The commercial terms of the contract can consume page after page of small print.  These pages should be reviewed carefully prior to submitting the bid on the project.  If there are objectionable terms the contractor needs to ask questions to see if they can be changed prior to the bid being submitted.

If exceptions are not allowed, as is the case with many governmental and some private companies, the contractor has to judge the risk. If the risk is acceptable the contractor should adjust their pricing to cover the risk.  If it is not acceptable, they should pass on bidding the project.

But it is not just the commercial terms of the contract; the technical specifications can create problems too.  Remember, the specifications identify the least acceptable quality level the owner is looking for in the project.  The contractor looks at them as the maximum level they have to meet.  When these two don’t meet – here come the problems.

Oh, By the Way… There are more than these obstacles to success.  Yet, contractors keep on bidding.  They have to be the most optimistic companies in the world.

Then there are the experts for each side.  They are fair game for the other side.  By this I mean they can be subject to the full treatment of getting beat up in depositions and during their testimony regarding their opinions.  Some of it can be deserved when the expert is clearly less than an expert in the area of testimony.  Some experts charge higher rates for depositions and their testimony.

It is interesting to see how some experts should not really be considered as experts when it comes down to it.  I have seen an “estimating expert” on the witness stand testify about construction estimating practices.  This expert was from an accounting and consulting firm.  His experience in estimating consisted of estimating fees on their assignments.  None of the estimating involved construction or time and motion knowledge.

Industry experts are truly beneficial to the dispute resolution process.  They can assist their client in many ways. It may involve telling them to settle the dispute.  It may be to participate in an oversight role with their client doing the bulk of the work in preparing for the trial or hearing.  It can even be assisting the attorneys with questions for the other side.

Oh, By The Way… Will an expert help make your case?  Maybe. Maybe not.  The facts are your best offense or defense.  If you rely upon an expert, make sure you have a knowledgeable industry expert who will present the facts and conclusions in the clearest manner possible to help achieve the best possible outcome.

The competitive advantage comes in the means and methods used to achieve the results the owner and architect or engineer have set out in the plans and specifications.  This is not to slight the other members of the project, but generally speaking the contractors (their estimators and project management personnel) are the most knowledgeable people regarding the means and methods on any given project.  Productivity gains and losses are where they make or lose money.

At bid time, when a competitive advantage develops, the smart contractor will price out the customary or conventional process and evaluate it against the “unconventional” process.  If there is a savings the pricing structure can reflect this.  They may take half the cost difference as a “risk/reward” amount to add back to their profit margin.

In my bidding, I have been “beat’ by others using this type of competitive advantage.  One that comes to mind is where the successful bidder used a work week with fewer overtime hours than the one we, and the other bidder, anticipated.  They saved on direct labor cost for each hour and gained in overall productivity.  The owner received the same project specified at a lesser cost than the other bidders would have provided.

Oh, By the Way… Innovation comes from experience and ideas developed from this experience.  With the “old timers” leaving the industry, and a dearth of training and mentoring, the construction industry may be in for some hard times in the upcoming years.

Bidders that short circuit the specifications are taking something of value from the owner of the project.   In the development of the specifications the owner has set forth their expected level of quality with regards to the materials and workmanship.  If they want Product X meeting Specification Y that is their decision.

If contractors desire to have a substitute product considered, there is a mechanism to get it done.  However too short bid periods, pride of authorship and other factors tend defeat this mechanism.  If this happens the contractors still need to bid to meet the specifications.

After the bid, the contractor can then re-approach the designer and owner about the substitution.  This process could involve a savings to the owner in time and/or money.  The owner and architect or engineer need to possess an open mind and have the knowledge to properly evaluate this option in any case.

Oh, By the Way… The successful, long term contractors that make money on construction are the innovative contractors.  They innovate on production and other areas to succeed.

It doesn’t matter if you have an earthwork program that is used for takeoff and then field elevation control.  If you do not set it up in the field correctly you will not get the right elevations.   If you set it up right once, it does not mean it will get set up right the next time.

Estimating software is another big time saver.  The resulting on screen displays and/or prints are impressive.  Because they look good, they must be right.   However if the user does know how to prepare an estimate, the results will be impressive looking garbage.

The same holds true for scheduling software.  If the user doesn’t know the logical relationships between the activities, the schedule is worthless.  Impressive, but not worth the time it took to prepare.

I imagine the same holds true for most software.  I know it certainly does for spreadsheets, word processing and accounting software.

Oh, By the Way… My moment of enlightenment in the car was finding out I needed to turn the heater on after two days of wondering why the temperature was not coming up to the one set on the screen!

A major firm needed estimating services.  They wanted the service on an hourly rate basis with established per diem rates for travel and such.  So far this is a doable deal.

