Ten Warning Signs A Project Is In Trouble And What To Do About It

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Construction Industry is starting to recover and I have been asked to expand my notes from last November’s article.   We are that stage of the recovery where Design Professionals and Contractors attempt to use their current staff to accomplish expanded project responsibilities.  This often leads to concerns for Owners and Lenders as they are returning to the development arena.

Fontainebleau Hotel, Resort & Casino, Las Vegas, NV

Ten Warning Signs A Project Is In Trouble And What To Do About It:

1.      The excavation is 50% of the total project cost and the electrical work is for free.

Cash flow — the two words that drive a contractor to perform.  At the outset of a project, the contractor prepares a schedule of values from which his progress payments are measured.  The fact that the owner pays the cost of the work less 10% for retainage means the contractor will get less than his cost as reimbursement for his progress.  The strategy is for the contractor to “front end load” this payment schedule to off set the cash shortfall.

Several comments regarding the schedule of values:

Compare the schedule with the estimator’s budget for the project.  The contractor’s schedule of values should closely align with the estimate.  Watch areas such as concrete work, sitework and mobilization fees.  These may be overstated to generate the cash flow.  Plumbing, fire protection and electrical work are normally understated.  Because the line items within the schedule of values have been adjusted, never accept a line item in the schedule of values for a credit on the project.

Every owner should be concerned about timely payment by contractors/ designers to their subcontractors/consultants.  Slow or non-payment of a contractor by the owner (or the contractor’s slow payments to the subs) will result in delays to your project.  The owner must establish prompt payment procedures for his contractor. Many owners also insist on prompt payment by the contractor to the subcontractors.  The owner of a multi-use project inGeorgialearned this lesson the hard way.  His architect failed to pay consultants on time, and even though the owner was aware of the problem, he took no steps to protect himself. The architect went out of business and to complete his project, the owner had to pay the consultants the balance left on their contracts.  The original funds paid to the architect for the consultants were never recovered.  Double payment and delays are the last thing any owner wants.  Simple use of lien waivers could have protected the owner from this catastrophe.

Pay applications that are repeatedly changed by the architect to accurately reflect the work performed is an early warning sign that the contractor may be having cash flow problems.  As the owner, seek a meeting with the contractor to address the issue and insist on performance by the construction team.  As an owner, assist in expediting payments. However, rarely is it in the owners best interest to provide advance payments to the contractor for work not yet performed.

2.      You find a sign in the contractor’s office that says “An RFI a day keeps the architect at bay.”

The RFI process was first established as a simple method to convey information to the contractor that may have been unclear or omitted on the drawings.  In recent years, some contractors have abused this process.  The abuse takes on several forms.

Too many RFIs – This indicates several causes for concern.  The owner should review the RFIs to determine if they could have been easily answered had the contractor reviewed the drawings.  The type of questions will indicate the level of understanding of the project.  If the RFIs are unrealistic or repetitive, the contractor may have done a poor review of the documents or may be causing a level of involvement on the part of the owner’s design team that keeps them from performing their normal functions.  The converse of this maybe the design team’s documents lack sufficient detail to complete the project, or the scope of work has been poorly defined.  This will result in a significant amount of change orders.  The owner must focus on this problem immediately and proactively resolve the change orders before they result in claims.

Lack of RFIs – This could indicate that the contractor is not reviewing the drawings and may start a “flood” of questions late in the process.  Normally this approach shows a lack of planning on the contractor’s part.  The review and questions only when the information is needed tends to cause delays should the response time be longer than the time allowed.

The solution includes a review of the RFI log.  Also review actual RFIs for content.  Statements like “This is the sorriest set of plans I have ever seen” do not reflect confidence in the design team.  Let the architect know that you will not entertain any claim for additional review of RFIs unless notice is promptly given when the review actually becomes excessive.  When it is clear that you are receiving a flurry of RFIs, your claims team should be brought in and an investigation made.

3.   The workers using the porta-john have to climb over stored materials.

Site organization is a simple early warning sign as to the potential success for your construction.  Should an owner find that his site is disorganized, chances are that the superintendent’s approach to the project will also be disorganized.

Construction is a dusty, dirty, multi-facilitated operation.  Material is delivered daily.  Tens to hundreds of workers must also come together to complete their assignments.  When the superintendent is disorganized he rarely understands his progress against the schedule and, more importantly, is destined to fail.  Our experience has been when we find a disorganized site, we will also find the project paperwork in the same disorganized fashion.

Warning signs include: a disorganized site or trailer; lack of procedures and meeting minutes; the superintendent is absent and/or personality conflicts between the owner, architect or contractor’s personnel.

The solution involves the owner, architect and the contractor’s project executive meeting to discuss the lines of communication and concerns and establish the necessary corrective actions and dates for them to be completed.

