Interface Consulting Articles RSS Feed

Every Step Counts in Successful Project Management

Philip Barnard - noemail@interface-consulting.com — Mon, 04 Apr 2011 19:00:00 GMT

Introduction

The goal of any contractor is to build a project on time and within budget. To be an effective and productive contractor, one must have a complete understanding of the construction process, which includes not only building the project, but, more importantly, effective scheduling and management of the project. The contractor is ultimately responsible for managing its activities as well as the activities of the construction parties under its supervision.

Successfully managing a construction project is a four-step process. It requires that the parties establish a project plan, develop a project schedule, monitor the project schedule, and manage change events. Each step requires dedication and commitment from each team member, and each step in the process is essential to a successful project outcome.

Step 1: Establishing a Project Plan

The first step in successfully managing a construction project is establishing a game plan for executing the work. Planning should be thought of as completing a puzzle. All of the pieces must be identified, as they are all necessary to complete the puzzle. Furthermore, this process involves establishing the time and cost for each piece, ultimately leading to the total time and cost of the project.

The owner, architect or engineer, and contractor (if involved) will develop the plans and specifications for the project, as well as the overall sequence of construction activities. Each construction activity is then identified and assigned to a construction party, who identifies what is included in its scope of work and what related activities are not included. This identification process is critical for the contractor to know what activities have not been assigned and could “slip through the cracks.”

During the project planning phase, the project price is established using several methodologies, such as competitively bidding, utilizing a not-to-exceed value, or paying for the cost of the work plus a fixed fee. Once the project price is established, the contract documents are reviewed, approved, and executed. During project pricing, product suppliers and manufacturers are also assigned.

Also during this phase, the construction parties must educate themselves regarding the procedures, problems, and pitfalls of obtaining labor in the project location. They must assess availability of equipment, and of suppliers and manufacturers of construction components. Finally, all construction projects must meet the requirements of a regulatory governmental body, and the contractor is generally charged with obtaining all necessary permits.

Though every piece of the puzzle may not be known at the time of planning, an effort must be made to establish the full scope of work including the construction tasks. Once all of the “puzzle pieces” have been identified, assigned durations, sequenced, assigned to parties, and priced by parties, the project schedule can be developed.

Step 2: Developing a Project Schedule

Following planning,the second step in successfully managing a construction project is developing the schedule. Proper scheduling of the work tasks is the most critical aspect of the construction management process. The project schedule not only divides the work by activities, but it allows other parties to know what activities need to be performed and when. All construction parties need to be involved in planning the schedule and “buy into” the project sequence before construction begins.

A schedule can be as simple as a bar chart or as sophisticated as a computer model, but it must be developed and utilized. In a bar chart, each bar represents an activity and the length of the bar represents the activity duration. The bars can be stacked and placed so that as one activity is completed, the next activity in the sequence begins. The following is a sample bar chart schedule:

Typically, construction schedules are computerized. There are multiple software programs that produce reliable schedules, with most utilizing the critical path methodology (CPM) technique. Of all techniques available, CPM has proven to be the most useful and effective means of developing and displaying project progress.

Utilizing the CPM technique, each work activity is assigned a duration, start date, and end date, and is sequenced to follow and precede another activity. This sequence of events becomes a construction path. Generally, there are multiple paths created and many can occur simultaneously with and independently of one another. But there is only one continuous path that occurs from the beginning of the project to the end; that path is considered the “critical path.” Delays in non-critical work activity paths will generally not delay the overall project; however, delays to the critical path will. Planning and scheduling project activities with CPM software creates a logic diagram or network that can be displayed graphically.

In a successful construction project, the schedule becomes the project roadmap that all parties can review to determine when their respective work is sequenced. This allows parties to plan accordingly and ensure that they have the required materials, labor, and equipment available to perform their respective work. The schedule also informs construction parties what work precedes, follows, and occurs simultaneously with their work. This will allow each party to plan its work at the project site so that it will not interfere with other parties’ work. Further, the schedule allows the owner, architect, engineer, and contractor to plan decisions or approvals on certain project items or deliverables.

Step 3: Monitoring the Project Schedule

The third step in successfully managing a construction project is monitoring progress. Before construction begins, the schedule is a plan, also known (later on in the project) as the “baseline” schedule. However, once construction begins, the schedule becomes a dynamic tool that can, and often will, change depending on progress. The contractor is responsible for ensuring the schedule is actively updated, which includes recording activity dates and durations once they have occurred. This is known as an “updated” schedule.

Once the frequency of schedule updates is determined, the contractor will instruct the construction parties relative to updating their own work tasks. Normally, a schedule is updated monthly in order to keep pace with monthly payment applications. This should be a minimum frequency for all project schedule updates, no matter what the project.

Based on the new information, all schedule activities that should have started during the updated period are identified. All activities that were underway during the updated period are tracked and assigned progress. Finally, all activities that should have been completed during the updated period are identified. By performing these updates, any activity that is not on schedule will be recognized and can then be evaluated.

There could be a number of reasons why an activity is not on schedule, including a design change or work that was added or subtracted. Whatever the reason, the schedule must be updated and re-issued to the involved parties. Additionally, it is important to analyze all of the scheduled and executed activities to determine whether the updates will affect the project completion date. If a delayed activity was not on the critical path, it may not affect the timely completion of the project. However, if a delayed activity was on the critical path, the entire project will be delayed. If this occurs, the contractor’s obligation is to investigate the involved work activities and mitigate any delay.

Step 4: Managing Change Events

The fourth step in successfully managing a construction project is managing change events, as changes will inevitably occur. Managing the schedule to account for changes is different than monitoring progress and reflecting that progress in an updated schedule.

Whereas an “updated” schedule reflects progress of the ongoing work and the data date changes as appropriate, a “revised” schedule includes modifications to future baseline schedule work components or activities. These modifications could include work activities broken down into more refined tasks to more precisely describe the sequence of events. An example of such a refinement could be breaking the foundation work into several activities such as surveying for footing locations, drilling the footings, assembling reinforcement steel cages, casting concrete for the footings, and setting foundation anchor bolts. A change to a specific activity such as this describes future work in more detail and is considered a revision to the schedule.

Once the construction has begun, it may be necessary to re-sequence certain activities to more accurately reflect project construction. In doing this, the activities that were originally scheduled to commence before and after the re-sequenced activity must be re-sequenced and re-scheduled as well.

Other changes to planned activities could include modifying durations. After a project begins, it may be determined that a certain activity planned to take two weeks to complete should actually take three. For this change not to affect the final project completion date, the schedule has to be adjusted to absorb the additional week duration. Or, if no other activity timeline can be compressed, the change must remain and additional manpower or manhours must be scheduled to compensate.

Other changes that occur on a construction project involve uncommon and common events. Uncommon events can include unusual weather, labor disturbances, and/or outside events that neither the owner nor contractor can control. Of these uncommon events, unusual weather is the most often occurring with the greatest impact on the schedule. Contractors include expected weather delays into their initial scheduling, but unusual weather, such as a hurricane, can affect overall project progress. Common change events include design changes, owner-added change orders, incomplete designs that have since become complete, or different conditions that occur on a project that were not anticipated.

Any changes that affect the future project schedule must be documented. Furthermore, these changes must be evaluated to determine the most appropriate revision to the planned schedule. All parties involved in the project must “buy into” the change or, if not, the revised construction activity must be modified to accommodate the involved parties.

If a contractor or its subcontractors delay their own work based on their own actions or inactions, the schedule should reflect the extended duration, and the cause of that extension should be documented. The contractor must assess the cause of the delay and pursue a solution. If there is insufficient labor, materials, or equipment to properly execute the work, the contractor must determine if additional resources can be utilized. If a contractor’s subcontractor is delayed, the contractor must assist in resolving the reasons for the delay. Furthermore, if the subcontractor is under contract with the contractor, the contractor is ultimately responsible, and it is its duty to rectify the delay and provide the necessary resources to put the project back on track.

Any revisions or routine updates to the construction schedule must be republished, distributed, and communicated to all parties involved in the construction process. It should be noted that the planned completion date should not be affected by publishing a revised schedule. If the planned completion date has been changed, the contractor must evaluate the project sequencing and determine how to avoid a different completion date than originally planned, unless a schedule extension is granted.

Conclusion

In conclusion, scheduling and managing a construction project is composed of four steps, including planning, scheduling work activities, monitoring construction progress, and finally, managing changes to the project plan. Without a proper and complete construction schedule including adequate updates and revisions, construction parties cannot be informed of and ultimately held accountable for the timing and duration of their planned activities. Further, it will keep parties informed of the status of others’ activities that may precede or follow their work. Finally, it is the contractor’s duty and the owner’s right to be continuously informed of construction progress. Adhering to these best practices will ensure a successful relationship between the owner, contractor, and subcontractors and thus, a successful completed project.

Article PDF

Philip D. Barnard, PE, CCE, is Senior Vice President and a Principal Consultant with Houston-based Interface Consulting International, Inc. As an expert witness and claims consultant, Mr. Barnard draws from 30-plus years of experience in the construction industry to provide consulting and comprehensive analysis on a variety of complex construction issues. As a former contractor and Assistant Director of Public Works, his background includes designing and engineering multimillion-dollar civil and bridge projects, as well as project management and oversight for municipal facilities and buildings. For more information, please call Interface Consulting at 713-626-2525 or visit www.interface-consulting.com.

4-Apr-11 2:00 PM

Fire Rebuilds Stoke Flames of Claims if Not Handled Appropriately

Chris Sullivan - noemail@interface-consulting.com — Wed, 28 Apr 2010 18:00:00 GMT

Today’s refining, chemical, petrochemical, and heavy industrial facilities process and utilize hazardous chemicals, and despite the best laid plans and procedures, accidents do happen. Accidents could range from fires to explosions, resulting in chemical releases and damage to equipment and the facility, hopefully with minimal or no injury to personnel.

Insurance is often called upon to reimburse the owner for property damage and business interruption expenses following the fire, all of which could result in claims and disputes if not handled appropriately. Heeding some lessons learned during the rebuild process can help minimize the opportunities for claims and disputes following a fire or explosion.

Extinguishing the Fire and Preserving Surrounding Assets

There are many critical items that should be considered following a fire or explosion. First and foremost, safety of all personnel should drive all responses. It is important to account for all personnel and rescue and treat those injured.

Additionally, the plant’s fire response procedures should include controlling and extinguishing the fire to minimize further damage. Dousing the fire with sufficient water may also help control vapor emissions and reduce air pollution.

Oftentimes, due to the sudden nature of the fire or explosion, the plant is unable to follow its normal shutdown and decommissioning procedures. It is important that unaffected systems be preserved or “safed” as soon as possible. Preserving a system typically includes a nitrogen purge to keep the air and moisture out of the system. Safing, on the other hand, includes removing hazardous chemicals or flammable hydrocarbons and a nitrogen purge to keep out moisture during the fire rebuild period. The fire damaged area should be isolated using blinds and/or by crimping pipes to facilitate safing non-affected systems and to prevent feeding additional flammable liquids and gases to the fire zone.

Incident Investigation

Shortly after the fire, various governmental and industry agencies require that an incident investigation begin. 29 C.F.R §1910.119 (m) Process Safety Management under OSHA, 40 C.F.R. Part 68 §68.81 Risk Management Program under the EPA, and the US Chemical Safety and Hazardous Investigation Board (also known as the US Chemical Safety Board) all require an incident investigation following a fire or explosion. An incident investigation is performed to investigate the likely cause of the fire or explosion and to make recommendations to limit the potential for a recurrence and/or mitigate the consequences of such an event.

A typical incident investigation includes conducting interviews, gathering and reviewing data and documents, reviewing the plant’s safety procedures, reviewing maintenance records with particular emphasis on mechanical integrity programs, and possibly conducting forensic analysis. It is important to recognize that an incident investigation could take several months and delay any effective rebuild efforts, as the fire area must be preserved until the investigation is complete. Therefore, owners and their insurers are advised to include sufficient time in the rebuild schedule and recognize that access to the fire area may be limited until the investigation is complete.

Damage Assessment

A thorough damage assessment is important, as it will be the starting point for any rebuild efforts. Various industry guidelines exist which provide methodologies for evaluating whether various plant systems, equipment, and piping systems are fit-for-service or require repair or replacement. API RP-579 contains guidelines for conducting damage assessments and testing, from visual inspections to hardness testing and, in some cases, finite-element-analysis.

It is important to recognize that damage may result in areas not directly in the fire zone, as heat may conduct itself along pipes and wires. This is especially important for instrument and electrical systems. It is often difficult to identify damaged wiring systems with visual inspections, and thus damaged instrument and electrical systems will likely be identified during the commissioning and start-up phases when those systems are tested. Furthermore, instrument and electrical systems may be damaged and corroded due to prolonged exposure to firewater, and thus it is advisable to check, as a minimum, critical systems for functionality prior to introducing hazardous feedstock into the unit.

A thorough insulation inspection is also recommended, as insulation can be damaged due to both fire and the deluge of firewater. Wet insulation generally must be replaced.

Coordination with the Plant’s Insurance Carrier

It is important to include any insurance carriers in the rebuild discussions and keep them informed of critical decisions, as this will help ensure a quick and full recovery of available insurance proceeds. Agree with the insurance company, if possible, on the extent of repairs, recognizing that there will always be additional damage, called discovery work, that is identified during the rebuild and/or commissioning phases.

The construction means and methods should also be agreed upon with the insurance carriers, as construction means and methods can have a direct impact on repair costs, as well as schedule duration, which directly impacts the business interruption claim. For example, depending on the extent of damage, it may be less expensive to “clear cut” the fire damaged area as opposed to surgically demolishing/repairing the damage. Clear cutting involves removing all pipe and steel from a given area and reinstalling new items. A clear cut approach typically leads to higher labor productivity, and hence, lower repair costs, as trying to surgically remove and reinstall items in a congested area can be more time consuming.

Sudden fires and explosions often do not allow the owner to follow its normal planned shutdown procedures, and as such, damage to systems and equipment may result. For example, improperly decommissioned furnaces can result in furnace tubes cracking or becoming fouled with coke deposits. The sudden shutdown following a fire and inability to properly decommission and drain the unit of flammable/hazardous chemicals may result in a more complex commissioning following the fire rebuild. Furthermore, extended shutdowns during repairs may require systems outside the fire zone to be commissioned, as it is not uncommon for systems to rust or deteriorate while sitting idle for extended periods of time.

Agree with the insurance carriers on any required code upgrades that may be necessary given the age of the existing facility. Oftentimes, owners are required to upgrade older facilities if industry codes have changed since the facility was originally built.

Lastly, there is typically a balance between repair costs (property damage) and business interruption costs. Not all repair options require the same construction duration, and as such, one must carefully balance schedule-driven costs with capital costs. It is advisable to agree with the insurance carriers on the appropriate use of incentives, premiums, overtime, and other acceleration measures, as there is typically a cost-benefit analysis associated with such acceleration measures.

Repairing the Facility

The next step is to retain qualified contractors and conduct the repairs. Resist the temptation to “upgrade,” recognizing that insurance companies will only pay for repairing “like-with-like” where possible. If upgrades are desirable, segregate those costs such that the insurance company can easily track and understand them, which will ensure they are not included in any insurance claim.

Likewise, should any maintenance work be performed during the shutdown, it is important to segregate those costs, as the insurance company typically will not pay for normal maintenance work outside of the fire damaged area. It may be advisable to utilize different contractors for upgrade/maintenance work, as opposed to the repair work, to facilitate cost segregation. In addition, with respect to business interruptions claims, owners are advised that any maintenance/upgrade work should be performed as non-critical path work. As an alternative, owners should clearly demonstrate that any critical path schedule delay associated with upgrades and maintenance work is not included in the business interruption claim.

Lastly, owners are advised to utilize an engineering and construction contract that puts some cost containment pressure on the contractor. Typically, a lump sum contract is not advisable due to the uncertainty and difficulty of the required repairs. There are various contracting strategies to consider, such as a target price with a fixed fee, a target price with a sharing of any under runs/overruns, or a unit price contract which places the productivity risk with the contractor. All of these strategies put cost containment pressure on the contractor.

Commissioning the Facility

Commissioning a facility occurs after mechanical completion and involves checking that the plant or system is safe and has been built according to the design. It also involves activities to ensure the plant is ready for start-up.

Commissioning a plant after a fire may be more complex than a typical commissioning following a planned shutdown. This is because, during a normal turnaround, piping and equipment systems are maintained in a controlled environment and protected from debris, moisture, and harmful chemicals. However, in a fire rebuild, typically there are multiple breaches in equipment and piping systems, resulting in water, air, hydrocarbons, and other chemicals sitting in these systems for an extended period of time.

A sudden and uncontrolled shutdown may result in the need to commission systems both inside and outside the fire zone. This is especially true if the unit sat idle for an extended period of time pending repairs. Discovery of additional fire-related damage to instruments and electrical systems should also be expected during commissioning, as this is typically when the systems are functionally tested and made ready for start-up. Therefore, it is advisable for all parties to recognize that commissioning a unit after a fire rebuild may take longer and cost more than commissioning following a planned shutdown.

Conclusion

Fire rebuilds can be complex and may not be as straightforward as a typical construction project. However, as with any construction project, claims and disputes can arise if various issues are not handled properly. Thankfully, fires or explosions rarely occur, but if they do, these lessons learned will provide some guidance for consideration prior to rebuilding the facility.

