Over budget construction projects are all too common problem for project owners. A Google News search of the term “construction cost overruns” yields the following stories for the month of July 2013 alone:
- A VA hospital that is $400 million over budget;
- A nuclear power plant that is $700 million over budget; and
- An airport terminal that is “substantially over budget.”
That is over $1 billion in total cost overruns for only three construction projects.
While most of the blame usually is directed towards the project’s general contractor, in reality project owners should only blame themselves. Owners usually spend little time (and money) making sure their construction documents are drafted to fully protect their interests.
Owners usually make three common mistakes, all with simple fixes, during the project’s contracting phase that cause them to have construction projects that are over budget: (1) failing to make sure the architect issues fully complete construction documents; (2) failing to require contractors to review the drawings and specifications prior to bidding; and (3) simply accepting the lowest bid.
1. Incomplete Design Documents.
While other forms of project delivery, such as design-build and construction manager at risk, are gaining acceptance, the most common delivery method remains design-bid-build. Under the design-bid-build delivery method, the owner hires an architect to design the project (Design). The architect designs the project and prepares drawings, plans, and specifications outlining what the contractor are to build. The owner then takes the plans and specifications and obtains bids from contractors to build the project (Bid). Finally, the owner selects a contractor to build the project (Build).
Projects go over budget when contractors demand more money from the owner for work that was not clearly shown on the plan and specification that the architect prepared. These payment demands are referred to as change orders. This mistake that most owners make is assuming that the architect has prepared a 100% complete set of plans and specification that contain every detail necessary for the contractor to build the project. To the contrary, most owner-architect agreements only require the architect to prepare plans and specifications that show the architect’s general design intent. It is up to the contractor to fill in the blanks by requesting information from the architect during the construction phase of the Project. Problems arise when contractors claim their bid was based on details not shown on the plans and specification and when the detail is revealed during the construction of the project the owner is forced to incur additional costs.
In order to address this problem, owners should insist that their owner-architect agreement contains language requiring the architect to produce a fully 100% complete set of drawings that are fully coordinated with any documents prepared by engineers and designs working on the project. By including such language, owners can look to the architect for compensation for cost overruns incurred because of missing details in the drawing. Of course, owners routinely look to the architect for compensation when they are forced to incur additional costs because of incomplete plans, however, by including language requiring the architect to produce a fully complete set of documents they undercut the number of defenses the architect can raise.
2. Failing to Require Contractors to Review Documents Prior to Bidding.
In order to combat the contractor who seeks additional compensation for work allegedly not shown on the plans and specifications, owners need to include language in their owner-contractor agreement that stating that the contractor has fully reviewed the plans and specifications prior to submitted its bid. The owner should also require the contractor to affirm that it is fully familiar with the plans and specifications and fully understands the architect’s design intent and that the contractor’s price includes all of the work necessary to achieve the architect’s implied or express design intent.
3. Accepting the Lowest Bid.
Whether it be demands of shareholders, boards of directors, or investors, the owner’s need to complete a project at the lowest possible price is understandable. However, unlike in the public contracting, there is no need for the owner to select the lowest bid among the bids it receives. As any experienced owner knows, the lowest bid does not equal the best bid. Indeed, some unscrupulous contractors are known to purposely under bid a project only to make up the cost through a series of change orders which request additional compensation.
Owners are much better off going with a trusted contractor rather than simply selecting the lowest bid. Selecting a trusted contractor with a track record of constructing projects like the one the owner wants to build combined with changes to the contract suggested above will greatly increase the chances that a contract will be completed on budget and on time.
Wally Zimolong
Wally represents contractors (and subcontractors) and developers. His clients build and develop residential, commercial, and industrial properties nationwide. Wally enjoys working with the owners of the businesses he represents because they tend to be entrepreneurs and all around interesting people.
