows on the tail of construction, and commonly begins at the point of "substantial completion." It is during this period that a series of administrative and managerial issues must be addressed to satisfactorily bring closure to the contract, such as:
- Preparation and satisfactory execution of punchlist items;
- Obtaining all necessary permits for occupancy;
- Facility testing and building commissioning;
- Transfer of extra materials and spare parts to the owner;
- Transfer of manufacturer warranties;
- Start-up and commissioning of all major equipment;
- Preparation and transfer of as-built drawings;
- Release of lien documentation; and
- Processing of outstanding invoices for payment.
Recommendations to minimize potential confusion and oversights during close-out include:
- Obtain consensus and written closure for all outstanding punchlist items, which would address any concerns related to workmanship, quality and overly-stringent owner expectations.
- Obtain all necessary inspections and written certifications from building department officials related to life-safety issues such as fire alarms, evacuation procedures and handicap accessibility.
- Schedule all commissioning tests so that they coincide with the calendars of building inspectors or other authority having jurisdiction.
- Prepare, coordinate and deliver all operation and maintenance manuals, as-built drawings, manufacturer warranties, and extra materials and spare parts.
- Provide system operation training to the owners' personnel.
Wayne H. Kalayjian is a director with in LECG's real estate and construction advisory practice in Los Angeles. He has over 25 years of industry experience, with specialties in construction cost investigations and project audits, defect actions, cost estimating, financial controls, organizational change, and process improvement. Mr. Kalayjian is a licensed professional engineer in several states, and has testified as a construction damages and liability expert in federal and state courts across the country. He holds academic degrees in civil engineering from Tufts University, structural engineering from Stanford University, and business management from the Massachusetts Institute of Technology. Wayne can be contacted at (310) 712-0149 or at firstname.lastname@example.org.
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