Article PDF

The author: Chris Sullivan is a Vice President and Principal Consultant with Interface Consulting International, Inc., based in Houston, Texas. Mr. Sullivan specializes in preparing engineering- and construction-related claims and providing litigation support, including consulting expertise and expert testimony, and has testified in various courts and arbitration forums. Mr. Sullivan has over 22 years of engineering and construction experience in the refining, petrochemical, chemical, and oil and gas industries and has worked on projects in Europe, the Middle East, Africa, Asia, and South America. For more information call 713-626-2525 (toll-free at 800-626-0054), e-mail cjsullivan@interface-consulting.com, or visit www.interface-consulting.com.

28-Apr-10 1:00 PM

In Construction Claims, A Picture is Worth More Than a Thousand Words

Danielle Sims - noemail@interface-consulting.com — Mon, 15 Feb 2010 21:00:00 GMT

“A picture is worth a thousand words” is an old proverb that suggests complex stories can be described by just a single picture. The same is true with respect to proving construction claims, where one visual or graphic can be more persuasive and influential than a thousand words.

Construction is a complex and risky process requiring extensive planning, engineering, procurement, and construction management. When all of these activities operate in concert with each other, the result is a successful project. However, when any one of these activities fails, the result can be a troubled project, often resulting in construction claims.

The claimant typically has the burden of proof in preparing and proving its damages in construction claims. However, oftentimes the decision makers are company executives who may not be intimately familiar with the project details. Therefore, it is essential to boil down and capture the essence of the claim without losing critical details, such as the root causes and resulting damages. Company executives are unlikely to read a 100-page claim, but they will read and study a one-page summary of the dispute. Therefore, it is critical to illustrate in graphical form the nature of the claim.

Some of the more persuasive construction claims graphics are illustrated below along with a brief explanation of why these graphics are effective.

A stacked graph can illustrate the interrelationship between various items over time. In Figure 1, change orders, requests for information (RFIs), the project schedule, and the labor histogram are plotted over time to illustrate that late project changes and RFIs can have a detrimental impact on labor productivity. As shown in Figure 1, excessive RFIs or late changes decrease labor productivity and result in increased labor hours.

Figure 1

Another effective illustration is the so-called “measles” diagram. A measles diagram illustrates the approximate location of various project problems, such as engineering errors, RFIs, or changes. As shown in Figure 2, a measles diagram can be effective on heavily disrupted projects to illustrate that virtually every aspect of the project was impacted.

Figure 2

Loss of labor productivity claims can sometimes be difficult to prove if project data are not available. However, 3D models can be used to illustrate the technical challenges associated with a work activity. For example, Figure 3 illustrates an engineering or fabrication error with a pipe that was fabricated three inches too long. While this may seem like a relatively simple fix, this section of pipe was approximately 120 feet in the air on top of a distillation tower platform. When viewed using the 3D model in Figure 4, the inherent difficultly and resultant decrease in labor productivity of working almost 120 feet above grade becomes obvious.

Figure 3

Figure 4

Construction claims are successful when the claimant artfully and persuasively explains why it is entitled to additional compensation, or in many instances, an extension of the schedule. Graphics can greatly enhance your chances of success with construction claims if they capture the essence of your claim and provide a linkage between the act or omission and the resultant damages. A well-designed graphic may well be worth more than a thousand words, and on large construction disputes, perhaps worth thousands (or millions) of dollars.

ABOUT THE AUTHOR

Chris Sullivan is a Vice President and Principal Consultant with Interface Consulting International, Inc. Mr. Sullivan specializes in preparing engineering- and construction-related claims and providing litigation support, including consulting expertise and expert testimony, and has testified in various courts and arbitration forums. Mr. Sullivan has over 22 years of engineering and construction experience in the refining, petrochemical, chemical, and oil and gas industries and has worked on projects in Europe, the Middle East, Africa, Asia, and South America. He has lived and worked overseas in various capacities including Director of Lump Sum Turnkey Proposals and Business Manager on a $200 million lump sum EPC project. He was most recently Project Manager for Foster Wheeler prior to joining Interface Consulting.

Article PDF

15-Feb-10 3:00 PM

The Greening of the Building Codes

Philip Barnard - noemail@interface-consulting.com — Tue, 26 May 2009 16:00:00 GMT

I. Introduction

Building codes are the “minimum requirements” to safeguard public health, safety, and general welfare through structural strength, means of egress facilities (emergency exits), stability, sanitation, adequate light and ventilation, energy conservation, and safety to life and property. These codes protect the public from fire and other hazards attributed to the built environment and provide safety to fire fighters and emergency responders during emergency operations.

As stated, building codes and related regulations exist to safeguard the public from fire and other health and safety hazards attributed to the building environment. Prior to 2000, at least three standard building codes were utilized throughout the United States. The International Council of Building Officials (ICBO) first published the Uniform Building Code in 1927. The Building Officials Conference of America (BOCA) was founded in 1915 and published the BOAC/Basic Building Code. The Southern Building Code was published in 1940 by the Southern Building Code Congress International (SBCCI).

In 2000, the International Code Council (ICC) was created by the merger of the three previously mentioned organizations. In that same year, the ICC published the International Building Code (IBC) that replaced the three existing building codes. Most of the cities and/or counties in all of the fifty states, as well as the District of Columbia, now utilize the IBC as a reference code and publish supplements to the code for their own communities. Federal agencies including the Architect for the Capital, General Services Administration, National Parks Services, Department of State, U.S Forest Services, Veterans Administration, as well as the Department of Defense, all reference the International Building Code as the building regulatory system.

These building regulatory systems have provided standards that minimize risks commonly associated with buildings such as fire, structural integrity, and means of escape in an emergency; however, these building regulations are widely acknowledged to inhibit innovation due to their complexity and preponderance of prescriptive-based rather than performance-based provisions. Yet almost all codes have provisions for alternative designs, materials, and methods of construction that allow for alternative or innovative approaches to building.

II. Houston Building Code

After the introduction of the ICC building code, the City of Houston formally adopted it as its standard with local amendments. In fact, the city adopted the ICC 2003 building code but made amendments to reflect the ICC 2006 updates as well as including its own local amendments. Generally, the local amendments for the City of Houston affect areas within the building envelope that either relax or enhance certain standards.

For example, the ICC standard code specifies that all high-rise buildings must be fully fire-sprinkled as well as require the duct dampers to be automatically closed. The Houston code, on the other hand, requires that all high-rise buildings must be fully fire-sprinkled, but does not require the duct dampers to be automatically closed. Other amendments follow local building customs and traditions such as requiring that all finished floor elevations on new buildings be at least 12" above the nearest sewer manhole or if there is no manhole, 4" above the crown of the street. Another example is the Houston building code that establishes a minimum regulation governing the design and construction of driveways, sidewalks, parking lots, and alleys.

The City of Houston usually updates its building code every three years, and it is understood that the 2009 update will adopt the ICC 2006 standard even though ICC will issue a 2009 update to its standard code.

III. Houston Building Code regarding Extreme Weather and Natural DisasterS

The only modification to the City of Houston Building Code resulting from a natural disaster occurred after Hurricane Alicia in 1983. When Hurricane Alicia blew through downtown Houston, the gravel and rock ballast on the downtown building roofs was dislodged, shattering windows throughout downtown and causing millions of dollars in damages. As a result, the city amended its building code to eliminate gravel and rock ballast for roofs within the downtown district. Additionally, the design standard for wind resistance was modified to increase the maximum design wind speed from a 90-mile-per-hour wind speed to a 90-mile-per-hour sustained wind speed and a 110-mile-per-hour wind gust for a three (3) second period of time. This last amendment seems meaningless if one considers the likelihood of experiencing a wind gust of 110 miles per hour for only three (3) seconds.

No other amendments have been proposed to the Houston building code as a result of the recent hurricanes Rita and Ike that also caused millions of dollars in damage to Houston.

IV. The Development of Green Standards

In recent years, there has been much discussion about “green” building codes. So, what are “green codes?” Technically, there is no such thing. There are building codes, fire codes, energy codes, mechanical (HVAC) codes, gas codes, electrical codes, accessibility codes, plumbing codes. There are no green codes.

What has prevented most municipalities from adopting “green” standards is the fact that building codes generally specify minimum standards to protect public health, safety, and general welfare from fire and other hazards attributed to the building environment. Changing these minimum standards to provide for “green” alternatives is difficult to do.

What has been occurring for almost 30 years is an uncoordinated and localized process of introducing innovative and alternative approaches to build more sustainable or “green” building and development projects. As early as 1990, the International Council for Local Environmental Initiatives (ICLEI) was founded as an international association of local governments and national and regional local government organizations that made a commitment to sustainable development. The ICLEI’s Cities for Climate Protection™ (CCP) Campaign was initiated in 1993 to assist cities in adopting policies and quantifiable measures implemented to reduce local greenhouse gas emissions, improve air quality, enhance urban living, and promote sustainability in buildings.

Fortunately, the process of changing local building codes for alternative designs, materials, and methods of construction to make buildings more sustainable and “green” is becoming easier. Historically, green building efforts never achieved broad market acceptance or critical mass until the advent of the United States Green Building Council (USGBC). The USGBC developed a third-party building certification program for the design, construction, and operation of high performing buildings. This program is known as Leadership in Energy and Environmental Design, or LEED® (LEED). The LEED Green Building Rating System (GBRS) is a voluntary, consensus-based national rating system for developing high-performance, sustainable buildings. LEED applies to all building types and emphasizes state-of-the-art strategies in five areas: sustainable site development, water savings, energy efficiency, materials and resources selection, and indoor environmental quality. According to the Environmental Information Administration, as of 2008, U.S. buildings consume 40% of primary energy usage, 72% of electricity consumption, and 13% of potable water consumption and contribute 39% of CO2 emissions.

According to the USGBC, there are LEED-certified projects in all 50 states and in 91 countries. As of December 2008, there were 283.3 million square feet of commercial LEED-certified projects. As of January 2009, there were 2,122 certified projects and another 17,450 registered projects. The USGBC reports that every business day, $464 million worth of construction is registered with LEED.

Early evidence of a fundamental shift in green building influenced by the LEED GBRS came in late 2003. At this time, a trend was developing with large cities and the federal government requiring that certain types of public buildings attain some level of LEED ratings. The following year, additional support came from larger cities to the point that LEED had become the de facto rating system for green buildings.

Since December 2007, several major U.S. cities have adopted LEED standards for city-owned buildings, including Austin, Boston, Kansas City, New York City, Portland, Salt Lake City, Seattle, and San Diego. Additionally, several states have passed LEED and/or Sustainability Design Laws.

V. The City of Houston’s Efforts to go Green

V.A. Green Building Resolution

The City of Houston has not adopted LEED or any “green” building standards within its building code. However, one of Houston’s efforts to “go green” occurred on June 23, 2004, when the Houston City Council adopted the Green Building Resolution, which set a target of Silver level LEED certification for new construction, replacement facilities, and major renovations of City of Houston-owned buildings and facilities with more than 10,000 square feet of occupied space. The Building Services Department is implementing this policy in the management of its projects in the City's Capital Improvement Plan.

Utilizing sustainable design practices is intended to significantly reduce operations and maintenance costs of buildings as well as decrease any negative impacts on the occupants of City of Houston-owned and occupied buildings.

The planning, design, construction, and operation of the City of Houston's LEED certified buildings, facilities, and leaseholds should have a significant positive effect on Houston's air quality, water quality, and quality of life, while contributing to the environmental and economic sustainability of the city.

V.B. The City of Houston’s “Quick Start” Program

The City of Houston’s standard commercial building plan review time for projects within the city’s jurisdiction has been significantly impacted. In fact, for 90% of all commercial plan reviews, the city’s turnaround time has been reduced to 11 days. This was a result of an initiative conducted by the Mayor’s Taskforce on Permit Reform. This plan-review process improvement puts Houston at the forefront of reduced permit processing times for large cities in the U.S.

In addition, in an effort to encourage LEED Certification, the Code Enforcement division of the City of Houston offers a Quick Start service for any project that has registered for LEED certification, regardless of construction cost and/or size. This Quick Start service involves one meeting with the various code enforcement officials, as opposed to separate meetings, to review and approve the final set of design drawings for the proposed structure. The Quick Start process used to be limited to projects that exceeded $1 million in value, but it is now open to any size project. Instead of resubmitting plans for subsequent reviews, LEED projects go directly to the meeting process.

The city charges a Quick Start fee for this service based on the value of the project; however, the City of Houston offers financial incentives for LEED certified buildings. On LEED certificate-seeking projects, the developer or contractor can qualify for a graduated rebate of the Quick Start fees. The rebate is based on the level of achievement as follows:

• Platinum Level – 100%

• Gold Level – 75%

• Silver Level – 50%

• Certificate Level – 25%

The Quick Service process begins when the developer or contractor declares its intent to gain LEED certification in the first plan review. The review is done through the normal submittal process. Then, as long as the developer or contractor sends in a complete set of construction plans and has its “outside” department approvals, it qualifies for the Quick Start meeting process. By opting to pay an additional fee of 65% of the permit cost, the final plan review is completed in a face-to-face conference-like meeting with the reviewers, designers, and owners. The Quick Start program is intended to eliminate at least one plan resubmittal, thus saving the builders valuable time and money. After the project is constructed and occupied and when LEED certification is achieved, the applicant must present the certificate from the USGBC to the city’s Code Review Department to confirm the level of achievement and the refund will be made based on the level of certification. The application for the Quick Start rebate must be made within 90 days of the date of certification.

The City of Houston is allowing broader access to the plan review for LEED projects and offering to rebate the additional charge. In doing so, the city believes it is providing a significant benefit to those who undertake the worthy goal of LEED construction and operation. The costs savings to builders are an attractive incentive to encourage Houston business and industry leaders to build LEED-certified buildings.

The following are City of Houston Projects currently pursuing LEED Certification and their estimated construction costs:

HPD Service Animal Facility – $6.5 million
Looscan Neighborhood Library - $5.9 million
HPD Property Room - $10.5 million
Fire Station 8 – $7.2 million
South Post Oak MultiService Center/Vinson Library – $9.2 million
Parks Department Headquarters – $6.9 million
Bracewell Branch Library – $4.4 million
Kendall Branch Library – $6.4million
South Right of Way Fleet Maintenance Facility - $10.7 million
Clayton House Library Complex – $5.5 million
African American Library at the Gregory School – $5.0 million
Fire Station 37 – $3.8 million
Frank Branch Library – $2.3 million
Westside Command Station – $8.3 million
Northeast MultiService Center – $6.2 million
Southwest Environmental Center - $2.9 million
Oak Forest Branch Library Renovation – $3.0 million
Kashmere MultiService Center Renovation – $3.0 million

V.C. Adoption of the IECC 2001 Energy Code

Houston’s other effort to “go green” occurred in August 2008 when the city adopted the International Energy Conservation Code (IECC) 2001 version. This code was developed and maintained by the IECC to set a comprehensive and coordinated national model construction code that is intended to save energy over the useful life of a building and contains energy specifications for residences and commercial buildings. Standard specifications address construction guidelines and material recommendations for roofs, insulation, lighting, heat, ventilation, air conditioning, windows, and doors. These standards will allow architects to develop energy efficient projects.

VI. 81^st Legislative Regular Session – State of Texas 2009

On February 17, 2009, Representative Harold Dutton of Houston introduced House Bill 303 that would exempt from sales tax the labor to install certain tangible personal property (equipment and material) in buildings that obtain LEED certification. If the tangible personal property is installed in a building that is designed, constructed, and operated so that it obtains certification under the LEED GBRS, the taxpayer would be entitled to a credit or refund. The bill would take effect October 1, 2009, and provisions of the bill would apply only to construction or renovation of a building for which design services are entered into on or after October 1, 2009. Currently this bill is awaiting action in the Ways and Means Committee with no prediction of its passage.

On March 16, 2009, Representative Eddie Lucio III of San Benito introduced House Bill 431 that would establish standards for new state building construction or renovations whose construction costs are more than 50% of the value of the state building. This bill would apply to buildings larger than 10,000 square feet. The bill exempts institutions of higher education, the Texas Department of Transportation, the Parks and Wildlife Department, and other agencies per Section 2166.003, Government Code. The bill would take effect September 1, 2009, and provisions of the bill would apply only to construction or renovation of a building for which design services are entered into on or after September 1, 2009. Currently the bill is progressing though the House State Affairs Committee with no prediction of its passage.

VII. LEED Rating System

The following discussion describes what is involved the USGBC LEED certification process. The LEED certification process is composed of a rating system that classifies projects within various groups or “tracks” that have been developed to cluster similar buildings or projects. Within each track there are a number of categories describing the various green building elements that are evaluated in the certification process.

VII.A. LEED Tracks

LEED is not a single rating system, but rather groups or tracks of rating systems depending on the type of building. As of this writing, there are six LEED tracks for certification with four tracks in the pilot stage.

VII.A.1. U. S. Green Building Council in Use

The USGBC has six LEED rating system tracks that are currently in use at this time.

VII.A.1.a. LEED for New Construction (and Major Renovations)

This track is developed to guide the design and construction of high-performance commercial and institutional projects, including office buildings, high-rise residential buildings, government buildings, recreational facilities, manufacturing plants, and laboratories.

