Construction Costs – Beyond the Amount at Bid Time

February 8, 2010 – 6:00 am

When bids are opened many owners and developers look at the bid amounts and breathe a sigh of relief that they are at or less than the budgeted amount.  They look at their project as now being a financial success and look forward to production or income becoming reality at the end of the project.  In some cases this is not true.  These are the cases where budgets have omitted key costs that will be incurred during and after the construction period.

Project owners can be surprised by a little item such as change orders.  They wonder how these can be extra costs to them.  After all didn’t the architect define the project and the contractors bid a firm price to do the work?  Change orders can also surprise the experienced owner.  They may have expected their customary one to three percent in change orders but the project incurs ten percent, or more, in change orders during construction.

Construction oversight and monitoring costs can be missed when setting a budget.  This can happen when negotiating fees with the design firm.  Construction oversight is typically an “extra” cost beyond the design fees.  The project may also be special in that it will require more than just processing the paper and verifying the pay application.

An owner may be in for a surprise if they have a commissioning requirement that has not been developed prior to awarding a construction contract.  While commissioning is not by the contractor, it does require craft support to implement.  Commissioning requires time that may not be included in the original planning for the completion date of the project.  These are added costs to be considered.  

In order to keep the process on track each owner and developer should provided budget funds, beyond what each line item may contain, to make sure the project can be completed as planned.  By doing this the “surprise” of added costs will be minimized so the project can be a success!

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , | Leave a Comment

Force Majeure Delay

February 5, 2010 – 6:00 am

I was reading an article in the 12-7-09 issue of ENR about the Hoover Dam Bridge.  The project was plagued by many problems; from funding to unlicensed concrete supplier.  The one thing that really bothered me was the fact that wind caused lines to collapse and the Nevada towers fell.  This incident caused a two year construction delay and was not ruled a force majeure.   Force majeure is an “act of god: a natural and unavoidable catastrophe that interrupts the expected course of events.” Now I do not claim to know all the events that happened and all of the circumstances of the event, but if wind caused the collapse and the collapse caused the delay; then it would be reasonable to say that the delay is force majeure!

By Justin Short | Posted in Friday Tips | Tags: , , , , , , , , | Leave a Comment

Ignorance Is No Excuse – Before and At Bid Time

February 3, 2010 – 6:00 am

Problems on projects can be more prevalent in the tough economic times.  Let’s ignore the low bidder being the one with the biggest mistake for now.  The contractors, subcontractors and vendors are facing tight financial times.  This also applies to architects and engineers.  The owners are facing these same or very similar conditions as the rest of the participants.  This makes it even more important to make sure all parties involved in the project know their responsibilities and obligations.

The architects and engineers are under financial pressures.  They have been for years on their fees.  This leads directly and indirectly to bid documents that are poorer quality each year.  A good example of this is all of the questions that are asked during the bidding period by the contractors and subcontractors.  Each question is a problem with the bid documents.

Contractors and subcontractors on the projects are facing hard financial times.  There are far fewer projects and competition is intense.  Backlogs of profitable work have been reduced.  They are looking to get and keep every contract dollar they can obtain.  In the “good times” many firms walked away from projects that could have had claims for extras because there was more work and profits coming on the next project.  This is no longer true.  Contractors are becoming more intense in recouping costs.

Owners and developers in the prior years could start projects without tenants lined up.  They could obtain loans for marginally viable projects.  Times have changed.  Loans are looked at with more scrutiny than they have in the past 10 years.  Owners and developers are looking to keep the project costs as low as possible.

All of these factors are coming together in one giant wave that can sweep away many firms in the overall construction industry.  The contractors must make sure the funds are in place so they can be paid.  The architects must do the same, not only for the design but construction period.  The owners and developers must make sure their architects and engineers are turning out quality documents.  Owners must make sure the contractors have the resources to complete the job, not just a bond.

Contracting is complex enough in good times.  Tough times can make it worse if the parties do not make themselves aware of the conditions of the others.  Ignorance is no excuse for putting your company out of business.

Oh By the Way… A payment and performance bond is supposed to get your project completed but it may not get it completed on time.  When was the last time the condition of a bonding company was verified?

