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Closing the Cost Gaps   Brokering the Risk During the Construction Phase

Roy R. Pachecano, AIA

Closing the Cost Gaps   Brokering the Risk During the Construction Phase

Posted: February 26, 2021 | Estimating

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How of ten do we hear that a new or existing building was flawlessly designed and constructed with no issues whatsoever? Or that the general contractor’s execution and coordination amongst the subcontractors was perfectly performed? Or the coveted, holy grail of all projects: to be completed ahead of schedule and under budget (without changes in scope)? All these scenarios dramatically affect cost and are precepts that have been around for a long time.

If you have been around long enough in the design and construction world, the reply to these questions is seldom in the positive. Meaning, when the project is either unsuccessful, or successful, it is a result of the process being impacted by decisions laid down with/without optimum collaboration, cooperation, and coordination which translate to a project delivery method that affects cost, time and quality.

Notwithstanding a complex design, a complicated construction schedule, and an anxious client/owner, the effort to smooth out a clear path to success begins with well coordinated contracts.

Presuming the ubiquitous standard form--the AIA B201 (formerly B141)* is utilized as the instrument to bind the owner with the architect, the pitfalls arise when the contract stipulates coordination efforts during the construction administration phase are to be delegated to the design team (a brief discussion of the standard agreement is on the following pages). Yet, it is that very design team who is not in control of any construction. Such trepidation felt by the architect and the team of design consultants for work of which they are not in control is fertile ground for many mistakes in the field, as building elements are to be coordinated by the general contractor amongst a cadre of subcontractors and often sub-subcontractors.

The underlining circumstance in many cases results in a set of shop drawings — intended to closely mirror the architectural/engineering drawings — being prepared by an entity with little or no direct contact with the architect. See Figure 1.0. This separation creates a gap in the flow of information amongst the parties charged with construction. Chief among the desired outcomes: the smooth manufacture of building components that adheres to the design intent of the project as signed-off by the owner/client by way of the “contract documents” (typically a set of drawings and specifications).

To complicate matters, the general contractor and his/her subcontractors have no agreement binding them to the architect; and rightly so, unless the owner/client elected to pursue a “design-build” delivery method by engaging a single entity. Closing gaps in scope, cost, and time is the essential goal of integrated project delivery method. See Figure 2.0. In the traditional “design-bid-build” scenario shown in Figure 1.0, AIA standard form A207 transfers much construction responsibility away from the architect and into the hands of the builder, binding the builder to erect an edifice that reflects what was draCwn. As “master of the works,” the general contractor, for a fee, sets off to build the project amidst a changing sea of material cost, timing of the subcontractors, and the purchase of long-lead items. As the watchman of the clock, the general contractor is in a race to complete the project within a specified time.

Often changes are made, on both sides: The owner and the contractor make changes as the design drawings are literally tested in the field. A large gap that seems to re-occur is when, during the construction phase, a sub-subcontractor does not communicate design changes with the architect as they are two, sometimes three, entities removed. The result is often a building component that gets installed with deviations from the design drawings, yet the architect is unaware of the change. Despite the architect being unaware, they are attesting that such changes are in compliance with the design when they sign off on the contractor’s requisition for payment using another form: the AIA G702 Certificate of Payment. At that point, the money is passed to the general contractor to build the project, who passes it to subcontractors who won the bidding for things like plumbing and sheet metal work, which often pass it to even more subcontractors. Under the G702, the architect holds themselves as responsible for attesting that the design intent is met, and takes on this additional liability.

It boggles the mind how and why the architect would ever sign such a document that represents a great liability when it attests to the owner that the hidden changes are in compliance with the design intent of the project documents, notwithstanding the less-than-ideal exculpatory language purportedly referenced in other contract documents. The architect is fully exposed with no limit of liability, while the general contractor can pass off its risks/responsibilities to its subcontractors. Such brokering of risk is customarily practiced in the United States and, since WWII, has set the construction industry along a path of endless post-construction disputes and litigation. The economic incentive of the general contractor is propelled by their control of the means and methods of construction. The general contractor pursues purchasing material and equipment at the least expense to itself. This cost paradigm has not changed for centuries.