VII.A.1.b. LEED for Existing Buildings: Operations & Maintenance

This track measures operations, improvements, and maintenance of buildings on a constant scale, with the goal of maximizing the operational efficiency of the building while minimizing environmental impacts of the building. LEED for Existing Buildings addresses whole-building cleaning and maintenance issues (including the use of chemicals), recycling programs, exterior maintenance programs, and systems upgrades.

VII.A.1.c. LEED for Commercial Interiors

This track is a measure for the tenant improvement market relative to green products. It is the recognized system for certifying high-performance green interiors that are less costly to operate and maintain and have a reduced environmental footprint.

VII.A.1.d. LEED for Core & Shell

This track measures base building elements such as structure, envelope, and the HVAC system. LEED for Core & Shell is developed to complement the LEED for Commercial Interiors rating system, as both rating systems establish green building criteria for developers, owners, and tenants.

VII.A.1.e. LEED for Schools

This track measures the unique nature of the design and construction of K-12 schools. Based on LEED for New Construction, it addresses issues such as classroom acoustics, master planning, mold prevention, and environmental site assessment.

VII.A.1.f. LEED for Homes

This is the only track that measures the design and construction of high-performance green homes.

VII.A.2. U. S. Green Building Council in Pilot Phase

The USGBC currently has four LEED rating system tracks in pilot phases that should be launched later this year.

VII.A.2.a. LEED for Neighborhood Development

This development track is intended to bring together the principles of smart growth, urbanization, and green building into the first national system for neighborhood design. LEED for Neighborhood Development is a partnership among the USGBC, the Congress for the New Urbanism, and the Natural Resources Defense Council. The pilot program, which began in the summer of 2007 and was tested on nearly 240 projects, is now closed and awaiting implementation.

VII.A.2.b. LEED for Healthcare

This development track is developed to meet the unique needs of the healthcare system infrastructure, including inpatient care facilities, licensed outpatient care facilities, and licensed long-term care facilities. LEED for Healthcare may also be used for medical offices, assisted living facilities, and medical education and research centers. The first public comment period for LEED for Healthcare is now closed awaiting implementation.

VII.A.2.c. LEED for Portfolio Program

This development program enables companies and building owners to integrate LEED into their new and existing building projects on a volume scale with a cost-effective, streamlined certification process. The LEED for Portfolio Program pilot was launched in November 2006 and the comment section is closed awaiting implementation.

VII.A.2.d. LEED for Retail New Construction and Commercial Interiors

This development program recognizes the unique nature of the retail environment and addresses the different types of spaces that retailers need for their distinctive product lines. The pilot program for LEED for Retail New Construction and Commercial Interiors is no longer accepting expressions of interest for participation.

VII.B. LEED Categories

LEED is a point-based certification system in which projects earn points for satisfying specific green building criteria. There are a total of six categories that are evaluated and rated. Within each of the six LEED credit categories, projects must follow particular prerequisites and earn points.

· Sustainable Sites (SS): This category involves the location of the building, preservation of the site, restoration practices for the site, and limiting the environmental impact of buildings on local ecosystems.

· Water Efficiency (WE): This category focuses on water efficiency and water use reduction.

· Energy & Atmosphere (EA): This category addresses the reduction in energy use and the use of renewable energy resources.

· Materials & Resources (MR): This category involves the reuse of materials and the use of local renewable resources to minimize natural resource consumption.

· Indoor Environmental Quality (EQ): This category involves minimizing the off-gassing of harmful chemical compounds, as found in adhesives, paints, carpets, wood products, and furniture in the indoor environment.

· Innovation in Design (ID): This category provides design teams the opportunity to be awarded points for exceptional performance of the building above the LEED requirements and/or awards points for innovative performance.

As of April 27, 2009, the meaning of “green building,” at least in a technical sense, changed depending on where you live. USGBC launched the third version of its LEED rating system for green buildings that includes a few key updates. Among them is a new regional bonus point system that is intended to address some of the criticism of earlier versions, which claimed it used a one-size-fits-all metric for buildings in very different settings.

Environmental concerns differ among various regions of the country. The regionally-specific credits give LEED a way to directly respond to diverse, regionally grounded issues. The inclusion of these regional LEED credits is the Council’s first step toward addressing regional environmental issues.

In the new rating system, projects that incorporate at least one of six green building strategies identified as regional priorities (based on a project’s zip code) can receive up to four “bonus points” toward LEED certification — one point per regional element.

In parts of Los Angeles, California, for example, new construction projects can receive an extra point for reducing water use, while in Amherst, New Hampshire, there’s a bonus for brownfield redevelopment. In rural Michigan, the USGBC has set up extra credit for elements meant to further the local priorities of preserving prime agricultural land, reducing light pollution in neighboring natural habitats and minimizing the amount (and improving the quality) of storm water gushing into the Great Lakes. In urban Florida, on the other hand, it’s largely about solar power, with bonus points designed to encourage use of abundant solar resources and decreased reliance on fossil fuels.

VII.C. LEED Point Allocation

Each LEED track allocates points to each of the six categories depending on the unique aspects of each track. The bonus is then applied to the Regional Priority track. Additionally, several categories include prerequisites. Failure to meet a single prerequisite in any category will preclude building certification. The following example shows point allocation for LEED New Construction 2009:

Point Category	Prerequisites	Possible Points
Sustainable Sites	1	26
Water Efficiency	1	10
Energy & Atmosphere	3	35
Materials & Resources	1	14
Indoor Environmental Quality	2	15
Innovation in Design		6
Regional Priority Credits		4
Total Possible Points		110

VII.D. LEED Certification Levels

The number of points a project earns determines the level of LEED certification it obtains. LEED certification is available in four levels: Certified, Silver, Gold, and Platinum:

Certification Level	Point Threshold
Certified	40
Silver	50
Gold	60
Platinum	80

At this time, the significance of the level of certification is more pride of ownership than anything else. The USBGC hopes that eventually federal and state governments and municipalities will reward attainment of higher certification levels with greater incentives based on the level achieved.

VII.E. Benefits of LEED

In addition to the environmental benefits of protecting ecosystems, improving air and water quality, and conserving natural resources, LEED also has several economic benefits. Though the overall economic impact of LEED development is unknown, several cost benefits have been established.

VII.E.1. Tax Incentives

A variety of federal, state, and municipal incentives are available for green buildings.

· Federal: At the federal level, the Energy Efficient Commercial Buildings Tax Deduction, which is a corporate deduction up to $1.80 per square foot, is available to the owner. Previously, there was also an accelerated depreciation deduction allowed utilizing the Modified Accelerated Cost-Recovery System (MACRS) methodology; however, this bonus depreciation expired December 31, 2008, but the five-year accelerated depreciation remains in effect.ⁱ

· State: Currently, the only state incentive is through the Oregon Business Energy Tax Credit (BETC). This credit is available to those who invest in energy conservation, recycling, renewable energy resources, and cleaner transportation fuels in their trade or business. The traditional BETC is equal to 35% of the eligible project costs, or the incremental cost of the system or equipment that is beyond standard practice. The credit can be used to offset Oregon individual or corporate income or excise tax. The credit is taken over five years: 10% in the first and second years and 5% each year thereafter.ⁱⁱ

· Municipal: In 2008, New York passed legislation that provided a one-time property tax credit up to $100,000 for building owners in New York City who install green roofs on at least 50% of available rooftop space.ⁱⁱⁱ

VII.E.2. Lower Operating Costs

A recent New Buildings Institute study concluded that new LEED-certified buildings were consuming, on average, 25-30% less energy than non-LEED-certified buildings.^iv For Gold and Platinum LEED certified buildings, the average energy savings was approaching 50%.^v The 2008 Green Building Impact Report by Greener World Media indicates that, since the inception of LEED, more than half of projects categorized as New Construction or Core & Shell projects have delivered at least a 30% reduction water usage, with 20% of the savings from those projects categorized as Existing Buildings Operations & Maintenance.

Almost 90% of projects categorized as New Construction and those categorized as Core & Shell projects have achieved 50% reduction in water use for landscaping.^vi

VII.E.3. Marketability

A recent study by the CoStar Group determined that sustainable green buildings outperform non-green buildings in specific areas such as occupancy, sale price, and rental rates.^vii According to the CoStar study, LEED buildings command rent premiums of $11.33 per square foot over their non-LEED buildings and have 4.1% higher occupancy.^viii Additionally, rental rates in Energy Star buildings represent a $2.40 per-square-foot premium over comparable non-Energy Star buildings and have 3.6% higher occupancy. As mentioned in Turner Construction Company’s 2008 “Green Building Market Barometer,” more than 80 % of real estate executives said they would be “extremely” or “very likely” to seek LEED certification for new projects in the next three years.^ix

VII.E.4. Tenant Comfort and Health

Greener World Media reports that, in 2008, companies operating in LEED-certified buildings achieved annual employee productivity gains of over $170 million as a result of improved indoor environmental quality — a cause and effect that has been difficult to quantify.^x That figure is predicted to jump well into the billions by 2015 as the number of employees in LEED buildings grows more than 10-fold.^xi

VII.F. Criticisms of LEED

While LEED is praised for its many benefits, there are others that criticize the reliance on LEED within municipalities building codes. The International Council of Shopping Centers has identified several problems with municipalities adopting LEED certification as a building code requirement.

· If local building codes adopt LEED certification standards by reference only, the public codes will be subject to change by every decision the U.S. Green Building Council develops. Representatives of the USGBC itself have argued against imposing LEED certification through building codes.

· LEED was intended to be a “cutting edge” standard. It was never intended as a base-line requirement or as a prerequisite for a building permit. LEED was intended to “push the envelope” and describe the most environmentally conscience use of materials. Building codes are properly intended to establish a minimum standard for safety and other purposes. Therefore, there appears to be a conflict in the compatibility of these two goals.

· LEED requirements can be in conflict with building codes in critical building code categories. Municipalities that mandate sustainability requirements may not understand the unintended consequences and impacts to the design and construction process as well as the resulting increases in time for approval and overall project costs.

· Final LEED Certification is only granted after a building has been completed or even after a building’s mechanical systems have been operational for a certain period of time. It is not clear what the effect would be on a building permit if a building is not ultimately certified at the mandated level. Some agencies require up to a $2 million bond as a Certification Compliance Guarantee. There is no clear appeal process for disputes regarding final certification approval except through the USGBC itself.

· Even though the USGBC does not charge for its certification standards (beyond a registration fee), the lengthy process can be an expensive one for developers. The USGBC trains and licenses third-party certification experts who charge for their services. Although costs can vary greatly, achieving LEED certification can add approximately $50,000 to the development of a small retail project. This additional expense does not cover all increases including those associated with design, material, or equipment changes driven by the LEED guidelines. In addition, adopting LEED certification as part of a municipal building code effectively gives a monopoly to LEED Accredited Professional Certified examiners.

· In recent years, the USGBC has intensely advertised building and site certification programs despite having only a limited capacity to handle the resulting demand. More than 17,400 projects have been registered, yet only about 2,100 have been processed (certified) to date. The certification process is now seriously overloaded, and the USGBC is having difficulty handling the demand even as it continues to change the rules for new projects. Because the USGBC has insufficient staff resources for the influx of new certification requests, most requests are handled by other third-party consulting firms – and their individual decisions to accept or reject various sustainable designs are effectively final. As demand increases, the USGBC process could collapse under the weight of its own success with no foreseeable agency to replace it or maintain the process.

· LEED standards do not apply directly to all types of construction. For example, the LEED certification standards for retail buildings are only now moving beyond the pilot phase (2008). And multiple site “portfolio” certifications, which can greatly reduce the per-unit cost of certification for national chains, have yet to be approved.

· The entire LEED certification process is undergoing significant changes for 2009. This is partially in response to the one-size-fits-all metric for buildings in very different settings. It also demonstrates that LEED certification is a moving target that can greatly complicate compliance efforts.

VIII. Alternative to LEED

We have discussed the LEED green building certification program, but there is another well-established green building certification program in the market and it is known as Green Globes, a product of the Oregon-based Green Building Initiative (GBI). Like LEED, Green Globes features an on-line interface and an escalating system of rewards based on achieving an increasing number of points under its system. Green Globes offers a self-assessment option that does not offer certification but allows the building owner to grade its facility. This self-assessment is an on-line questionnaire regarding the green components of a building and transmitted to Green Globes for evaluation with return comments on how to upgrade the building. However, under Green Globes, a building can only receive recognition after a site visit and inspection by a certified verifier. LEED does not currently require on-site verification. Once an assessment is verified, properties receive a Green Globes rating based on the percentage of total points (up to 1,000) achieved. The reward system provides an increasing number of “globes” based on the verifier’s analysis, as follows:

· Four (4) Globes are awarded to projects obtaining 85-100% of available Green Globes points. The “4 Globes” level of certification is reserved for select building designs that serve as national or world leaders in energy and environmental performance. The project also introduces design practices that can be adopted and implemented by others.

· Three (3) Globes are awarded to projects obtaining 70-84% of available Green Globes points. The “3 Globes” level of certification demonstrates leadership in energy and environmental design practices and a commitment to continuous improvement and industry leadership.

· Two (2) Globes are awarded to projects obtaining 55-69% of available Green Globes points. The “2 Globes” level of certification demonstrates excellent progress in achieving eco-efficiency results through current best practices in energy and environmental design.

· One (1) Globe is awarded to projects obtaining 35-54% of available Green Globes points. The single “Globe” level of certification demonstrates movement beyond awareness and commitment to sound energy and environmental design practices by demonstrating good progress in reducing environmental impacts.

IX. Comparison Between LEED and Green Globes

IX.A. Cost

Green Globes requires an initial $500.00 fee for each self-assessment. If an applicant wishes to obtain formal certification, it must obtain third-party verification, which runs an average additional total cost of $4,000 to $5,000. This includes a conditional verification—at the construction documents stage—and final verification after a site inspection is conducted. In contrast, the initial LEED registration fee for a project is $450 for USGBC members and $600 for non-members. LEED certification fees vary by project size, but the average certification cost is $2,000. Total LEED or GBI costs vary from project to project but can range from 1 to 8+% of total construction costs, depending on the level of certification and/or points pursued.^xii

IX.B. Program Fundamentals

Green Globes can be used as a guide without committing to verification, but LEED cannot. To receive Green Globes certification, the applicant must obtain third party, on-site verification. LEED certification requires only a paper review by the USGBC. In addition, LEED requires certifications (potential warranties) from designers, but Green Globes has no similar requirement. Unlike LEED (in its current version), Green Globes does not hold projects accountable for inapplicable strategies (e.g., for a project with no exterior lighting, the applicant can select “N/A,” which removes those points from the total number available).

In addition, the Green Globes appeals process is not articulated, whereas LEED has a fully developed point appeals process that includes an on-line database of prior rulings. Unlike LEED, Green Globes does not favor Forest Stewardship Council (FSC) over Sustainable Forest Initiative (SFI) forest certification. Finally, Green Globes has no prerequisite points, whereas LEED has numerous prerequisite points in a number of categories.

X. Conclusion

As discussed in this paper, building codes are the “minimum requirements” to safeguard public health and safety to life and property from fire and other hazards attributed to the built environment and to provide safety to fire fighters and emergency responders during emergency operations. Building codes include standards to address fire safety, energy usage, mechanical (HVAC), gas, plumbing, and electrical requirements and accessibility standards. Building codes do not contain green building standards; however, the federal and state governments and municipalities are recognizing the need to address green standards.

As the environmental impact of buildings becomes more apparent, green, or sustainable, building will be recognized as the practice of creating and using environmentally friendly and more resource-efficient models of construction, renovation, operation, maintenance, and demolition.

The process of changing local building codes for alternative designs, materials, and methods of construction to make buildings more sustainable and “green” is becoming easier. Due to the broad acceptance of the USGBC LEED Green Building Rating System, the building market is more readily embracing the movement to become green. Though LEED is voluntary and not totally exclusive, it has supported efforts by federal and state governments and municipalities to formulate their own green standards by which to develop buildings in which we live, work, and play – standards that will protect us from nature's extremes and protect our health and environment.

XI. Notes

i See Database of State Incentives for Renewables & Efficiency: http://www.dsireusa.org/library/includes/genericfederal.cfm?CurrentPageID=1&state=us&ee=1&re=1

iⁱ “Business Energy Tax Credits Technical Requirements,” Oregon Department of Energy, June 20, 2008.

iⁱⁱ Green Roof Property Tax Abatement (A.11226).

iⁱⁱⁱ Mark Frankel and Cathy Turner, “Energy Performance of LEED for New Construction,” New Buildings Institute (March 4, 2008).

v Ibid.

vⁱ “State of Green Business,” Greener World Media (January 2008).

vⁱⁱ Andrew C. Burr, “CoStar Study Finds Energy Star, LEED Bldgs. Outperform Peers,” (March 26, 2008).

vⁱⁱⁱ Ibid.

^ix “Green Building Market Barometer” Turner Construction Co. (2008).

^x “State of Green Business” Greener World Media (January 2008).

^xi Ibid.

^xii See Green Building Initiative website at http://www.greenglobes.com/about-faq.asp#cost and Peter Morris, “What Does Green Really Cost?,” PREA Quarterly (Summer 2007): 55-60.

