Construction Informer

Since Integrated Project Delivery (IPD) is a process that requires collaboration, the typical ways construction contracts are crafted don’t fit it very well. According to the IPD symposium report by the California Council of the American Institute of Architects (AIA) most construction contracts

“create incentives for individual firms to protect their own interests at the expense of the project.”

So the characteristics of contracts used in IPD have to be different – different enough to stimulate open collaboration and innovation. Here are some of the key points the symposium participants came up with.

• Participant compensation can be raised or lowered based upon their performance as measured against predefined targets
• Balancing risk and reward eliminates the need for inflationary contingency pricing, promotes relationships that can solve problems, and creates incentives to innovate
• Multi-party agreements instead of individual two-party agreements are preferential
• Bringing subs in for pre-construction work, and compensating them for that, is well worth it since it reduces RFIs and their associated costs
• Problem participants who refuse to play by the new rules, and who won’t bend to peer pressure, may have to be removed with the whole group’s agreement

At the risk of over-simplifying, the concept that comes through the most for me relating to IPD is that it has at its heart the idea of helping many players to build the best project they can while looking out for one another. And that, as an HVAC pro used to say to me – “is a beautiful thing.”

Just Build It Right: In Biskra, Algeria, the housing and town planning minister is cracking down on what he calls “urban anarchy” in building. Armed with additional funds the organizations that police compliance with building codes are imposing sanctions on builders who violate the “rules of urbanism and construction.” While a lot of the rest of the world reels under the current economic storm it seems Algeria is on a growth path. According to the International Monetary Fund the country is expected to post 4.9 percent growth in 2008 and 4.5 percent in 2009.

South Korean Builders On Growth Path: South Korean builders are building more and more of the Middle East. With overall construction orders up a record 45.4 percent year-on-year the boom is being enjoyed by medium and large firms alike. South Korean builders are also increasingly grabbing contracts throughout Asia with a 56 percent gain in that sector. In one interesting collaboration a consortium of South Korean construction companies won a $6.3 billion refinery project in Kuwait. The country’s builders are also handling desalinization and gas facility projects.

Concrete Figures Prominently In Africa: Tanzania is undertaking the construction of the single largest cement plant in the east African region. Expecting demand in that area to grow at twice the rate of projected economic growth of 5 to 6 percent, Kenya’s Athi River Mining (ARM) company will build the plant with a capacity of 4,000 tonnes (4,480 tons) a day. Funding for the project was concluded before the world’s recent economic crisis and it drew from both national and international sources. A spokesman for the project said a reduction in the demand for cement because of the market turmoil is not expected to be significant. ARM is the second largest cement maker in Africa.

I received a note from a construction management student who asked for an opinion on a case study where a subcontractor lost (is loosing) a boatload of money. This case reminded me of just how important those little details are when companies are in the early stages of bidding a project.

In this instance the subcontractor ran into a work stoppage because the union workers refused to do a portion of the job that didn’t fit their type of work. Electricians were being required to install wooden blocks for some of the light fixtures they would hang. On the surface many would ask, so what’s the big deal? After all, if you install the blocks yourself then you will know they are in the right place and your job will be more efficient in the long run. In many ways the strict division of labor that permeates construction contributes to its inefficiency. Others argue that division is necessary in order to develope highly skilled workers. In the end these kinds of issues often play themselves out in different ways from job site to job site, and with different results.

Since the GC had placed the installation of the blocks under the electrical subcontract it was necessary for the electrical subcontract bidders to figure out how to accomplish that. Nobody wants to go back and forth in the pre-bid stages trying to get these types of details pristine, so creativity must flourish and solutions have to be developed.

In this instance the estimators must have missed the requirements for the installation of the blocks, ignored them, or just assumed the electricians would do that work. Unfortunately, this was probably the first place where this issue could have been dealt with. By planning on hiring some carpenters to do that work the sub could have avoided all the headaches and lost money that resulted from the dispute with the union electricians.

Estimating is far more than just putting numbers to processes. There is a great amount of critical thinking that has to go into the effort. Considering the details is what leads to that critical thinking.

Sub contractors are taking to the streets- well not literally, but they are kind of rankled- out in California because of indemnity clauses in contracts with GCs. They don’t think it’s fair that contracts are written to pass costs of building failures along to them, almost exclusively. So they are behind legislation that will lower their risk when it comes to construction defect claims.