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , , , , , , | Leave a Comment

My Biggest Competitor and Best Revenue Source – The Free Estimate

February 1, 2010 – 6:00 am

I lose a lot of estimating work due to the contractors in this country that do free estimating on projects in the budgeting and pre-construction phase of a project.  I also get a lot of work from the owners that get the free estimates and then find out that free doesn’t necessarily mean a good deal!

As a consulting estimator I have to contend with owners and developers that have been unduly influenced or trained to expect free estimates for their project.  The lure of a “free no obligation estimate”, such as can be found in the want ads or the phone book, must be too irresistible to pass up.  How often is there really a free estimate or a no obligation service actually provided?

 I also have encountered the contractor providing the free estimate so that they can receive “preferential treatment or some extra goodwill” by their potential client.  How far does goodwill go to pay the costs of the estimating staff required?  How much paying work has to be given up to meet get the promise of preferential treatment?

 The free estimates may not be such a good thing.  On many projects the early estimates are prepared with little or no reliable cost data.  Where a firm may excel at bidding per plans and specs or with a great deal of information, they may be terrible at conceptually considering all of the costs.  This is when the free estimate is my best source of revenue.

 Oh By the Way…I also get a lot of work from contractors and construction managers that are being paid for the pre-construction estimates.

By Don Short | Posted in Construction | Tags: , , , , , , , , , | Leave a Comment

Free Estimates

January 29, 2010 – 6:00 am

I attended a meeting this past week on the topic of “Ethics in Construction: There is no Free Estimate”.  There were numerous contractors that have been bitten by providing a free estimate and who were then not even asked to bid the project.  One good suggestion was made and that is to ask three questions before agreeing to do an estimate.  “Am I going to get paid to do the estimate?”  “Will I be awarded the job?” “Will this project be sent out for competitive bids?”  Just asking those questions will help you in your decision to provide an estimate for the owner/design team.

By Justin Short | Posted in Friday Tips | Tags: , , , , , , , , , , , | Leave a Comment

Politicians – Impeding Progress and Success

January 27, 2010 – 6:00 am

Once again actions by politicians and political appointees are dealing a blow to progress and success.  This latest example can be found in Florida where the Florida Public Service Commission denied rates hikes needed to construct new power facilities and modernize existing plants and infrastructure.

This rate hike would help fund the construction of two nuclear power plants worth between $12 billion and $18 billion, modernized two other plants for approximately $2.4 billion and halted a related natural gas pipeline.  The modernization program of the two plants would have cut carbon emissions by 50%.

Ironically in the same news report from ENR.com Democrats in the United States Senate were reportedly drafting an $82+billion “jobs” plan to aid the economy for small businesses, teachers and mass transit.  If this plan is of similar vein to others, it will have zero lasting benefit to the people of the United States and increase taxes.

Oh By the Way…With spending on two nuclear power plants worth $12 to $18 billion, what would the construction of 30 to 100 nuclear plants a year do to stimulate the economy?  Look how it would benefit the environment.  Go figure!

By Don Short | Posted in Construction | Tags: , , , , , , , , , , | Leave a Comment

Negotiating Cost Reimbursable Contracts or Anything Else for That Matter

January 25, 2010 – 6:00 am

I have had the opportunity to sit in on contract and pricing discussions over the years on a wide variety of projects.  Some of them are simple and straight-forward others are large and complex.  I have also had the opportunity to participate as an expert or as an arbitrator when disputes develop over cost reimbursable contracts and pricing.  The disputes can get real ugly, real fast!

The one thing that always amazes me is that one or more of the parties usually, but not always, must believe the other party is just plain stupid.  They may think the other party doesn’t understand contract terms, pricing or the scope of the work.  In some cases they think they can pull a fast one on the other party.

This belief is not just held by the owner or developer it can reside with the construction manager, designer, prime contractor, subcontractor and/or the material and equipment suppliers.  There does not appear to be any limit to who thinks the other party is stupid.

When this attitude occurs on a project, usually from the beginning, it upsets a delicate balance that would normally occur between the parties.  This balance would tend to avoid disputes.  From what I have observed, this upsetting of the natural balance actually tends to shove the parties into an adversarial position more often than not.