XII. Bio: Philip D. Barnard, PE, CCE

Philip D. Barnard, PE, CCE, is Senior Vice President with Interface Consulting. With more than 30 years of industry experience, he is a veteran in engineering and construction management. As a former engineer, contractor, and Assistant Director of Public Works for the City of Houston, Mr. Barnard’s experience includes multimillion-dollar capital improvement projects, heavy civil and bridge construction, and project management for facilities and other public works projects. In his role with Interface Consulting, he focuses on commercial and public building construction as well as heavy civil construction by analyzing damages and claims, providing proactive project support, and performing productivity and schedule analyses as well as entitlement and damage assessments for owners and contractors. He has a Bachelor of Science in Civil Engineering from Southern Methodist University and is a registered professional engineer in the state of Texas and a Certified Cost Engineer (CCE). His professional affiliations include the Association for the Advancement of Cost Engineering International (AACEI), the American Society of Civil Engineers (ASCE), the Project Management Institute (PMI), the American Institute of Steel Construction, Inc., (AISC), the American Concrete Institute (ACI), and the American Water Works Association (AWWA).

[Article PDF]

26-May-09 11:00 AM

Keeping Proposal Promises from Becoming Contractual Obligations

Chris Sullivan - noemail@interface-consulting.com — Tue, 07 Oct 2008 18:00:00 GMT

Contractor’s proposals are often the first step in a courtship between owners and contractors. Initially, everyone is optimistic for a successful outcome. The honeymoon period may last the entire project and culminate in a project that is delivered on-time and on-schedule. However, in today’s overheated construction environment, costs may rise, labor may become scarce, engineering may be late or defective, and equipment and material may arrive at site late or defective, all of which may strain relationships between owners and contractors and often can lead to litigation.

A recent trend in construction litigation involves a rather novel approach of owners claiming a breach of contract against contractors for failing to fulfill the “promises” contained in their technical and commercial proposals that are often referenced in or attached to the contract as an exhibit. Contractor’s proposals often contain optimistic statements, sometimes with a salesmanship twist, that attempt to present the contractor in the best possible light when vying for a project. So what happens when the project deteriorates and a dispute arises, do so-called “proposal promises” become contractual obligations of the contractor? Let’s take a closer look.

Contractors’ proposals typically include an execution plan and similar write-ups describing how the contractor plans on executing the project to achieve the owner’s desired result of an on-schedule and under-budget project. These write-ups often contain general, sales-focused statements, similar to the following:

“Our scheduling programs will eliminate schedule coordination problems.”
“We will dedicate the best team to the project containing all the right skills.”
“We will optimize cost and schedule.”
“Our execution approach will minimize overall program costs.”
“We are familiar with labor in the area and will properly manage and source skilled labor.”
“We will utilize our tried- and-true cost tracking and forecasting programs to ensure project success.”

Potential problems arise when the contractor’s proposal is considered part of the contract, either by reference or as an attachment/exhibit. Typical proposal statements, such as those listed above, contain ambiguous terms such as “optimize,” “minimize,” “ensure,” and “properly.” Such statements, in the hands of skilled trial attorneys, can take on different meanings in the eyes of a jury. Ambiguous terms have no place in a construction contract.

Construction is a risky business and even the best laid plans can be disrupted by unforeseen events. For example, many parts of the country are experiencing an overheated construction economy resulting in rising costs, a shortage of skilled labor, and tighter project schedules, all of which could increase the overall cost of construction. If project costs rise higher than reasonably anticipated, does this mean the contractor was negligent, somehow failed to perform, failed to fulfill its “proposal promises” to minimize cost or schedule, or failed to “ensure success?”

As stated above, ambiguous terms have no place in a construction contract. The following suggestions may help to ensure that owners and contractors are in better alignment regarding contractual rights and obligations. This in turn, may help to avoid misunderstandings and potential disputes.

Do not attach or incorporate the contractor’s proposals into the construction contract – Often, the proposal is rendered obsolete by post proposal clarifications and bid addenda and, as such, the proposal may not be consistent with the final agreement of the parties. Should the parties wish to preserve parts of the proposal, such as bid clarifications or exclusions, these should be separately listed in the contract as opposed to attaching the entire proposal to the contract. This may also avoid vague or sales-type wording from being incorporated into the contract.
Clarify vague language prior to incorporating it into the contract – The main body of the contract contains many legal terms that may be hotly negotiated, including warranties, insurance requirements, or commercial terms. Technical exhibits typically do not get the same level of scrutiny; therefore, it is more likely that vague or unclear terminology may be incorporated into the contract. It is prudent to review all contract attachments/exhibits to ensure all terms are properly defined and that any potential “proposal promises” are defined.
State the basis for proposal execution plans – The execution plans in a typical contractor’s proposal should, at best, be considered preliminary as they are often based on preliminary engineering and incomplete information. Execution plans are “ever green” documents in that they evolve over time as more information is made available. It is important to state the basis for critical sections of the proposal, so that when things change or evolve, the parties have an established starting point. For example, a contractor’s execution plan may state that it intends to utilize certain cost or schedule control programs, but during the project, a lack of data from the owner’s other contractors may render the programs useless without the needed data to populate the model. In addition, it is prudent for each party to list the data it needs to perform its work, along with the date needed, to ensure both parties understand the expectations.
Document changes from the original plan – Good project management requires thorough documentation of changes, not just regarding the scope of work, but also regarding the manner of performance. A contractor may have planned to execute the project in a certain manner but, due to unforeseeable events, may be required to modify the plan accordingly. Should the project be completed on-time and under-budget, few questions are likely to be raised. However, in today’s litigious environment, the Monday morning quarterbacks (and litigators) will be out in full force criticizing the contractor if the project turns sour due to, as some may argue, the contractor breaking its “proposal promises” and not following its original plans. The owner may claim these “promises” were part of the reason why it selected that contractor in the first place. Contractors are advised to document critical changes in their execution plans to help the parties understand that even the most carefully planned and executed project may require adjustments to their execution plan due to unforeseeable events.

Construction is risky, and it is not a perfect science. More often than not, project circumstances change, resulting in changes to the project execution. An over budget or late project leads to disappointment and increases the chances that the Monday morning quarterbacks will be second guessing project decisions. Therefore, by being aware of potential “proposal promises,” contractors can hopefully ensure that only critical information is included in the contract, while at the same time preventing sales-type information from becoming an ambiguous contract obligation.

Article PDF

7-Oct-08 1:00 PM

A New Day Dawning for East End Students, part 2

Steve Parker - noemail@interface-consulting.com — Thu, 19 Jun 2008 15:00:00 GMT

This article is the second in a two-part series about how Project Lead the Way (PLTW) and the Houston Independent School District’s (HISD) Chavez High School are making a difference in students’ lives and the engineering profession.

According to PLTW’s director of research and evaluation, Gary Edelson, Ed.D., the mission of the program “is to provide the engineers this country needs for the next 50 years.” Successes in other parts of the country include Wheaton High School in Montgomery County, Maryland. Education Week reports that “members of the academy’s (Wheaton) 26-student class of 2007—its first graduating class—went on to study in mechanical, electrical, nuclear, and other engineering fields…claiming more than $1.6 million in scholarships.” At Albany High School in New York, Technology Director Richard Kissane attributes program successes to the curriculum because it is “hands-on, out-of-their-seat, building something, designing something, seeing the actual product at the end.”

Mr. Dan DeLeon, principal at Chavez High School says the program “gives his students something special, beyond the regular high school curriculum.” In Introduction to Engineering Design, students use Autodesk® Inventor to develop 3D drawings. Two major projects completed by PLTW students at Chavez were the Puzzle Cube and Wheel Rim. VAM Drilling, an oil services company in Houston, was so impressed with the Wheel Rim design of one student that they offered him a summer job, which became an after-school job the following year.

The East End Chamber of Commerce and its members have been very active in supporting the PLTW program at Chavez. The program filled every seat before the 2006 school year started, and the Chamber and its partners made sure there were computers, software, and all necessary school supplies before classes began. At the November 2007 awards dinner, Education-The Horsepower of Success, sponsored by the Chamber, PLTW students exhibited their work. That evening, Valero Energy CEO, Mr. Bill Greehey, committed $75,000 for implementation of the program at three East End high schools.

Area universities are also getting involved. Chavez students have visited the University of Houston (UH) to conduct experiments and have been mentored by UH engineering students. Additionally, UH provides PLTW training for teachers. The Texas Education Agency has provided over $1.5 million to address the critical need for science, technology, engineering, and mathematic (STEM) career fields. Rice University is also offering a summer enrichment program for 25 PLTW incoming ninth graders and 25 PLTW rising tenth graders. Four area chemical plants, Valero Refinery, Texas Petrochemicals, Rhodia, and Lyondell Basell are funding the entire cost of the program.

In addition to individual mentoring, the East End Chamber has also implemented a mentoring program between business families and PLTW student families. This program encourages greater parental support of students and the curriculum and offers tutoring or higher educational planning according to specific student needs. Recently, fifteen chamber member families hosted a hamburger and ice cream social for fifteen “adopted” PLTW student families. One of the PLTW students had been in a gang and wanted to break free. Although it wasn’t planned, one of the parents in the family that “adopted” this student is a police officer who had all the right connections to help.

In late April 2008, Chavez High School’s PLTW was accepted into the National Engineering Academy Network, making this HISD school one of only 21 in the country designated as a “National Engineering Academy.”

These efforts have given students hope and most have improved their grades in other courses. While some people envision Scott Adams’s comic strip character Dilbert when they think of engineering, that isn’t the case at Chavez. Peers of PLTW students see the program as “cool” and “a way out” of their current environment.

The program is proving to be as exciting for the adults partnering with the program as it is for the students. “Our youth are our future and our responsibility,” remarked Ms. Diane Lipton, East End Chamber president, “providing this curriculum is one step towards graduating a qualified workforce for our community.”

To find out how you can become a part of this dynamic program, encourage students, and help provide enthusiastic new professionals to stem the engineering shortage, visit PLTW’s website at www.pltw.org. You can also contact Diane Lipton of the East End Chamber at diane@eecoc.org.

Article PDF

BIO
Steve Parker is a senior consultant and Graphics Director for Interface Consulting International, Inc., a leading construction consulting firm. An award-winning graphics designer with over 20 years experience, he is a specialist in analyzing complex data and determining the most effective way to illustrate a message for persuasive and resolution purposes. He holds a BBA in Marketing from the University of Houston. Mr. Parker also serves as President of the Greater Eastwood, Lawndale, and Wayside Super Neighborhood in Houston’s East End. He is also on the City of Houston Planning Commission’s Neighborhood Preservation Committee and a steering committee member for the East End Strategic Vision Project. He can be reached at (713) 626-2525 or at separker@interface-consulting.com

19-Jun-08 10:00 AM

The Cost of Doing Business – Is Your Company Suffering from Increasing Material Prices?

Peter van der Schans - noemail@interface-consulting.com — Wed, 28 May 2008 17:00:00 GMT

Introduction

This year, exceptionally high price increases of construction materials have caused serious problems for the construction industry. A major factor is the current economic and construction boom occurring in China. China is experiencing rapid growth and, with it, tremendous construction activity which is creating shortages in the US and throughout the world.

Background

Basic economics tell us that, in an open marketplace, prices will rise when demand increases or when supply decreases. Demand is increasing exponentially in China due in part to a construction boom resulting from the country’s economic revolution, preparations for the 2008 Olympic Games, construction of the Three Gorges Dam, and the construction of thousands of highways throughout the country. Demand is also significantly higher in the US due to a rise in construction activity, related in part to new home construction. Some of the highest price increases have occurred with steel, lumber and plywood, while cement has been in short supply. The following graph shows the extent of construction material price inflation over the past twelve months:

Steel

The construction industry has seen the demand for steel increase and the supply decrease simultaneously. All types of steel have increased in price over the past twelve months. Reinforcing bar has risen by 45.2%, while structural steel has risen by 25.7%.

China is currently consuming about 25% of the world’s steel supply. Since China is a major player in the steel production market, it can redirect previously exported steel to fill its own domestic demand for the material, reducing the material’s availability on the open market. A similar situation is occurring in India, where some suppliers have halted exports in order to meet domestic material demands.

While demand for steel has risen greatly, the shortage of coke, used in steel manufacturing, has reduced US steel production. Other factors such as high energy costs, high transportation costs resulting from increased fuel costs, the weak value of the US dollar, and the consolidation of steel manufacturers are all contributing to the increased steel prices. Delivery delays have resulted from international shipping lanes being stretched to capacity.

Lumber and Plywood

The prices for lumber and plywood have also risen dramatically over the past twelve months, mainly due to increased residential construction activity in the US. Low interest rates have spurred much of this new residential construction. Lumber has risen an average of 25.8% while plywood has risen an average of 21.5%. Since the start of this year’s hurricane season, repair and reconstruction work necessitated by hurricane and flood damage has further driven up lumber prices. These high prices will likely be sustained over the short term while the massive reconstruction efforts are progressing.

Cement

While cement prices have not risen as significantly as other materials’ prices, the shortage of cement has been a problem, particularly this past summer. Concrete mixing companies could not produce concrete fast enough to keep up with demand. The shortage led to countless project delays and disruptions.

In 2003, 20% of the US demand for cement was fulfilled by imports. The US has anti-dumping laws and very high tariffs against Mexico, making imports from that country cost prohibitive. The length of time to import materials from overseas, as opposed to receiving materials from Mexico, is much greater, as it takes weeks rather than days to receive a shipment. The resulting delays can be hard on contractors who need to adhere to a tight schedule. In addition, because of high activity in Asian markets, particularly in China, freightliners are making the majority of shipments to that part of the world rather than to the US.

China is currently consuming approximately 40% of the world’s cement supply. The country’s exceptionally high demand for concrete has allowed it to outbid US buyers on the world market, further reducing availability to the US.

Challenging Times for Contractors

Many of today’s construction contracts are lump sum or unit price contracts, which can take a year or more to complete. Because these contracts are typically based on material prices estimated at the beginning of the project, the contractor can be adversely affected when material prices surge unexpectedly.

The contractor must often absorb the increased cost of construction materials. Considering the increased cost of materials and the fact that numerous projects today have slim profit margins, many contractors either make no profit or stand to lose money on a given project.

While steel prices have leveled out recently, albeit at a high level, there is always the possibility they could increase again. Even though China’s government has instituted measures to slow the dangerously rapid growth of their economy, the overall demand for construction materials is still very high.

In addition to rising prices, another major problem is the delayed delivery of materials to contractors due to material shortages. Material delivery delays are generally beyond the control of the contractors, and they can delay the entire project. Such delays can put contractors at risk of liquidated damages due to missed project deadlines.

Possible Solutions

The following list highlights possible solutions to the increased material prices and material shortages dilemma:

Incorporate price protection clauses into contracts (apply bid qualifications).
Lock in on material prices.
Buy materials early in the project to ensure availability.
Delay the project until prices decrease.
Work together with other builders and contractors to obtain group discounts on material purchases.
Employ value engineering to help reduce costs.
Renegotiate contracts to accommodate price increases and/or industry shortages.
Purchase materials in bulk to receive discounts.
Consider renovating an existing building as opposed to building a new structure.
Maintain a good relationship with material suppliers.

Looking to the Near Future

Increased material costs may eventually cause a decrease in residential construction and are already increasing the price of new homes. This, in turn, could negatively impact new home sales, as home buyers are priced out of the market.

The market may, however, experience some relief in the near future. The following factors may alleviate the current situation:

Rising interest rates may slow construction enough for cement and steel production to catch up, thus stabilizing prices and supplies.
Construction rates will decrease as winter approaches.
The measures being taken by the Chinese government may slow down its economic growth and in turn reduce some of the material price increases being experienced throughout the world.

Conclusion

Contractors must be careful to protect their own interests in a market that is shifting an increased amount of risk onto contractors. Protection from material price increases is just one of the considerations contractors must keep in mind. Owners must also be aware that current material shortages can delay projects and increase their costs.

Article PDF

28-May-08 12:00 PM

A New Day Dawning for East End Students

Steve Parker - noemail@interface-consulting.com — Tue, 13 May 2008 22:15:00 GMT

This article is the first in a two-part series about how Project Lead the Way, HISD’s Chavez High School, and the East End Chamber of Commerce are making a difference in students’ lives and the engineering profession.

In the United States, the number of college graduates earning engineering degrees each year is rising slowly after a major decrease a decade ago. While this is good news, the number of US engineering professionals retiring in the next ten years is out-pacing the number of new graduates. How did this happen and what can we do to remedy the situation?

Early engineers were not degreed, they apprenticed with skilled craftsmen instead. In the early 1800s, West Point Military Academy offered the only US engineering degrees, taught in French. At that time, most engineering degrees were earned either in France or Germany. A knowledge revolution occurred in the mid-1800s due to the second industrial revolution, and by the start of the 1900s, engineering continued to grow and become more of a scientific field. After World War II, the U.S. began to face a shortage of engineers and college curriculums did not emphasize science, math, and engineering.

Educators and professionals alike sounded an alarm about our country falling behind others. It wasn’t until 1957 and the Soviet’s launch of Sputnik that a change occurred. In response to this event, the government opened research agencies, colleges updated curriculums, and students poured into engineering programs. That large group of engineers is currently retiring. Now, at a time when there is a heavy emphasis on new technology, there is a decreasing number of engineering professionals and an increasing need. We are once again facing a shortage.