4.  The contractor asks you how to spell “CPM”.

Fail to Plan and You Plan to Fail – Once the contract has been awarded, the contractor’s first instinct is to start construction activity and generate cash flow.  Yet the simple act of planning and scheduling the work can save money and time.  Ninety percent of the value of the construction schedule happens during the planning process.

The contractor scheduling their own work and that of the key subs is extremely important.  Several warning signs are:

  • The CPM submittal is slow to be received.  This could indicate that the contractor might not be planning the work in-house or with a professional consultant.  A slow submittal may also indicate a slow buy out with a lack of subcontractor input into the schedule.
  • Schedule updates – Are updates performed often?  The most common requirement is for monthly updates.  The owner probably paid for them as a general conditions line item.  If you are not getting them, expect trouble ahead.

One solution is the development of a recovery schedule.  This process requires the contractor and his key subs to demonstrate how they intend to return to their original schedule, no matter who may be at fault for the delay.  It will help keep the team focused on completing the project.

Another solution is to determine the level of subcontractor participation by the owner participating in the contractor/subcontractor meetings.  At these meetings the owner may get an understanding as to the level of subcontractor commitment to the schedule.

Shop drawing and material submittals – A slow submittal process raises several concerns.

  • This could be a preliminary indication that the contractor has not completed the buy-out process.  As noted above, this may be a sign that the contractor may have a budget or staffing problem.
  • Multiple submittals raise a different warning.  Check the clarity of the design drawings or if the contractor and subcontractor are attempting to substitute materials or details.

5. The schedule shows the final carpet is installed before the roofing subcontractor gets to the job site.

An experienced project manager once stated “Construction is like putting together a series of cars on a train.  Each car has its place and when they are out of order, things start to screw up”.  This is a good tenet to follow!

Good, aggressive project management ensures that subcontractors all push the trades ahead of them while being pushed from those following.  This keeps up the pace.  When there are gaps between the trades, this usually signals a problem.

Most projects have a sequence that, once started, is followed throughout the project.  High-rise construction starts with the foundation, then the structure.  The exterior skin usually follows the structural frame by five to six floors.  A good management team will staff the crews so that each trade will keep pace with the crew in front.  If the gap is expanded or closed, a problem has occurred that should be investigated.  By monitoring the sequences in the gaps, owners will be able to detect early warning signs, investigate the issues, and avoid problems before they become critical.

6.   The architect asks “what budget?”

Design is a project, too!  Delivery of the design on schedule and at the owner’s budget is expected from the design team.  Some early warning signals that your design team may be in trouble include:

Design schedules – Design schedules should be clearly presented in an organized format.  Designers should be able to clearly convey their plan as to how they will achieve their contract requirements.  MicroSoft Project or some other scheduling program should be used.  The required design documents should be delivered to the architect at each milestone.  A suggested document list for each milestone is attached as an exhibit.

Numerous Drawing Changes – Denotes a bad set of drawings or poor thinking on the part of the design team.  Development teams sometimes try to expedite a project by forcing designers to provide bid documents before they are ready.  Many times this necessitates another release of those documents after the bids have been received.  If the parties are clear that the job will be built on a fast track schedule, then only scope changes require additional dollars.  Refinements to plans do not involve increases in the contract amount.  If significant drawing changes are released after the bid (greater than 30% of total drawings), the project may end up in litigation, or the owner can be hit with numerous and/or costly change orders.

Designing to the Budget – Designers and Owners must reach an understanding of the balance between the budget and program.  The design team tends to include more than an owner can afford.  This is often thought to be a method to test the budget validity.  The inverse is true when the owner wants more than he can afford and the design team does not tell him for fear of losing the commission.

Another warning sign is when the estimated construction cost constantly increases throughout the design.  A solution is to be aware of who is providing the cost information.  Challenge their experience for providing this service.  Many owners accept a contractor as the construction cost consultant because they do it for free.  Their rationale is that because they are a contractor there should be a high confidence in the accuracy of the original budget and each subsequent version.  Many contractors have the expertise for final document estimates, but fail miserably when dealing with concept or incomplete documents.  Do a reference check on the firm performing the cost model.  Whether the firm is a contractor or a consultant, seek information from references as to how the costs fared from the concept through final design.

A third solution is that the A/E contract should have a design to a budget clause. If the project is over budget, the architect should redesign for free or at least cost.  You will have their attention.