Pushing one or more parties into an untenable position on a contract, a project or any endeavor can lead to unwarranted delays and cost increases.  How does this benefit anyone?

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , , , , , , , , | Leave a Comment

Estimate Documentation

January 22, 2010 – 6:00 am

 When you are preparing an estimate for a project that is not 100% designed – documentation is the key to a successful estimate.  You as the estimator have to document what you have included in the estimate so when it comes down to the estimate resolution meeting you can fully explain what you have in the estimate.  One of the best ways to document is to draw on the drawings the locations of the items included in the estimate.  If there is any disagreement over the estimate you can point to what you have done on the drawings.  You can also include any data sheets of items that you used.  When there are changes in design you can compare them to what you have already done and update the estimate accordingly instead of wondering what you included and have to do the entire estimate over.

By Justin Short | Posted in Friday Tips | Tags: , , , | Leave a Comment

Low Price Is Not Necessarily a Good Deal

January 20, 2010 – 6:00 am

We are seeing a small bit of life in the pipeline for private projects.  However, these owners and developers may have some tough times coming up.  It is not from being unable to finance the project but from taking bids that are too low.

The firms contemplating construction are expecting the exceptionally low bids to make their projects, not break them.  Where they may have a project at $100 per square foot, they are expecting bids around $70 to $80 per square foot.  When they run these through the financial performance calculations, they become giddy with excitement on the anticipate profit margins!  And why shouldn’t they, it is a 20% to 30% cost reduction.

However, they are ignoring the ancient adage of if it looks too good to be true – it is too good to be true.  The sad thing is there are contractors in the market today that will not hesitate to bid this cheap, which is essentially below cost.  The owners that are giddy tend to think only good profits will come from this level of pricing.  Sometimes they even fail to make sure the contractors and subcontractors have payment and performance bonding in place.

What happens to the pro forma calculations when a contractor goes under and it costs more to complete the work?  What happens if more than one subcontractor on a project defaults on a contract?  What size of impact does the extra time and cost have on a project?  Consider the dispute resolution arena where disputes can take several months to years to settle, even if a bond is provided.

What happens to the project in the mean time?  Will the owners or developers be able to take a hit on their end if a project goes down the drain?  Will the successful contractors be able to survive the unsuccessful owners and developers?

Oh By the Way… Owners and developers can prevent these problems prior to bid time by using independent bid evaluation estimates to weed out the low ball bidders that can create problems on their project.  Prime contractors can help by not using these goofy low bids.  After all, the lowest price is not necessarily the best deal for the owner or for the contractors.

By Don Short | Posted in Construction | Tags: , , , , , , | Leave a Comment

The Economy is Getting Better – Really!

January 18, 2010 – 6:00 am

 Hot off the wire:  The recession is over.  Stimulus spending works.  The country is on the road to recovery.  Inflation is not a concern.  The moon is made of cheese.  Construction unemployment is over 23%.  Only one of these is true.  One is a fairy tale.  The rest are “facts” put out by the government.

The rate of unemployment is rising, not just in the construction industry.  It would be higher if the federal government had not hired so many people.  There is a “Misery Index” in the January 18th issue of Business Week that is a combination of unemployment and inflation.  The index is heading up – that means the economy is getting worse, not better.  How could this be?

Companies are making some money according to the reports from the stock market and other sources.  But they are not spending the money.  I know of companies that are deferring their spending on capital projects and maintenance.  They are accumulating cash because cash is king in uncertain times.   We are in uncertain times.  More and more contracting business plans are becoming “I am trying to figure out how to survive this year.” And “I hope the goofy low bidders go out of business before I do.”

These uncertain times are brought to you by the politicians in Washington DC and in some of the state capitals.  The returning TARP funds will be misused and run up the national debt.  The Cash for Clunkers, various bailout packages and the Stimulus program are doing the same thing.  Look at California for a financial mess that will have national repercussions.  What plan from the federal government is benefiting the country in the near term or long term?

Oh By the Way…The health care reform will not cost any extra money and the Emperor has no clothes! Which one of these is true?

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , , | Leave a Comment