One response to the shortage is to offer pre-engineering classes in high school so that students are more interested and prepared for college engineering courses. Project Lead the Way (PLTW) was started in 1997 in upstate New York to achieve that goal. Mr. Richard Blais, chairman of that school district’s technology department, hoped to expand it to twenty schools. Today, PLTW is in over 2,200 schools across the nation, with over 200,000 students enrolled in PLTW classes and 7,000 teachers and 5,000 counselors trained in the program.

The program offers courses such as Introduction to Engineering Design, Principles of Engineering, and Digital Electronics at the first level. Different high schools then choose specialization courses from Aerospace Engineering, Biotechnical Engineering, Civil Engineering and Architecture, or Computer Integrated Manufacturing. The program concludes with the capstone course, Engineering Design and Development.

In 2006, the East End Chamber of Commerce in Houston studied education challenges in the community. They discovered Project Lead the Way and began to investigate its success in other schools.

Statistics told them that Chavez High School, located in an inner city, low income, largely Hispanic area had a 50% dropout rate and limited parental involvement. The dinners held to introduce students and parents to the program had a good turnout. After the first year, 96 of 100 students continued to the second year and parent involvement had been phenomenal. Not only were the students excited about the program, but their grades improved in other coursework. The University of Houston notes that “studies of PLTW’s curriculum prove that participating students become the kind of prepared, competent, high-tech employees U.S. industry needs to stay competitive in the global market.”

The East End Chamber is working with the business community to provide supplies, mentors, and other opportunities for the students. In Part II of this article, we’ll look at what the Chamber and other partners are doing to continue the program’s success and how you can help this and other PLTW programs in your area.

Article PDF

13-May-08 5:15 PM

Pre-engineering Program Launches Star Students

Steve Parker - noemail@interface-consulting.com — Tue, 13 May 2008 22:00:00 GMT

An article in Time reported “the U.S., the world’s greatest technological civilization, is running short of engineers.” It stated that the shortage also meant that “most engineering graduates have a least a half dozen offers, with an average starting salary of $350 a month.” Not a bad salary for April 21, 1952, when the article was published.

It was a time when “the basics” were not emphasized in school and fewer students were entering science, engineering, and math careers. Scientists and educators alike tried to emphasize that this trend would result in a loss of the dominant technological status we had maintained since the industrial age. The government was also underfunding science and technology. The debate ended on the evening of October 4, 1957, when the Soviets launched Sputnik, the first artificial satellite, into orbit. Students began to pour into engineering and science programs. In response to Sputnik, President Eisenhower formed the Science Advisory Committee, the Science Advisor position, and the Advanced Research Projects Agency (ARPA). Soon after, President Kennedy announced the goal of sending men to the moon. These and other programs led to significant investments in technology research and development.

Today, we are once again experiencing a decrease in the number of students graduating with math, science, and engineering degrees, yet technology is far more important in our daily lives than it was fifty years ago. The US graduates 84,000 engineers a year, far behind other countries, including China which has over 300,000 engineering graduates per year. Those who entered engineering fields because of the effects of Sputnik are now nearing retirement. The US Department of Labor - Bureau of Labor Statistics calculated that fewer engineering graduates, coupled with increased retirement and greater demand, have led to almost 1.3 million jobs recently becoming vacant. Now, as technology applications are growing, there are fewer engineering degrees being awarded and a rapidly decreasing workforce. How do we reignite interest in the discipline?

In the 1990s, a program was developed to increase the quantity and quality of students in engineering fields. It started as a small program in an upstate New York school district and, in 1997, it became known as Project Lead the Way (PLTW). At the time, Mr. Richard Blais, chairman of the school district’s technology department, hoped to expand it to twenty schools. The initial goal was to generate student interest in college engineering and technology programs by offering pre-engineering classes combined with math and science coursework while students were still in high school and even middle school. The director of research and evaluation for PLTW, Gary Adelson, Ed.D., explained in an interview with the Central New York Business Journal that the mission of the program “is to provide the engineers this country needs for the next 50 years.”

Today, Project Lead the Way has become a phenomenon, with high school students around the country striving for placement in the program. Currently, PLTW is active in over 2,200 schools, with over 200,000 students enrolled in PLTW classes and 7,000 teachers and 5,000 counselors trained in the program. As a not-for-profit organization, PLTW forms partnerships with public schools, higher education institutions, and the private sector to help achieve its goals. In a video for PLTW, Mr. Richard Kissane, Technology Director for Albany High School in New York, attributes the program’s success to its curriculum because it is “hands-on, out-of-their-seat, building something, designing something, seeing the actual product working at the end.…it’s real important for high school students to see the end product.”

Education Week reported that at Wheaton High School in Montgomery County, Maryland, “members of the academy’s 26-student class of 2007—its first graduating class—went on to study in mechanical, electrical, nuclear, and other engineering fields at such selective universities as the Massachusetts Institute of Technology and Cornell University, claiming more than $1.6 million in scholarships.” Of Wheaton’s 1,325 students, 89% are members of racial or ethnic minorities. As statistics show, minorities are underrepresented in engineering professions. The Commission on Professionals in Science and Technology reports that the total US labor force is 82.7% white, 10.9% Asian, and 6.4% underrepresented minorities. In comparison, the population is 69.1% white, 3.6% Asian, and 25.4% underrepresented minority. Historically, PLTW has closely mirrored the US population, with slightly higher Hispanic and slightly lower African American levels. Successes in recruiting and retaining minority students, like Wheaton’s, are being repeated across the country.

In 2006, the East End Chamber of Commerce in Houston, Texas, studied education challenges in the East End through its Education Task Force. In the inner city, low income, largely Hispanic area around the newly opened Chavez High School, the task force found a greater than 50% dropout rate and limited parental involvement. In March of that year, they discovered Project Lead the Way and began to investigate its success in other Houston-area schools.

Faculty and administration at Chavez High School, already familiar with PLTW, enthusiastically partnered with the Chamber to notify incoming ninth graders and their parents about the program at informational dinners. Ms. Diane Lipton, president of the East End Chamber of Commerce, recalls that “through the enrollment period, we had a good turn out of students, but we were surprised by the even greater turnout of parents and siblings. There was a lot of enthusiasm for the promise that the program held. Younger siblings saw the support and commitment that the school district and the community was giving and wanted to know how they could get into it, too.”

Chavez principal, Mr. Dan DeLeon, tells his students that the only prerequisite to getting into the program is “you have to come with the desire, not necessarily a particular previous knowledge, experience, or expertise.” They had 100 seats open for the first year’s course, Introduction to Engineering Design, which were filled long before the school year started. The Chamber and its members worked closely with the high school to make sure they had enough computers, software, and supplies in place before the school year started.

After completion of the first year in 2006, 96 of the 100 students returned for the second year (four moved outside the district). At a meeting with business leaders, student work from 2006 was exhibited. One company president was impressed by the project completed by student Jason Cherry, remarking that he “had engineers who can’t do that.” He hired Cherry for the summer, and then for two hours a day after school this year.

Ms. Deborah Jaques, the PLTW Academy Director for Chavez, describes the parent involvement as astronomical. She said that “the parent/student dinner for the second year not only ran out of food, but every student returned the application, filling the program immediately. We also have had a lot of students who didn’t sign up for the program last year asking how they can get in. We are looking to see if we can make some accommodations.” She added that “their peers don’t see engineering as nerdy, as some people have labeled it. Through PLTW, they see it as cool and creative.”

Project Lead the Way is exciting students not only about engineering, but education overall. In fact, most students improve their grades in other classes. The University of Houston notes that “studies of PLTW’s curriculum prove that participating students become the kind of prepared, competent, high-tech employees U.S. industry needs to stay competitive in the global market.” Project Lead the Way not only encourages students to reach for the stars, but provides the tools that may actually get them there.

Article PDF

To find out more about Project Lead the Way and how you or your company can help students in your area, visit their website www.pltw.org. To contact one of the business or education partners about the successful program at Chavez High School, contact Ms. Diane Lipton at diane@eecoc.org.

13-May-08 5:00 PM

Failing to Plan is Planning to Fail: Tips for Owners for Successful Projects

Chris Hanvey - noemail@interface-consulting.com — Tue, 13 May 2008 21:00:00 GMT

Part one of this two-part series addressed change order management and claims from the contractor’s perspective. This article will focus on techniques from the owner’s perspective for planning for and managing project change and avoiding claims. Although this information is geared towards owners, the information can help all parties on a construction project. Construction is not a one-way street, and it is beneficial for each of the parties to have a more complete understanding of the other parties’ perspective.

Time is money, and in today’s construction industry, almost all projects are on the fast track. The amount of time taken in the conceptual design, project development, and the detailed engineering phases has become increasingly compressed as cost and schedule concerns become more important. In recent years, innovative project delivery systems such as Design-Build have become more prevalent in an effort to maintain a timely and cost-effective project delivery while mitigating the potential for problems with the contract documents. While the up-front planning and design stages are compressed to facilitate a faster project completion, greater effort and cooperation is paramount to ensuring these initial stages are performed completely and accurately to minimize any impacts to the project.

A discussion on change management could likely fill this entire magazine; however, in this article, I will address three (3) key areas that we routinely encounter as claims consulting experts:

Lack of consistent contract documents
Failure to address discrepancies in a timely manner
Late changes

Lack of consistent contract documents

The majority of disputes that we see as construction claims experts originate as a result of inadequate, incomplete, and/or inconsistent contract documents, drawings, and project specifications. Inconsistent and incomplete project documents may require re-engineering, engineering holds, construction rework, and excessive requests for information and change orders from the contractor. To minimize the potential for these problems, owners should take steps to ensure the contractor has a complete understanding of their requirements.

Clear bid and contract documents
Designate an owner representative
Establish the precedence of documents

The owner should perform a thorough review of both the bid documents, as well as all contract documents prior to entering into a contract agreement with the contractor. Additionally, pre-bid clarification meetings with bidders can be effective at reducing inconsistencies in the bid documents, and subsequently the contract documents, as there are numerous contractors “checking” the documents and asking for clarifications on potential discrepancies.

Before the bid process begins, an owner representative fully familiar with the project should be designated as the point of contact for all document discrepancies, questions, requests for information, etc. This individual may have other project oversight or management responsibilities; however, a single point of contact for noting discrepancies and requesting information concerning the scope of work will help prevent issues from falling through the cracks.

Owners should establish a precedence of documents in the contract. This will help ensure that there is a clear delineation of the contractor’s scope of work, which will potentially reduce severe conflicts and costly change orders for changes to the scope of work. The precedence of documents establishes a clear path for determining the contractual scope of work in the event a conflict between documents is discovered. This allows the owner the opportunity to decide whether the contractual scope of work is acceptable, or whether it wants to issue a formal change order to modify the work scope. Lack of an order of precedence clause in the contract will almost always result in a change order when discrepancies arise.

Failure to address discrepancies in a timely manner

Establish procedures for handling discrepancies in the documents from the beginning of the project and incorporate these procedures into the contract. Consider requiring timely contractor notification in the event discrepancies in the drawings, specifications, and contract documents are encountered. This will likely allow the owner to determine the best course of action to mitigate potential impacts to the contractor.

The contract notice requirements should also address timely response to these issues from the owner. It is the owner representatives’ responsibility to ensure the owner responds in a timely fashion. Simple requests for information can become more expensive change orders and disrupt the project if left unaddressed. Larger issues should be prioritized and handled as efficiently and expeditiously as possible to mitigate disruption to the project. An experienced owner’s representative can prove valuable in effectively prioritizing and handling these issues. However, at no time should a contractor’s notice of discrepancy or request for information be left unanswered beyond the time limit outlined specified in the contract.

If there are known areas in which information is incomplete, plan in advance for handling this situation. This may include when the information will be available; how the information will be incorporated into the documents; and what work-arounds will be required, if any. Also, consider options in the event the missing information is not available when planned. The foresight to plan and have contingency for known issues will mitigate the impact of not having the necessary information at the planned time, as well as prevent such issues from becoming more significant later in the project. If the contractor is aware of the missing information up front, as well as the plan for how the missing information will be handled, it reduces the potential for a contractor change order later in the project.

Late changes

The most important factor in managing change and mitigating the potential impacts is to recognize the increasing impact of changes as the project progresses. Early in the project, a change may only require a small modification or clarification to an engineering drawing. However, if this same change is made later in the project, after construction has begun, it might require the demolition of existing work and rework in addition to the engineering change.

Additionally, the impact of changes is more easily absorbed into the overall project earlier in the projects. Most schedules contain some float to absorb any potential schedule delays or impacts, and the project contingency is more likely available to cover additional costs associated with the change. Later in the project, the schedule is more compressed, contingency has already been used, and there is less potential to mitigate the impacts of the changes by resequencing or accelerating work, reducing costs in other areas, etc. The following graphic illustrates the general relationship between the timing of changes and the ability to mitigate the impact of the changes on the project’s cost and schedule.

Increasing Impact of Late Changes

All preferential engineering should be considered and implemented during the conceptual design stage prior to detailed engineering and construction. Minimizing “preferential” changes will reduce the overall impact to these activities. Also, a project will experience some change, as all construction projects do, that is unexpected. Managing these changes is difficult enough without having to deal with avoidable, preferential changes. Spending additional time up front during the planning stage to consider all potential options and make a decision regarding any preferential items will prove beneficial later in the project.

Perhaps you are reading this article and read last month’s article from the contractor’s perspective and think this information is just basic common sense in construction, and I would agree. However, as construction claims experts, we have noticed that a large majority of the projects that get into enough trouble to require our services have a breakdown in construction fundamentals similar to the ones described here. Whether the problem is caused by a lack of knowledge/experience, complacency, cutting corners, etc., the results are the same – a project that takes longer and costs more to complete. A project’s success can depend on understanding that change is going to happen before it happens, and having effective plans in place for minimizing, mitigating, and handling changes.

Article PDF

13-May-08 4:00 PM

Opportunities Abound for Construction/Building Science Grads

Kimberly Hester - noemail@interface-consulting.com — Tue, 13 May 2008 21:00:00 GMT

Colleges around the nation prepare future construction managers for promising careers

Construction management-bound college graduates today are finding that, more and more, universities are responding to the challenges of an ever advancing field. Higher education programs around the nation are collaborating with industry leaders and accreditation agencies to develop specialized curriculums to prepare students for successful careers. As engineers and architects try to keep up with global competition to design the most innovative structures, demand for skilled construction managers is surging, and employers are seizing students faster than they can graduate.

While construction management as a profession has existed for many years, colleges have not always offered the specialized degrees they do now. Rather, construction/building science degrees have slowly evolved over the past approximately 70 years. They are a result of a combination of factors, including the homecoming of World War II soldiers in need of housing, as well as a philosophical shift in engineering education. The “Summary of the Report on Evaluation of Engineering Education,” published in a 1955 issue of the Journal of Engineering Education, called for an increase in the application of scientific principles to engineering curriculums, and resulted in the eventual removal of management-focused courses. To make up for the management skills gap, many universities began offering alternatives to traditional engineering degrees, sometimes within existing engineering and architecture departments, and other times within new departments.

Since their make-shift beginnings in the 1940s, construction management degree programs around the nation have become highly sophisticated. Not only are the programs of better quality, but also of increasing quantity. The U.S. Department of Labor reports in its Occupational Outlook Handbook, 2008-09 Edition, that there are approximately 105 undergraduate programs across the nation in construction science, building science, and construction engineering, as well as approximately 60 graduate programs in construction management or construction science. That’s approximately two undergraduate and one graduate program for every state, on average. Of those 165 construction-related undergraduate and graduate degree programs, 68 are certified by the American Council for Construction Education (ACCE), according to the listing of accredited schools on its website. Accreditation criteria include a curriculum that continually adapts to requirements and advancements in construction, including social, economic, and technological developments; as well as to contributions from related fields, such as engineering.

Schools can go to great lengths to ensure their curriculums are in line with industry needs and ACCE accreditation requirements. Dr. Yilmaz H. Karasulu, undergraduate coordinator and assistant professor to the department of construction science at Texas A&M University, said that his department conducted interviews with four industry focus groups to gain perspectives on what topics make up a comprehensive construction science curriculum. The result of the focus group study is briefly discussed in a report titled, “Evolution of Construction Education in the United States: A Case Study,” written by Dr. Karasulu and his colleague, Dr. Richard Burt, associate department head and associate professor. It states that the most important course topics identified relate to business and construction management. Texas A&M combined the focus group input with its own university requirements and the specific elements needed for ACCE accreditation to develop its current curriculum.

As demand for construction managers currently exceeds supply, a concerted effort to prepare students for careers in construction management is crucial to sustaining industry productivity. With the long-term increase in the number of construction projects, a decrease in labor supply has become a formidable problem. According to the U.S. Department of Labor’s Occupational Outlook Handbook, 2008-09 Edition, the construction labor supply is dwindling due to an aging management workforce, transfers out of the field, and lack of a work environment appealing to prospective employees. Construction employers must focus on attracting and retaining younger generations to keep pace with current and future industry demands.

Luckily, many college graduates are deciding to pursue the profession of construction management. The U.S. Department of Labor’s Occupational Outlook Handbook, 2008-09 Edition, reports a faster than average construction employment growth rate, with job opportunities exceeding the number of qualified candidates. For those candidates that do qualify, many challenging job opportunities exist. Generally, graduates of construction science programs take on roles in project management, estimating, and scheduling, and quickly reach increasing levels of responsibility. Many students have multiple job offers upon graduation.