The Romans were ardent builders. To overcome arduous obstacles, such as distance, they employed engineering, skilled labor, and the key [intangible] ingredient of marrying the appropriate organizational method with the proper bureaucracy — typically localized control. Engineering genius aside, this was how the Roman Empire was built, according to “The Secrets of Ancient Rome’s Buildings,” by Erin Wayman, Smithsonian Magazine. Localized control helped the Romans close gaps in construction costs.

The nature of building in the United States remains one of the world’s least efficient businesses. The construction productivity rate — how much building workers do for each hour of labor they put in — has been flat since 1945, according to the McKinsey Global Institute. Over that period, sectors like agriculture, manufacturing and retail saw their productivity rates surge by as much as 1,500 percent. In other words, while the rest of the economy has been supercharged by machines, computers, and robots, construction companies are about as efficient as they were in WWII.

Contractors describe this handoff as “brokering risk.”

What they mean is that while everyone in the chain has agreed to build a certain piece of the project for a set amount of money and in a given amount of time, none of them are 100% sure (despite what their contracts say) that they can do so as cheaply or quickly as they’ve promised. They broker that risk by paying someone else to do it for them, minus a small fee. This well-honed industry practice is not driven by contractual arrangements as much as it is driven by a combination of market forces and the contractor’s tolerance of risk/reward (testing its own profit margins).

The development of the standard contract has long been advocated by the American Institute of Architects (AIA) for its convenience and flexibility. The A/E professionals over time have embraced these standard forms of agreements, yet without fully understanding the gaps that exist within their boilerplate format. The AIA has promulgated these standard forms of agreements for over a century, which has, in turn, established a case law legacy and a degree of legitimacy.

Written in collaboration with the Association of General Contractors (AGC), these instruments are hybrid in nature — meaning they can offer protection, or lack thereof, for the A/E and its consultants if not properly integrated. The boilerplate efficiency and convenience of standard forms does not always produce a seamless integration of scopes of work by those entities at risk. This exposes the owner’s team (architect and consultants: cost, M.E.P., structural, specialty), to gaps in scopes of work that drive costs up when the owner’s project goes into the construction phase.

Three helpful steps are useful in closing gaps in construction cost:

[1] Who/Where are you in Figure 1: By understanding where your company is on the organizational diagram, you can ascertain which key parties have greater risk/reward — a primary motive being profit-taking. Savvy builders can exploit gaps and generate greater profits by change orders and field requests.

[2] Follow the money: By understanding who/where construction funding is sourced, one can ascertain who is at greatest risk during a particular phase in the project. This is one of the single-most overlooked factors in identifying cost gaps as leverage changes from owner to builder over critical milestones.

[3] Thoroughly review contract documents — these include, but are not limited to construction drawings, specifications, project manuals, and relevant consultant agreements. To the extent possible, and if the project delivery method allows, request to examine bid documents of the bidawarded entity to compare costs submitted by subcontractors and the owner’s cost-estimating consultant to mitigate any misalignments in cost. This three-part process will expose gaps in cost; it will not expose the rift between price and value — that is a topic for another article.

About the Author: Roy R. Pachecano, AIA, MSRED A builder, architect, advisor, author, and lecturer, Mr. Pachecano operates PorticoREI LLC. His firm financed, designed, and restored the first 1899 LEED-Platinum historic landmark dwelling in the United States. In 2009 he was appointed Adjunct Professor at Columbia University and currently works with the Urban Design Lab on research projects. As a consultant, he continues to work with legal counsel on design integrity and developing remediation strategies for failing structures.

* Note: The American Institute of Architects periodically retires its standard forms. Search: “Retired AIA Docs” for more details