The contract agreement documents contained 51 pages of single spaced text.  Considering the contract scope could be for well under $250,000 up to $2 million in value, I suppose this could be considered as tolerable.

The “I gotcha’s” were many. What became the problem was they were requiring locally available personnel for staffing at the various sites located around the country.  The assignments were for undefined time frames and they retained approval rights on the personnel being provided.  If qualified personnel were not available locally they were to be assigned on a per diem basis with the same conditions attached.  Besides these terms, there were numerous other considerations being imposed.

In review of the total package it became apparent what they really wanted was a “job shop” or temporary labor agency, not a consulting company to provide professional estimating services.

Oh, By the Way… In spite of the lousy construction economy, we declined to submit on this RFP since it did not match our methods of operations and untenable contract conditions.  It would have degraded our typically outstanding results.

By its very nature the design-bid-build procurement process is a competitive one where all of the competitors are bidding on the same scope of work.  This scope is fully defined in the plans and specifications, etc.  On a design build basis, this may not be the case.  Each bidder may have a different basis for the pricing.

The competitive nature of the design-bid-build market is such that the prices are the “best” each contractor, subcontractor and vendor can develop in order to win the job with the lowest price.  With each bidder quoting the same scope, it is a relatively straightforward process to determine the successful firm on the project.  On a design build basis, the lowest price may not be the best price because the scope has to be evaluated in conjunction with the pricing.

Change orders and litigation can be considered as a part of the cost.  On the design-bid-build projects we have observed change orders percentages can be quite low, in the range of one to three percent of the bid amount.  However we have a client where their change orders were in excess of twelve percent on firm price projects.   This high rate was due to their internal practices (and yes we did show them how to reduce the change orders and they did).

On design build projects it is not uncommon to see change orders or changes to the initial bids far in excess of the amounts stated above.  Whether it is an unforeseen scope (another discussion point), owner directive or another of a host of reasons, design build by its very nature is more costly when it comes to changed values from the initial bid amounts.

Litigation is a project gone wrong.  The projects we see in arbitration, litigation, etc. have been the result of owners, designers, managers, contractors, subcontractors and/or vendors that do not uphold their responsibilities to one another.  This applies across the board to design-bid-build and design build contract formats.  The sky is the limit when the project hits this stage.

Oh, by the Way… If an owner wants the cost effective solution I recommend design-bid-build.  If they want design-build I show them how to get the best value for the money they spend.

How about when cheap is low in price and worth more than its cost?  This has a place in the market for the buyer.  The phrase, “I bought it cheap!” can be thought of as bragging when this occurs.  While the buyer is happy, what about the competitors that lost out?  Did the cheap result from the low bidder making the biggest mistake?  Did it result from the low bidder cutting vendor and subcontractor prices with the intent of bid shopping after getting the job?

When cheap is low cost and shoddy the buyer may have the same thoughts on buying it cheap.  However, did they consider how it became cheap and the ramifications?  Did the cheap seller adhere to the specifications?  Does the buyer know that this may cause extra costs to be incurred in other areas?  What will the maintenance and operations associated with this version of cheap?  Perhaps quality and useful life didn’t enter into the selection process.

In both of these situations the competition to win the work suffers.  In the pre-2007 “normal” market this may have occurred from time to time without too many lasting ill effects.  The bidder that was usually goofy or unreasonably low would disrupt the market and then go out of business.   Since 2007 the “cheap” bidders have been far more prevalent in the construction market.  We are going to see some long lasting problems due to this.  It will not just be the contractors that suffer from these consequences.  It will be the buyers of construction projects that feel the effects too.

 Oh, By the Way… I am an advocate of competitive bidding and pricing.  However when less than astute business practices overrules basic sound bidding principles, it then degrades the entire industry.

In some respects auditing a GMP contract for the owner should not be necessary.  The owner has placed their trust in a firm that has promised to look out for their interests on the project.  So why bother to audit?

Well, there are many reasons.  A simple reason would be to check for math mistakes in the billing amounts.  This audit would double check the supporting payment information to make sure the math was done correctly.  After all, mistakes can happen without being caught when the payment application was processed.

More complex reasons involve making sure the GMP Prime Contractor/Construction Manager was living up to their responsibilities identified in the contract.  An audit may not be necessary of the Prime/CM was conducting business in a transparent manner in the pre-construction, construction and close-out periods.

So why should an audit take place?  Think of it as a quality control/quality assurance program.  If the contract terms and conditions are being met then there is very little likelihood that things are going wrong.  By bringing in a third party to conduct the audit the owner and the Prime/CM can be assured that everything is in conformance to the contract.  If not, they can be corrected, hopefully in short order.

Our blog will resume January 4th.