In addition to abundant job opportunities, starting salaries for building science graduates are also promising. A survey conducted by the National Association of Colleges and Employers found that recent graduates with a bachelor’s degree in construction science or construction management attained average starting salaries of $46,930 per year. Furthermore, a May 2006 Department of Labor publication regarding the annual salaries of construction managers of varying seniority found that the middle 50 percent earned between $56,090 and $98,350. The median income was $73,700, with the highest paid 10 percent making over $135,780 and the lowest paid 10 percent making under $43,210.

Employers are also benefiting from the changing climate in building science education. That is because degreed professionals offer the skills needed for the growing complexities inherent in present-day projects, such as accelerated schedules, increasing reliance on project management and scheduling software, globalization of project operations, and new laws governing labor, materials, and the environment. Construction industry employers realize these complexities require fine-tuned management skills. Thus, many prefer to hire construction science graduates, rather than train others who may be inexperienced in project management.

How do engineering degrees shape up in comparison to construction science degrees when it comes to preparing students for jobs in construction? A white paper published by a strategy committee at the Construction Industry Institute (CII), concludes that the need for project management knowledge transfer to engineering students is increasing. While civil engineering degrees do provide some courses in project management, the paper indicates that current project management coursework in other engineering disciplines such as electrical, chemical, and mechanical engineering, is too limited. Many firms are requiring new hires to complete internal training on project management to compensate for this deficiency. Therefore, from an employer’s perspective, it can save time and money to hire employees that possess project management skills from the outset.

For building science students, often a larger percentage of coursework is focused on management principles. Many universities have increased the number of courses offered in business and management due to changes in curriculum standards over the years. Capstone courses can further students’ management skills by providing hands-on experience in real-life construction projects. For instance, at some universities, including Texas A&M, students work with local industry mentors to complete various phases of a project, such as preparing a bid proposal. In addition, including more project management coursework in college can have a positive impact on the jobsite. For example, a CII study acknowledged that including more management courses in engineering curricula would greatly benefit on-the-job performance by improving the time and cost effectiveness of design efforts, internal company processes, and capital facilities projects.

Is there a trend toward more universities offering construction management and building science degrees? “I’m not sure if it’s a trend. I do believe everyone recognizes the need,” states Dr. Karasulu. As construction industry officials try to keep pace with building demand, they can rest assured knowing that universities are equipping the next generation of construction managers with the necessary skills to meet future project needs.

Article PDF

13-May-08 4:00 PM

Project Change: Deal with It

Chris Hanvey - noemail@interface-consulting.com — Wed, 19 Mar 2008 18:00:00 GMT

Every construction project, regardless of its size, inevitably encounters change. Changes can be minor, such as field rerouting of pipe to avoid an interference, or they can be major, such as a massive acceleration effort costing millions of dollars for additional personnel and overtime premiums. Managing change is an important aspect of construction project management and successful project completion. This article is the first in a two-part series that addresses issues relevant to managing change and handling unresolved change orders from a contractor’s perspective. The second article will look at mitigating change and managing claims from an owner’s perspective.

As construction claims experts, nearly every project that we encounter suffers as a result of the parties’ failures to effectively manage change. This article addresses several key factors in effective change order management that help to mitigate the impacts of changes and increase the probability that change orders will be resolved:

Understand and follow the contract change order procedures
Be aware of key change order language
Designate a single change order representative
Document changes

Additionally, this article provides some tips for submitting an effective claim in the event the parties are unable to resolve the issues surrounding the change order.

Understand and follow the contract change order procedures

First and foremost, the contract is the controlling document that governs the parties’ responsibilities and provides a framework for handling change orders. It is important for all parties to understand the contractual requirements for submitting legitimate change orders including, but not limited to, notice provisions and timing, structure of the change order, information required to support the change order, and acceptable pricing for the changed work.

It is important for the parties to consistently follow the change order procedures in the contract. Failure to do so may set a precedent for handling change-related situations outside of the contract, or may be perceived as a waiver of contract requirements.

Be aware of key change order language

Because they modify the terms of the original contract, change orders are a part of the contract. As such, it is important to be aware of the information contained on the actual change order form. Depending on the type of contract and the nature of the change, pricing for change orders may be performed for a lump sum price, unit rates, or a time and materials (T&M) basis. If the change order pricing methodology is not specifically addressed in the contract, it is important that it is agreed upon prior to performing the change and included as part of the change order.

Additionally, the time impact or delay associated with the change should always be included on the change order. In many cases, however, it is not feasible to establish the schedule impact at the time the change order is executed. In these cases, it is prudent to include language communicating that the schedule impact cannot be determined at that time. The parties should reserve the right to make this assessment and request a time extension at a later date once more information becomes available.

Some change orders include boilerplate language which may state that the change order is full and final payment for all work associated with the change, including any productivity impacts, inefficiencies, or issues related to the cumulative impact of changes. It is often difficult, if not impossible, to recognize and quantify these impacts and inefficiencies at the time the change order is signed. Such boilerplate language can limit the contractor’s ability to make a claim for these impacts later in the project, and is often overlooked until it is too late and the change orders have been signed.

Designate a single change order representative

Designate a change order representative at the beginning of the project. The person in charge of the change order process should consistently monitor the project status and be aware of potential areas of change. The project manager possesses the most knowledge of the overall scope of work and is in the best position to recognize changes to the work, or where an authorized change is impacting another aspect of the work. However, other job responsibilities can make it difficult for the project manager to spend the time necessary to adequately monitor the work and recognize potential changes. The change order manager or representative should regularly inspect the work being performed and keep in close contact with the project supervisors and foremen supervising the details of the work and the construction means and methods.

Two potential points of dispute can be resolved by delegating single-point responsibility for authorizing changes. First, the owner’s personnel know who has the authority to sign off on changes and that changes cannot be authorized by anyone other than the designated representative. Secondly, having a person dedicated to handling changes may result in fewer changes going unnoticed and undocumented. Often a contractor’s project supervisors or foremen may not have detailed knowledge of the entire scope of work, or are so focused on progressing the project that changes go unreported. Designating a change order representative addresses this issue.

Document changes

As soon as a change is recognized, it should be documented in writing. In claims consulting, we often encounter “he said/she said” disputes where there is not adequate contemporaneous project documentation to support either side’s position. It is important to ensure that all communications are documented and all verbal agreements or instructions are later confirmed in writing. This includes situations that may not necessarily change the scope of work, but may impact the means and methods of performing the work.

Also consider establishing a separate cost category for change order work, even if the work is not being performed under a time and materials basis (in which case all costs would be tracked separately). This will assist with tracking costs associated with the changes, as well as ensure that pricing for later changes is more accurate. There will be times when the parties will not agree that the work is actually a change. Discretely calculating the actual cost of the change may assist in a claim situation or if the issue escalates into other dispute resolution forums such as mediation, arbitration, or litigation such as mediation, arbitration, or litigation such as mediation, arbitration, or litigation such as mediation, arbitration, or litigation.

Unresolved change orders

In the event the parties are unable to reach agreement on a change order, it may be necessary to submit a formal claim. An effective claim document should provide a clear and concise written description of the facts. It may help to provide graphics to illustrate key points or to clarify more complex issues. The claim should include all relevant contract clauses that support your stated position; however, be prepared to address contractual language that may not necessarily support your claim. In legal settings, ambiguous contract language and contract documents are typically construed against the drafter of the contract or specific language.

It is important to respond to all communications and requests for additional information in a timely manner, and be prepared to provide all relevant supporting data. Consider starting a separate file for each claim issue where all relevant material and contemporaneous documentation can be assembled easily. A central claims folder can expedite the resolution process if the contractor is prepared, organized, and able to locate and provide necessary supporting documentation. It also allows the key project personnel more time to devote to the actual work instead of spending unnecessary time managing the claim.

The most important factor in resolving claims is to prevent the claim from impacting the other work activities. The contractor should continue performing the work and make a reasonable attempt to mitigate any impact the claim issues have on the remainder of the project. This helps to maintain positive relationships with the other parties involved, which can facilitate a more timely and equitable resolution of claim issues, as well as avoid more time consuming and costly claims later in the project. Remember that at the end of the day, it’s just business, and change and claims are a part of that business. Don’t make situations worse by taking it personally.

Article PDF

19-Mar-08 1:00 PM

Effective Use of Experts in Mediation

Interface Consulting - noemail@interface-consulting.com — Fri, 29 Feb 2008 17:00:00 GMT

There is an ongoing debate as to whether or not it is advisable to use experts in mediation. In many cases that go to mediation, the issues in dispute are often relatively simple, strictly fact-based, and do not require damage calculations. In such cases, experts are often not required. This is generally not the case in the engineering and construction industry. Issues and disputes that occur during construction projects are typically not black and white issues. Using experts in these situations can prove beneficial for everyone involved in the mediation. The purpose of mediation is to find a mutually acceptable solution or compromise. Using construction experts with respect to these more difficult issues can help the client enter the mediation from a position of strength based on a thorough technical analysis. It is also important to remember that this may be the first time the opposing side’s senior management has seen or heard an unfiltered view of the positions.

Construction experts should be used to address technical design, construction, schedule, delay disruptions, impacts, and productivity analyses. They also may provide damage models and address other issues which the parties to the mediation are not completely familiar with and may not understand. It is important to consider that some of the parties involved in the mediation, including possibly the mediator and executive-level decision makers, may not be familiar with the technical aspects of the dispute. It is the expert’s job to present these issues in such a way that everyone involved understands the issues and positions at the center of the dispute.

Mediation is a less formal dispute resolution method than either arbitration or litigation. For that reason, and because mediations are often held earlier in the resolution process, attorneys may choose not to use experts. However, in addition to addressing complicated issues, there are other benefits to having experts involved earlier in the process to assist with the construction mediation.

For instance, one of the biggest obstacles to a successful mediation is that because mediation is often contemplated early in the construction dispute resolution process, one or both of the parties may not have fully evaluated or assessed the facts of the case and the issues in dispute. If the parties have not developed their positions and are unfamiliar with the strengths and weaknesses of their positions, then the chance for settlement in mediation is significantly reduced. When construction experts are involved early in the process, they can help define and evaluate issues, objectively evaluate each party’s strengths and weaknesses, talk with the client and fact witnesses, and discuss the case with the attorney, which ultimately leads to the parties being better prepared. By investing a little more time and effort up front, timely and costly litigation/arbitration may be avoided later.

Consider allowing experts to make a formal presentation, whether they are presenting their own independent analysis or simply presenting the client’s position. The client is often too emotionally involved in the case and gets too caught up in the minutia of the case. This level of detail is not necessary in high-level settlement processes such as mediation. Experts can provide a more summary level analysis and stay focused on the key issues. It is important for key fact witnesses to be present or available during the mediation in the event that factual questions arise. Experts should avoid minor or small dollar issues in their presentation and present the major issues in a succinct and clear manner. Additionally, the expert should simplify complex analyses. Graphics, illustrations, and photographs can emphasize key issues or simplify difficult concepts. If more detailed questions arise, the expert can explain these issues to the mediator in more detail during the breakout caucuses.

Whether presenting their or the client’s position, the expert can be utilized to present the facts, themes, and “story” surrounding the case. This leaves the client out of the line of fire and allows the client to look like the “good guy” by taking a less strict position and making some concessions, which can facilitate both sides making compromises. This is the important first step to settlement in mediations.

The expert should remain at the mediation through the first caucus session to answer any technical questions related to their presentation or to more fully discuss specific issues. However, after these issues have been addressed, the expert should be dismissed in most cases because a majority of mediations become commercial settlement discussions, and the expert’s analyses are no longer needed. It is a good idea to ensure that the expert will be available by phone in case they are needed to answer additional questions.

The attorneys should discuss whether or not they will be using construction experts in the mediation. This will prevent one side from potentially being blindsided and feeling “attacked,” which can derail any potential chance for settlement. A level playing field can prevent one side from feeling overwhelmed, and it can also ensure that an attorney does not look unprepared for the mediation in front of the client in the event the other side has an expert. The goal in mediation is to come to a settlement which maintains a good working relationship between the parties.

Although presentations made in mediation are often considered “for settlement purposes only,” if an expert is going to make a presentation, the attorneys should formally agree that all information and positions presented and discussed in the mediation be considered confidential. This confidentiality should extend to any slide presentations or reports prepared specifically for the mediation. Any material prepared for the mediation should be marked as “For Settlement Purposes Only,” to prevent it from being introduced by the opposing side in arbitration/litigation if the mediation is unsuccessful. If the parties cannot agree upon confidentiality issues upfront, any information provided by the expert in the mediation may be discoverable, and using the expert in the mediation should be reconsidered.

The attorneys should also agree on a general outline for presenting each side’s position, including the expected duration of any expert presentations. The parties are involved in mediation in an attempt to settle the outstanding issues and, if one side takes an inordinate amount of time early in the process to present its side, it can create tension that is not conducive to a successful mediation

In summary, successful mediations are built on preparation, knowledge of the issues, effective presentation of positions, and both parties’ willingness to compromise. Having experts involved early in the process and involved in the construction mediation itself can be helpful in preparing for the mediation, in understanding the strengths and weaknesses of each party’s positions, and in providing an effective presentation of key issues and positions. The decision to compromise is up to you.

Hanvey is a senior consultant with Interface Consulting International, Inc., Houston. For more information, email clhanvey@interface-consulting.com.

Article PDF

29-Feb-08 11:00 AM

Interpreting Force Majeure in the Wake of Disaster

Interface Consulting - noemail@interface-consulting.com — Thu, 02 Aug 2007 15:00:00 GMT

In general terms, force majeure is considered to be “an act of God” or an occurrence outside the control of the parties which impacts or delays the project. Force majeure includes issues such as unusually severe weather, labor strikes, natural disasters, or governmental actions/changes in law that negatively impact the work. Typically, force majeure is not considered to be a compensable delay, meaning neither party is entitled to compensation as a result of the impact of the force majeure event. The recent Gulf Coast hurricanes have raised some interesting and complex issues associated with defining force majeure.

Typically, force majeure contract clauses include language that defines the force majeure event, including notice requirements and the terms of the schedule extension. Events such as unusually severe weather or a labor strike have clear start and end dates. It gets more complicated when there is a major event that not only directly impacts the work but also creates potentially changed working conditions after work resumes. This leads to several questions regarding the contractual language with respect to allowable project extensions, responsibility for mitigating the event’s impacts, as well as the costs associated with mitigation efforts. There are two primary difficulties in defining force majeure events that encompass the magnitude of events like hurricanes Katrina and Rita:

Dealing with continuing impacts associated with the disasters (i.e., reduced labor force and reduced labor productivity)
Defining the responsibility for mitigating the event’s immediate and continuing impacts

Continuing Impacts

For many of the projects that were in the hurricanes’ paths, a force majeure event was declared, project personnel secured the site, and the workforce left the project site until the hurricanes had passed. However, the hurricanes devastated large areas along the Gulf Coast, leading to massive evacuations; destroying houses and buildings; and demolishing infrastructure and utilities such as roads, power lines, gas lines, running water, etc. Although, by strict definition of most force majeure clauses, the event had ended, the impacts continued delaying and disrupting these projects. With reduced labor availability, no available housing for the labor, limited utilities, higher paying jobs for cleanup/repair, and transportation and communication issues, these projects have suffered and could continue to suffer productivity impacts and schedule delays. Do the continuing impacts of such events constitute force majeure? Is the contractor entitled to additional schedule extensions as a result of these impacts? There are no clear-cut answers to these questions, and they are likely not addressed in the contract. Contracts that do address these issues substantially increase the likelihood of mitigating the impact of the event. Force majeure clauses should clearly define what constitutes a force majeure event as well as what is considered the end of the event.

Contract language dealing with force majeure events should consider the type of force majeure event as a major determinant of when it ends. Although a hurricane may continue to affect the contractor’s ability to perform the work as it had originally planned, this issue is separate from the actual force majeure event. The force majeure event should end at the time work is allowed to resume, even in a limited capacity. The affected party should be allowed a schedule extension, without compensable damages, for this time period, unless the contract language indicates otherwise. In areas that could be massively affected by force majeure events, such as hurricanes or earthquakes, the parties should consider additional contractual language to address a force majeure event’s continuing impacts to the work progress. This separate language should address issues such as:

Reduced labor availability and productivity
Impacts to utilities necessary to perform the work
Lack of basic utilities and housing for labor
Site availability
Impacts to material and equipment suppliers

Because the basic premise behind force majeure provisions is that none of the parties should be liable for damages associated with the event, it may be in the parties’ best interest to establish conditions in which they both bear some responsibility for costs associated with extraordinary force majeure events. For instance, they may assume responsibility for the following:

Making a fair determination of schedule extensions/liquidated damages
Making allowances for productivity impacts
Providing living/transportation facilities
Increasing labor rates
Providing basic utilities
Improving site access

Implementing contractual language can more clearly define force majeure events as well as what the parties accept as risk. This can lead to amicable resolutions and lessen the potential for conflict. It does, however, lead to the question of what constitutes reasonable mitigation efforts during the force majeure event.