Design meetings – The design is a project in itself, requiring all of the project management expertise required of a contractor.  Communication between the design team members and the owner should be documented.  Regularly scheduled meetings should be held and documented.  The team should have a design schedule with periodic updates reflecting where they are on the schedule and, if behind, how they intend to make up the time.  The owner’s warning sign is when the major consultants are not at the design meetings.  As a solution, many owners require the major consultants to attend the design coordination meetings and have a schedule that reflects when specialty consultants should be included in these meetings.  The owner should attend the meetings and depending on the size of the project his attendance should be bi-weekly or monthly.  The lack of attendance by key consultants at these meetings may be another warning sign of slow or non-payment to the consultants.

Job site visits – When an architect is not coming to the job-site it may mean potential design team budget problems.

Code compliance – The design team should start this process early with code officials.  Code official approval can delay the design process, but more often, lack of a continuing dialog with the code officials leads to a delay in receiving final sign-off on the building and the certificate of occupancy.

7. The architect says, “Coordination of details will be done on the shop drawings.”

The low design fee is not always the best fee.  Too often owners select design professionals based on the lowest fee, but end up paying more in the end.  A good professional design or engineering firm must be able to creatively solve problems by exploring solutions that are not only economical from the first cost perspective, but also for ongoing maintenance.  A design firm’s best solution is not always the first choice of solutions.  Exploring all the alternatives can avoid costly mistakes.

An example of the lack of creative problem solving happened with anAtlantaparking deck project.  The structural engineer used a cost effective computer model to size the parking structure.  However, no two beams in the entire structure were alike.  These unique beams weren’t discussed during the bid or negotiation process, but became painfully evident to the contractor when he realized he couldn’t reuse the formwork.  The contractor went into bankruptcy, causing the owner long delays in completion and extensive interest carrying charges.

Although the owner originally got the least expensive design firm, which in turn used the least costly method of design, the owner ultimately paid more in construction fees and interest costs than what he saved in design fees.

A clear understanding of the scope of the project is important. When the owner and architect have a poor definition of what is required, it results in multiple design and program revisions.  An early warning sign is that the design team’s process for finalizing the drawings appears to be inadequate.  Indicators include multiple design revisions, revisions that do not meet the directions given at the last meeting, or significant changes in the design budget between submittals.

Architects stamp shop drawings after review with “approved”, “approved as noted”, “revise and resubmit”, “rejected”, or similar words.  Look for other notations on shop drawings which would manifest that the architect is attempting to make contract changes by notations on shop drawings.  This is not acceptable.

8.   The contractor states “I’ll fix it when we get to the punch list stage.”

The owner should start looking at major checks for quality early in the process.  Examples would be interim sign-off of building officials such as code enforcement and close in inspections.  If the contractor becomes adverse to correcting the problem during construction – wants to wait until later, establish a process of dealing with the problems during the progress meetings.  Should this approach not work, notify the contractor by letter of the problem, and if necessary, withhold money from the pay request until the contractor takes corrective action.  To avoid litigation it is important to have the owner/architect in agreement on any payment withholding issue.

9.   The contractor says he will finalize the GMAX when he believes the drawings are done.

Low-bid contractors, coming in under all other bidders by more than 3% to 5%, need to be investigated completely and offered the option to walk away without penalty.  Remember the saying, “The low bidder is the one who made the most omissions in the proposal.”  The temptation to accept a significantly lower bid won’t save money.  The owner who succumbs to this temptation will end up paying the difference in supervision, change orders, or worse — litigation.

Often you will hear that a contractor is taking work at cost.  A contractor will seek to make a fee (even after taking it “at cost”) by claims or otherwise.  All owners should ensure that their contractor makes a fair return that will vary with the risk involved.  Taking a project at cost leaves no room for error.  The owner carries the greatest risk and will ultimately pay the price through supervision, change orders, delays, or completion costs when the original contractor is unable to complete the project on time and on budget.

An often overlooked warning indicator is back charges accumulated by the contractor towards the subcontractors.  Owners should obtain a copy of the schedule of back charges between the contractor and the subcontractors.  If there is a significant amount, then there may be a problem with pay, schedule, or potentially a closeout issue.  This is a great source of information and will provide an insight as to what is going on below the surface.  For GMAX contracts, this listing should be part of the open book philosophy.  When a lump sum contract is used, obtaining the listing may be a little more difficult.

10. The contractor starts sending delay claims the first month of the project.

When a contractor is slow to obtain building permits this may be an indication of a lack of organization or subcontractor buyout problems.  The owner should immediately investigate these questions to confirm the reasons and deal with the issue.

Claims can take on many forms.  They can range from simple requests for compensation for an extra to the contract to a several volume claim submittal, or anything in between.  It is better to be an owner who aggressively pursues the resolution of changes in design and construction.  Open change order files are like individual bottomless pits attracting surplus costs, schedule delays, or any other conceivable problems.  Owners who consider the delay approach to settlement of change orders will pay a greater price for changes than if they had solved each item as it came up.

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