I’ve been watching this for a number of years and I have to say it does seem that the old adage, "shit rolls downhill," seems to be at work in the construction contract area. Of course the GCs are kind of upset because the legislation would reduce the amount of control they have in defense against defect claims.

Because builders under current California law can require subcontractors to pay legal fees up front when owners complain of construction defects the subs say that amounts to extortion (my word) since it can cost them a lot more than just the cost of repairs. On top of that the subs say those costs accrue to them even though they may have nothing to do with the defect. For example, driveway paving companies are named in claims about leaky roofs and bad windows.

This is just more of the same old "do-things-the-same-way-using-the-same-techniques-because-we’ve-always-done-it-that-way" routine that in many ways works against the construction industry.

Accepting the responsibility to pay up when a claim is presented is one thing if the claim is directly related to your work. But many times, subordinate players in construction contracts are required to take on responsibility for the work and inactions of others. There also may not be any financial limit to their indemnification responsibilities.

It just may be that it would be a lot less costly, and in everyone’s interest, if they did their jobs in the first place. A GC ought to be checking the work completed by subs to the extent that they can be well assured there will be no issues at a later time related to the work. An owner, (or state or government entity) should be doing the same. How difficult is it to look at the materials the sub is using and compare them to specs? Testing structurally-critical concrete is certainly within the reach of any builder. How much time does it take to check framing, or insulation installation, or even plumbing connections? Is it that difficult to protect work-in-place so no damage happens to it after it is put in place? If so, I’d be looking at my processes, and the people I’m hiring. GCs especially are supposed to be versed in all aspects of building. If not, why do they have GC licenses?

Everyone in the chain needs to do their parts to make sure what is being built is what is supposed to be built. But those performing the smaller parts of the job shouldn’t bear an unreasonable amount of responsibility and cost.

I don’t know why I’m even opening this can of worms but it is an interesting topic and one that people have a wide range of opinions on. The fact that “retainage” isn’t even recognized as a word by my spell checker ought to make you suspicious. And the fact that it sounds like a bad case of constipation ought to make it doubly suspicious.

According to at least one source retainage is a percentage of a bid that is held as a good faith deposit to help insure completion of the contract work within the contract specifications. I have been on more than one job where retainage was leveled by the owner and then have witnessed it passed on to everybody else in the chain by the GC so that all shared in the event. After all, the GC’s performance is directly linked to the performances of subs and others, so why not? I have heard there are GCs who do this on their own even though the owner does not require it.

The American Institute of Architects (AIA) has as one of its legislative agendas this year to eliminate retainage rules for architects and engineers on federal government contracts. If the federal government can’t enter into quality contracts then retainage is the least of its problems. That’s really what this comes down to…picking and entering into quality contracts. In most cases quality contacts are ones where every participant stands to benefit, instead of every participant trying to best the other.

There is one old 2000 poll that shows owners and contractors in favor of retainage and subcontractors not in favor. I only mention it not because I view it as relevant but just to illustrate the kinds of “so-called” statistics that are bantered around in writings about this.

One argument you hear is that retainage helps to ensure the people you are depending upon to do the work actually complete the work and that they meet a barrage of other requirements like carrying the necessary insurance and so forth. So why are we doing business with people we don’t trust? Wouldn’t it be better to develop business relationships based upon mutual trust and then treat each other that way?

Arguments against retainage say owners and GCs simply use it most of the time to extort money from the subs, or each other, and use the money to play the money markets. Then there are those who advocate paying interest on retainage. Once again, where is the trust? It seems construction has a big issue with trust.

Here’s a novel idea. How about work-in-place paid for when it is completed according to contract specifications? Some would argue that given construction’s working environment you can’t do that, but I would suggest that if owners and GCs dedicate the necessary manpower, deliver contract documents that are accurate and build-able, and expect to pay for value rather than getting something on the cheap, then it shouldn’t be a problem to inspect the work as completed and pay forthwith.

There is too much usury already in the world to allow things like retainage to exist. Better business models can only exist when they are constructed on trust and each party does due-diligence to ensure they are dealing with trustworthy partners. Everything else is risk, and you use insurance to cover that eventuality.

Others Say: This is like selling real estate. You cannot do so successfully unless it is done in good faith. An investment is worth the trust factor. Even home insurance that you have or life insurance is something you invest into in good faith. Insuring the success of better business models comes down to one word-trust.