Responsibility for mitigating immediate and continuing impacts

A vast majority of force majeure provisions include language concerning mitigation (i.e., “…the Contractor shall use all reasonable effort to mitigate the impact of the force majeure event on the project.”). What constitutes “reasonable effort to mitigate” and, if there are continuing impacts, who is responsible for the costs associated with mitigating those impacts? These efforts could include simply securing the site or involve more complex efforts such as building temporary housing, providing utilities and basic necessities, increasing wage rates/per diems, and accelerating the work. Obviously these solutions cost money, and the purpose of force majeure provisions is to protect the parties from financial damage resulting from the force majeure event.

At what point does the contractor’s responsibility to perform the work under the terms of the agreement supersede the force majeure provisions, and when does “reasonable” exceed the amount of money the contractor is willing to expend to mitigate the event’s impacts? Under traditional force majeure clauses, the contractor has the right not to expend excessive money as a result of the event. Although the contractor is entitled to non-compensable schedule extensions, which may cost the contractor project extension costs, the owner also has every right to expect the contractor to meet the terms of the contract. If the contractor does not, the owner may suffer losses in revenue from late product production (i.e., oil/gas or late product availability, office space/rental property, etc.). The contractor should expect schedule extensions and the suspension of liquidated damages as a result of the project’s delay. Alternatively, the owner should expect that the contractor will make all reasonable efforts to complete the work in a timely fashion to mitigate impacts to future revenue expected from the project.

By implementing additional contract language concerning continuing impacts, some of these issues can be avoided; however, it still does not address responsibility for mitigating damages with “reasonable” effort. The problem is that current force majeure contract provisions do not adequately address the parties’ responsibilities for mitigating the impacts of force majeure events and subjective terms such as “reasonable” are used to describe the parties’ responsibilities. What is “reasonable” to the contractor may not be “reasonable” to the owner. Both parties are expecting a profitable project, so the requirements defined by “reasonable effort” do not address whether mitigation efforts require direct costs to limit the impact of the force majeure event. The contractor will naturally absorb costs to demobilize/remobilize resources, secure the facility, and store equipment, and the owner also incurs additional costs associated with late completion of the project. Therefore, each party has a different definition of “reasonable” mitigation efforts.

The most effective way the parties can protect their interests is to clarify contract language regarding reasonable mitigation efforts. In this case, the parties can adequately identify potential risks associated with performing the work. If the contract language is unclear, it is nearly impossible to accurately assess potential risks associated with performing a project. In turn, the parties may underestimate the potential risks which may lead to disputes. Some of the questions that should be considered by the parties when determining force majeure mitigation efforts include the following:

What is a clear definition of “reasonable?”
What are considered reasonable mitigation costs for force majeure events?
What mitigation efforts might be necessary (i.e., securing the facilities, employee living costs, hourly rate increases, temporary housing, etc.), and when should they be employed?
Which party or parties are responsible for these costs, and are they shared?
Are potential mitigation efforts included in other contract provisions?
How long should one party incur these costs?
What impact do these mitigation efforts have on potential schedule extensions?

Obviously these, and other, questions should be considered by the parties when writing a force majeure contract clause. The parties must ask themselves if their requests are reasonable regarding the contract language. One-sided contractual language is not beneficial to successful projects and often leads to the parties feeling they are unfairly treated. If the contract language does not agree with their position, parties may look to recover costs in other ways. It is important to remember that the contractual language, if unclear or ambiguous, will be construed against the party that drafted the contract.

Conclusion

Force majeure events are anticipated on construction projects, yet the potential impact of these events cannot be foreseen. As a result, unclear contractual language is often associated with force majeure events. Recent force majeure events, such as hurricanes Katrina and Rita, have raised an awareness regarding the importance of clear contractual language defining these events. Including specific contractual language to address issues such as defining the end of force majeure events and outlining mitigation responsibilities can help clarify ambiguity and reduce potential conflicts. By increasing risk awareness, clarifying responsibilities, and reducing the potential for significant conflicts, all parties can successfully endure the event and its immediate and prolonged impacts.

Article PDF

Disclaimer: This article is intended to be a source of general information on a specific construction-related topic. Its content should not be considered legal advice. If you are seeking legal advice, please consult with professional legal counsel. For assistance in assessing a specific construction-related issue, please contact Interface Consulting directly.

2-Aug-07 10:00 AM

Time Equals Money: Maximize Efforts to Resolve Project Changes

Interface Consulting - noemail@interface-consulting.com — Thu, 02 Aug 2007 15:00:00 GMT

In the construction industry, the ability to manage change can determine the success or failure of a project’s objectives. The failure to recognize and promptly manage change frequently costs the parties involved money and time. Establishing a change order management process using either contractual change order requirements or a firm’s proprietary system increases the effectiveness of progress reporting, labor productivity evaluation, work scheduling, and other elements of project change. The following steps provide a streamlined approach to resolving project changes in a more cost and time efficient manner:

1. Evaluate the contract

2. Identify the change properly and in a timely manner

3. Provide timely notification to internal and external parties

4. Effectively document the change

5. Prepare the change request

6. Resolve the change request

Implementing these steps at the first sign of a change can help the parties to spend less money and exert less effort to recover or pay for the change costs. As shown in the following diagram, the parties should maximize their efforts to resolve the changes during the project rather than incurring the high costs associated with mediation, arbitration, or litigation.

Step 1: Evaluate the Contract

Rather than relegate the contract to a shelf in the job trailer gathering dust, as often occurs on construction projects, the parties should thoroughly review the contract before the project starts, during the project, and when issues arise, such as drawing revisions, differing site conditions, or project disruptions. In order to identify a change, the parties need to know what the contract considers a compensable change. All of the parties should understand the provisions regarding conflicts and discrepancies in the documents and other risks, such as evaluating the project site, which could affect the entitlement to recover a change. In addition, the contract will provide the proper procedure for processing the change.

Step 2: Identify the Change

The second step is to identify the change, which is defined as any anticipated or actual deviation from the contractual scope, schedule, or cost. One of the most common problems on a project is the contractor or owner’s failure to recognize project change. There are essentially five types of changes:

Extra/additional work
Defective/deficient plans/specifications
Delay and acceleration
Differing site conditions
Disruption

Contractors need to ask themselves if a change for extra/additional work is a directed change with an issued formal change order or a constructive change. A constructive change is defined as any conduct by an owner that is not acknowledged by a formal change order but which requires the contractor to perform work that is not mandated by the contract, such as altering the contractor’s methodology, quality, or scheduling of work.

When defective plans and specification issues arise, evaluate the contract language, as it may shift the responsibility to the contractor. The contract may contain a disclaimer regarding the accuracy and completeness of the contract documents or require the contractor to field check dimensions. Specifically, the contract may require the contractor to meet certain performance specifications rather than a particular design. Additionally, the contractor may be viewed as an expert in its field who should possess the required knowledge to determine that the specification was defective.

Contracts can be very specific regarding the types of compensable delays allowed, thus it is important to review the contract for no-damages-for-delay clauses which typically bar the recovery of delay damages. However, even if the contract has a no-damages-for-delay clause, the contractor may still be eligible for delay compensation if the delays were not contemplated by the party, were caused by fraud or bad faith, were of such unreasonable duration that contractor abandonment would be justified, or were caused by active owner interference.

Other time related changes include acceleration and constructive acceleration. While acceleration costs such as additional labor or overtime premiums can be covered by a formal change order, constructive acceleration efforts are not. Constructive acceleration occurs when the contractor is delayed by something that warrants a time extension under the contract but the owner denies the time extension request. The owner also maintains the original completion date or indicates that it will penalize the contractor if it does not meet the schedule. The contractor needs to identify this has occurred and inform the owner that it will accelerate its workforce to recover the delays and will incur acceleration costs. Owners need to be able to identify this type of change, as they may not realize that they have essentially authorized or implied an order to accelerate.

Differing site conditions are also generally addressed in the contract. If changes resulting from differing site conditions are barred by the contract, then evaluate alternative contract support such as directed changes to the work, constructive changes, defective plans and specifications, or misrepresentation.

Another type of change is disruption, which may be caused by a delay, directed or constructive change, lack of action, or a number of other factors such as workspace overcrowding or defective owner-supplied equipment. Disruption increases the level of difficulty in performing the work and the cost of performance. Be aware, however, the damages resulting from disruption can be difficult to quantify and prove, as they involve labor productivity, material costs, or workmanship issues.

Step 3: Notify Internal and External Parties

Notification is the third element in effective change order management. It is both an internal and external function and is critical to identifying when a change occurs and the resulting impact. Notifying the project management/project control teams early allows them the opportunity to more effectively control costs and schedule impacts.

In addition, contractors need to adhere to the required external notification procedures, particularly time constraints. Prompt notice is generally a contract requirement, but even if it is not, contractors should promptly notify the owner of any conditions encountered, such as an unforeseen site conditions, even if there is uncertainty whether there will be a forthcoming change order request. Lack of notice can be a strong defense for owners, and owners should be given an opportunity to seek the most economical course of action in response to a change. This is particularly true if the contractor encounters a constructive change or constructive acceleration. In this situation, the contractor should notify the owner, in writing, that the instruction is considered a change.

Finally, anticipate critical issues as early as possible, since changes can be rejected solely on the failure to meet contractual time limitations. Internal and external notices should be sent promptly without waiting for quantification of time or costs. Timely notice and exchange of information promotes prompt change order resolution.

Step 4: Document the Change

The next step, documenting the change, is a vital construction management function. If profitability depends upon the collection of extras or defense of claims, and the claimant has no records, the world’s best consultants and lawyers will be unable to create them. Or, if the records are in poor shape, the cost of compiling suitable information for the pursuit or dispute of a change order may be high. The most important point about documentation is that it needs be created and in a timely fashion. A comprehensive documentation system provides the data necessary to obtain an equitable resolution when disputes arise. Proving the occurrence of events and causes of problems are key elements in resolving change requests. Negotiations may be held months or years after the work was performed, and those performing the work may not remember details regarding the specific issues or may not even be present during the negotiations. Furthermore, courts and arbitrators tend to give more credence to contemporaneous written documentation than to testimony.

The discipline required for effective documentation requires the same type of management emphasis, instruction, repetition, and follow-up that construction professionals use to ensure that equipment is properly maintained, safe working practices are followed, and reports are submitted on time. Project managers should establish a minimum checklist of records for retention including:

Diaries
Daily reports
Project correspondence
Meeting minutes
Schedules
Cost records
Photographs

These documents should specifically cite if planned operations are delayed, prevented, or changed in nature. Documents from the other party need to be reviewed carefully for accuracy, and errors or omissions should be promptly corrected in writing. Also, it is critical to have regularly updated schedules at various intervals to identify and quantify the schedule effects of a change. The importance of accurate cost records cannot be over emphasized, as contractors are generally required to demonstrate that they actually incurred the costs because of extra work, delays, or disruptions. When extra work is identified and separable, the associated costs, including labor and material costs as well as equipment utilization, should be recorded under separate cost codes established specifically to quantify it.

Step 5: Prepare the Change Request and Damage Calculation

Different types of changes require different types of supporting documentation and analysis. Change requests should follow the contract requirements and be prepared in a professional manner, well-organized, and neatly presented for review. Additionally, change requests should effectively use graphics and numbers to communicate the desired information to the intended audience and establish a link or cause-effect relationship between the entitlement and the damages. They should include the following elements:

Factual history with key documents and correspondence
Entitlement utilizing contract provisions, industry standards, legal statutes, and equity concepts
Damages utilizing various calculation methods

Using key documents and correspondence is helpful in establishing a factual history regarding the change. Creating a timeline of events or using the project schedule, if possible, is also advisable, as it can illustrate the events leading up to the change as well as any events occurring after notification of the change.

A common weakness in change requests covering complex issues is the absence of provable linkage between the causes of construction claims and their effects. Knowledge of the contract is invaluable in establishing entitlement to damages and reference to applicable industry standards can strengthen the entitlement. Thus, adequate preparation is important to achieve optimal results.

There are different methods used to calculate damages. Change orders may be priced by a contract agreed-upon lump sum price or unit price. If changes are to be calculated by unit prices and the estimated quantities have significantly changed, then the contractor may be entitled to a price adjustment for the performance cost increases. However, the contractor needs to prove that the nature or character of the work significantly changed.

Delay damages are another change order option and generally require a schedule analysis to prove delay periods and associated entitlement. Compensation may include a schedule extension, extended general condition costs and home office overhead, idle equipment costs, and escalation. In addition, the contractor may assert consequential damages such as lost profits on other work.

Productivity loss calculations are another form of damage calculation that address manpower overruns associated with overtime, scope change, poor site conditions, and other construction labor interferences. Productivity losses can be calculated utilizing industry studies such as MCAA, Business Roundtable, CII, or NCAA as references, internal productivity/manpower records, or the court preferred method, the measured mile. The measured mile calculation compares the production rates of an un-impacted time period to an impacted time period for the same work activity. The un-impacted time period serves as the baseline to determine the productivity loss for work that was inefficiently performed.

Two other damage calculation methodologies are total cost and modified total cost. Total cost is where the contractor claims the entire cost overrun as the consequence of the changed condition. For the contractor to assert total cost, the contractor should pass a validity test: the contractor’s costs are accurate and reasonable, the contractor’s bid was reasonable and contained no errors, the contractor was not responsible for the cost overrun, and no other way exists to reasonably calculate the contractor’s damages. The modified total cost approach is used when the total actual cost incurred on the project is less than the estimated cost to perform the job under expected circumstances or there is a need to adjust the difference for any of the contractor’s own faults on the project, such as a bid error or faulty work.

Step 6: Resolve the Change Request

Resolving the change request is the final stage of the process and is perhaps the most frustrating. For cost benefits, both parties should strive to resolve the change request at the negotiation level, as litigation or arbitration are expensive and time consuming. One of the most important decisions in negotiation is deciding who will attend. Depending on the parties’ current relationship status and ultimate goals, owners and contractors need to decide between utilizing the project management team, company managers, or outside consultants.

It is more important, though, to enter the negotiations with the right mind-set. Each party needs a member who knows how to effectively present the position or identify incentives or needs for the other party. The negotiation team should be aware of the situation, from a factual, financial, and legal standpoint. Furthermore, patience is critical, as the negotiations can linger for weeks, months, or years. Members need to deal with roadblocks, such as the opposing side not having qualified or prepared representatives present, rather than becoming discouraged or ignoring the roadblocks. And, finally, if settling the dispute is the number-one priority, then both parties need to be willing to compromise.

By understanding and implementing these change management steps, the chances of the parties resolving the outstanding change orders more effectively and efficiently greatly increase. If these steps are implemented in a timely manner, the parties are more likely to resolve the changes during the project as opposed to during mediation, arbitration, or litigation, which is the most costly option for all parties involved.

Article PDF

2-Aug-07 10:00 AM

Increasing Material Prices Gouge Construction Industry

Interface Consulting - noemail@interface-consulting.com — Mon, 30 Jul 2007 16:45:00 GMT

Introduction

This year, exceptionally high construction material price increases have caused problems for the construction industry. A major factor is the current economic and construction boom occurring in China. China’s rapid growth and tremendous construction activity are creating shortages in the US and throughout the world.

Background

Basic economics dictate that, in an open marketplace, prices will rise when demand increases or when supply decreases. Demand is increasing exponentially in China, which is affecting prices worldwide. The increased demand stems from a construction boom resulting from the country’s economic revolution. China is in the midst of the 10th phase of its 50 year plan, which specifies that the construction industry should be promoted, improved, and better managed. Other factors increasing China’s demand for materials include preparations for the 2008 Olympic Games, construction of the Three Gorges Dam, and the construction of thousands of highways throughout the country.

Demand is also significantly higher in the US due to a rise in construction activity, related in part to new home construction. Some of the highest price increases have occurred with steel, lumber and plywood, while cement has been in short supply. The following graph shows the extent of construction material price inflation over the past twelve months:

Steel

The construction industry has seen the demand for steel increase and the supply decrease simultaneously. All types of steel have increased in price over the past twelve months. For example, concrete reinforcing bar has risen by 45.2% and structural steel has risen by 25.7%.

Currently, China is consuming about 25% of the world’s steel supply. Since China is a major player in the steel production market, it can redirect previously exported steel to fill its own domestic demand for the material, but it reduces the material’s availability on the open market. A similar situation is occurring in India, where some suppliers have halted exports in order to meet their own domestic material demands.

While demand for steel has steeply risen, the shortage of coke, used in steel manufacturing, has reduced US steel production. Other factors such as high energy costs, high transportation costs resulting from increased fuel costs, the decreased value of the US dollar, and the consolidation of steel manufacturers are all contributing to the increased steel prices. In addition, delivery delays have resulted from international shipping lanes being stretched to capacity.

The federal government removed tariffs on imported steel earlier this year. While this action was expected to lower prices, the effect was negated by the rising demand.

Lumber and Plywood

The prices for lumber and plywood have also risen dramatically over the past twelve months, mainly due to increased residential construction activity in the US. Low interest rates have spurred much of this new residential construction. Lumber prices have increased an average of 25.8% while plywood prices have increased an average of 21.5%. Since the start of this year’s hurricane season, repair and reconstruction work necessitated by wind and water damage has further driven up lumber prices. These high prices will likely be sustained over the next year or two as the massive reconstruction efforts progress.

Cement

Some regions of the country have been hit with dramatic cement price increases, but on a national scale, the average price increase has only been 2.5%. The shortage of cement, however, has been widespread. In some cases concrete mixing companies, which rely on the steady supply of cement, cannot produce concrete fast enough to keep up with demand. The shortage has led to project delays and disruptions as well as increased costs.

In 2003, 20% of the US demand for cement was fulfilled by imports. The US has anti-dumping laws and very high tariffs against Mexico, making imports from that country cost prohibitive. The length of time to import materials from overseas, as opposed to receiving materials from Mexico, is longer, as it takes weeks rather than days to receive a shipment. The resulting delays can be hard on contractors who need to adhere to a tight schedule. In addition, because of high activity in Asian markets, particularly in China, freightliners are making the majority of shipments to that part of the world rather than to the US. China is currently consuming approximately 40% of the world’s cement supply. The country’s exceptionally high demand for concrete has allowed it to outbid US buyers on the world market, further reducing availability to the US.

Challenging Times for Contractors

Many of today’s construction contracts are lump sum or unit price contracts and can take a year or more to complete. Because these contracts are typically based on material prices estimated at the beginning of the project, the contractor can be adversely affected when material prices surge unexpectedly.

Depending on the contract, increases in the cost of construction materials can be transferred from the contractor to the owner. More often, however, the contractor absorbs the increased cost of construction materials. Considering the increased cost of materials and the fact that numerous projects today have slim profit margins, contractors are facing situations where they either make no profit or stand to lose money on a given project.

In addition to rising prices, another major problem is the delayed delivery of materials to contractors due to material shortages. Material delivery delays can be beyond the control of the contractors, and they can delay the entire project. Such delays put contractors at risk of liquidated damages and extended overhead and project costs due to missed project deadlines.

Impact on Public Projects

Public projects constitute a large portion of construction spending in the U.S. Many municipal projects are being delayed because bids are coming in much higher than the budgeted amount. This is a somewhat unique problem for cities and states, since bonds, which are usually for a specific amount, must often be approved by voters. In several recent cases, from the time when a bond was put to a vote and the time bids were requested, material costs increased dramatically. Thus, bids are coming back for much higher than the approved amounts. At that point, municipalities must determine how to make up the difference, which could mean going back to the voters for more money. This can put projects on hold if voters are unwilling to approve increases in the bond amounts, or if there is simply no additional money available. For example, in South Hackensack, New Jersey, bids for an elementary school renovation came in at approximately $2.5 million over the budgeted amount due, for the most part, to increased steel prices. Because voters were reluctant to approve the increase, the project was put on hold.

Possible Solutions

Extraordinary material price increases can, as they have in the past year, set in quickly and unexpectedly. In addition, some of these high prices may be here to stay, at least for the near future. Some possible solutions for dealing with increases and high prices include:

1. Incorporate price protection clauses into contracts (apply bid qualifications):
A contract clause can be the ideal way for a contractor to protect against material price increases. Typically, a price escalation clause will take effect with a price increase over a certain percentage, around 10%, and max out at a percentage of perhaps 80%. As a concession to the owner, the clause may also include provisions for reduced compensation should prices fall. Specific language for drafting a contract clause typically requires consulting an attorney; however, some elements to consider including in a price protection clause are as follows:

A statement indicating that the contract amount is subject to change, depending on the price of certain materials
A specified trigger percentage and maximum percentage
A time extension due to material shortages and delays resulting from material shortages
A notification requirement for the contractor to inform the owner of delays and requests for extensions or of significant price differences
A specification that proof of price increases or material shortages will be provided in writing from various sources

2. Lock in Material Prices:
In the same way that owners secure the value of a contract with a contractor, a contractor should attempt to lock in construction material prices with its suppliers whenever possible. This is difficult to do for concrete, since suppliers have been reducing the time during which their price quotes are valid.

3. Buy Materials as Early as Possible:
On projects where it may not be standard practice, if site conditions allow, a contractor can purchase as much steel, or other materials, as early in the project as possible and then store the materials on site. Buying early is advantageous since the contractor can lock in on prices and ensure there is an adequate supply of materials for the project, even if a market shortage occurs later in the project.

4. Delay Construction:
Because of the volatility of material prices, it can occasionally benefit an owner to delay a project, when practicable, until prices come down. There is a certain amount of risk associated with this tactic, since prices could steadily increase.

5. Bulk Discounts:
If a contractor is purchasing material for multiple projects, it may be beneficial to purchase materials at the same time to receive bulk discounts. From an owner’s perspective, it can choose to utilize some of the same furnishings and finishes on similar projects in order to obtain better bulk discounts.

It is sometimes possible for builders and contractors to work together with other builders and contractors to obtain groups discounts on materials. This can be achieved by buying larger quantities at a bulk rate.

6. Employ Alternatives to Help Reduce Costs:
A contractor can have parts of a project redesigned with less costly materials in order to keep a project within budget. Value engineering involves reducing the scope of the project, delaying certain aspects of the project, or eliminating wish list items like skylights or elaborate landscaping.

In some situations, it may be advantageous to consider renovating an existing building as opposed to building a new structure. A cost comparison may reveal that a renovation is significantly less expensive than a new building. Alternatively, depending on the condition of the existing building, the renovation may be significantly more expensive (e.g., renovating a much older building requires bringing it up to code).

7. Renegotiate Contracts to Accommodate Price Increases and/or Industry Shortages:
There are certain realities the owner must acknowledge regarding material price increases, and it may be necessary and beneficial for the contractor to be proactive with the owner. It may be possible for a contractor to renegotiate a contract to accommodate price increases or industry shortages. In some situations, it may be in the best interest of the owner to renegotiate. For example, if the duration of the project as well as the price of the project increases significantly, the contractor may be put at financial risk. In this situation, the owner could make certain allowances for increases rather than risk the entire project.

8. Maintain a Good Relationship with Material Suppliers:
It is good business practice, and general common sense, for contractors to maintain a positive relationship with material suppliers. Part of building and maintaining this relationship is paying the suppliers’ invoices on time. Without the cooperation of the material suppliers, the project simply will not happen.

Looking to the Near Future

Increased material costs are already increasing the price of new homes and may eventually cause a decrease in residential construction. The increased material costs and potential schedule delays may also decrease the level of overall construction in other sectors as well.

The market may, however, experience some relief in the near future. The following factors may alleviate the current situation:

Rising interest rates may slow construction enough for cement and steel production to catch up, thus stabilizing prices and supplies.
Construction rates will decrease as winter approaches, allowing production rates to catch up and thus prices to stabilize.
The Chinese government has taken measures to slow its economic growth, which may in turn reduce demand and prompt a decrease in material prices throughout the world.
Potentially, new production and manufacturing facilities could increase supply.

Conclusion

Contractors should be careful to protect their own interests in a market that is shifting an increased amount of risk onto contractors. Protection from material price increases is just one of the considerations contractors should keep in mind. Owners should also be aware that current material shortages can delay projects and increase their costs.

Article PDF

Disclaimer: This article is intended to be a source of general information on a specific construction-related topic. Its content should not be considered legal advice. If you are seeking legal advice, please consult with professional legal counsel. For assistance in assessing a specific construction-related issue, please contact Interface Consulting directly.

30-Jul-07 11:45 AM

Risks of Differing Site Conditions

Interface Consulting - noemail@interface-consulting.com — Mon, 30 Jul 2007 16:15:00 GMT

Contractors frequently experience site conditions differing from those anticipated in their bids. An example would be existing facilities, which are to form part of the contract work, that differ in their location, makeup, or state of repair from information in the bid documents or from what would be apparent to a contractor making a responsible, prebid inspection. If the differing site conditions should have been discovered or anticipated by the contractor and the contractor failed to do so, the chances of receiving additional compensation through a change order are very low. However, if the condition differs from what was indicated in the plans and specifications or what was apparent from inspections, the likelihood of receiving additional compensation for changes in the work can be quite high.

Differing site conditions (also known as changed conditions) are frequent sources of dispute between owners and contractors. Many contractors proceed with work under changed conditions with the misconception that conditions at the site, which they neither expected nor included in their bid, automatically constitute extras and should be addressed as such. Unfortunately, this assumption can lead to a costly lesson in contract law. A contractor does not have an implied right to receive additional compensation for unanticipated site conditions. Any such rights must flow from the contract, or from other conditions that may arise from the differing condition, such as changes to the work or impossibility of performance.

Normally, recovery of additional costs incurred due to differing site conditions is governed by the express language in the contract. A contract may contain a differing site conditions clause, as federal construction contracts do; or it may be silent on the topic; or it may contain an explicit disclaimer making such costs the responsibility of the contractor. Applicable language will usually be found in the general conditions of the contract. The specifications often will contain further language providing limited disclaimers or changed conditions coverage (such as a clause making the contractor responsible for underground utilities or one providing payment adjustment for a specific item that had to be bid on the basis of assumed conditions). The lack of specific contract language or the limitations imposed by specific disclaimers can be crucial to a contractor's entitlement.

When the owner provides information to the contractor for bidding, one of the objectives is to reduce contingency costs included in bids for uncertainties regarding site conditions. In doing so, the owner assumes a corresponding liability for conditions encountered that differ materially from the information the owner provided. In most cases, a contractor's claim may be supported by showing that the conditions encountered were different from those represented by the owner in the bid documents. A contractor's claim becomes problematic when the differing site conditions are not at variance with what is shown or indicated in the contract documents. The latter type of claim may prevail only where the contract contains language such as that found in the federal differing site conditions clause, which includes, "unknown physical conditions at the site, of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in this contract."

How can a CONTRACTOR reduce the risks of differing site conditions?

Try to negotiate for a differing site conditions clause in the contract and against an owner's disclaimer of these conditions.
Be knowledgeable of the benefits and limitations of the contract language and of the extent and limitations of the information supplied by the owner. Inadequate subsurface information accompanied by a disclaimer should be considered a red flag.
Conduct a thorough and responsible investigation of the site prior to bid and document the investigation and its results.
Promptly notify the owner or general contractor of any unforeseen site conditions encountered, even if you are not yet certain that you will be submitting a change order request. Lack of notice is a strong defense against differing site conditions claims, as owners must be given an opportunity to seek the most economical course of action.
If the owner has attempted to disclaim responsibility for site conditions in the contract, a change order still may arise from a design change forced by the condition, e.g. a deeper foundation. And the owner may be held responsible for specific representations in the contract documents in spite of disclaimers.

What should an OWNER do to minimize the cost of differing site conditions?

Ensure that the designer receives or obtains adequate information, specifically subsurface information, for a reliable design.
Include a differing site conditions clause in the contract. This advice may appear to be backwards; however, federal government studies have shown that disclaimers do not discourage claims for differing site conditions, but they do deter early resolution of such claims and lead to costly disputes. These same studies have demonstrated that in most claim situations, early resolution is the most economical option for owners.
Enforce the notice clause in your contract and respond promptly when given notice of a differing site condition. If the condition is not the responsibility of the contractor, work with the contractor to determine the best course of action and issue change orders accordingly.

Differing site conditions can undermine a project's success faster and with greater financial impact than most other disruptions. If differing site conditions are not dealt with promptly, expensive claims for constructive change and constructive acceleration are likely to follow. Knowledge of the contract provisions and site conditions can provide considerable rewards to both contractor and owner.

Disclaimer:This article is intended to be a source of general information on a specific construction-related topic. Its content should not be considered legal advice. If you are seeking legal advice, please consult with professional legal counsel. For assistance in assessing a specific construction-related issue, please contact Interface Consulting directly.

30-Jul-07 11:15 AM

Ten Steps to Dispute Avoidance

Interface Consulting - noemail@interface-consulting.com — Mon, 30 Jul 2007 16:00:00 GMT

Most would agree that the earlier a construction dispute, or potential dispute, is addressed, the better the chances of a fair and prompt solution. Undisputed facts may be available at the time of occurrence, facts that often become muddied with time and emotions.

But acting promptly is not enough in itself. All potential disputes must be accurately and fully documented as they occur - not reconstructed with hindsight based solely on project cost overruns. By observing the following simple guidelines, it is possible to keep most construction difficulties from escalating into expensive, drawn-out claims.

1. Planning: An effective project manager should ideally spend more time anticipating potential trouble areas to be avoided, rather than rectifying problems that have already occurred.

2. Recognition: Recognizing a potential dispute situation as it unfolds is the key to avoiding claims or minimizing their impact. Knowledge of the different types of claims enables a contractor or owner to take action to avoid a claim, or even worse, litigation.

3. Communication: Develop open communications between empowered people on both sides. Let the decision makers talk to each other; otherwise, precious time is wasted, and an accumulation of seemingly insignificant issues may begin to restrict progress. Owners should be aware that their representatives may be reluctant to acknowledge a problem in an attempt to "protect" the owner from any additional costs. Similarly, contractors should be aware that their managers may seek to escape the consequences of their own faults by blaming others, particularly the owner. Both situations lead to confrontation, especially when an owner receives an unexpected claim near the end of the project.

4. Definition: Do not ignore a problem, or its potential consequences, in the hope of a more favorable settlement after the work is complete. Once a problem is established, it should be defined and the parties should reach a consensus, if possible, in terms of impact, extent, cost, and plausible solutions. By establishing these parameters and rationally assigning responsibility, it is more likely that the parties will reach a mutually acceptable solution.

5. Notification: When a problem arises, the contractor must promptly inform the owner or the owner's representative in accordance with the requirements of the contract, and the owner must promptly respond. Failure to do so, by either party, could result in a claim and/or litigation. Each party should provide factual evidence to substantiate its position.

An untimely or poorly prepared submission places both parties in difficult positions, severely limiting options and resolution mechanisms. After-the-fact submissions for schedule impact and/or additional compensation are generally, and understandably, viewed with suspicion.

6. Documentation: Accurate, up-to-date project records are critical throughout a project, especially during the negotiation and litigation processes. Since contemporaneous project documents usually provide the most reliable account of a project's history, it is imperative that a well-documented, logical cause-and-effect relationship exist between any unanticipated events and their consequences. Without this information it may not be possible to demonstrate the full effects of the events that occurred.

7. Contract Documents: The contract documents should be fair to both parties and as specific as possible, as warranted by the nature of the project. One-sided contracts promote disputes that often end in litigation. With the increasing complexity of facilities, it has become correspondingly important to prepare accurate contract drawings and specifications that the contractor can readily interpret at the bid stage of a project.

8. Cost and Schedule Impact: In addition to the obvious direct cost associated with any change, the contractor should establish detailed schedule implications (direct and indirect) of the delay/disruption to the project completion date and intermediate milestones. Contractors must be confident they have the resources to undertake additional work and consider any potentially damaging effects on the regular scope of work. This exercise will enable the owner to make a well-informed decision and possibly provide an incentive to work towards a more timely solution once the schedule's critical activities are analyzed.

The fact that the contractor loses money on an element of work is not, of itself, entitlement for a claim, nor should the contractor build in excessive profits on extra work dictated by the owner or circumstance. Such action may undermine the contractor/owner relationship and destroy credibility. The owner must recognize the contractor's right to compensation and fair profit on any additional work the contractor is required to perform.

9. Administration: Parties should administer change orders as they would new contracts, promptly and in accordance with contract requirements. Change orders should clearly define the scope of the additional work and clearly delineate between direct and indirect costs when applicable.

10. Solution: One party is often in the best position to recognize the most cost-effective method to deal with a particular problem. This knowledge should be used to establish acceptable alternatives that will reduce the other party's exposure. However, neither party should assume total responsibility under the proposed alternative. Thus, mutual contribution or consensus remains an integral part of the process. Deviations from the original contract will create new areas of exposure and responsibility. Definition and reasonable allocation of this additional risk and responsibility can reduce the typical finger-pointing that can begin as soon as problems arise.

The Next Step

Inevitably, some disputes will remain unresolved. This does not mean that the parties should "revise" their positions, pull in unrelated incidents to discredit other parties, or inflate claims in anticipation of a compromised settlement, as all of these actions jeopardize the fair and efficient resolution of a legitimate claim. If efforts to avoid a claim situation at the project level prove unsuccessful, effective documentation will remain useful as favorable testimony and form a solid basis for future dispute resolution.

30-Jul-07 11:00 AM

The "Rules of Engagement" and Construction Claims: Towards a Smooth Construction Contract Execution and Responsible Claims Process

Interface Consulting - noemail@interface-consulting.com — Mon, 30 Jul 2007 16:00:00 GMT

Chapter One: Introduction

There are certain assumptions that both the contractor and the owner possess when entering into a construction contract. These assumptions do not necessarily coincide with one another. The contractor should assume that the scope of work is sufficiently defined, the plans and specifications are complete and accurate, and the owner has fulfilled any requirements necessary to proceed with construction. The Owner, on the other hand, assumes the contractor is qualified to complete the work accurately and on schedule, and the price proposed is the total amount the owner will have to pay for the project. When these assumptions are not fulfilled, a claim usually ensues.

Many different approaches exist to administer a construction contract from the position of the owner or the contractor. There are simple ways that will get the job done and there are complicated ways to get the paperwork done. Neither of these ways will necessarily produce a successful project. A concise strategy to administer a construction contract is important and should support a successful project. Knowing and understanding this strategy can support or challenge construction claims.

From a contractor's position, it is understood that one should have competent supervision and competent and effective workers, subcontractors, and suppliers. Additionally, a contractor should have a concise strategy that incorporates at least six rules of engagement that are critical to know and understand when entering a contract. These six rules include the following:

1. Read and know the contract documents
2. Develop a comprehensive and accurate construction schedule
3. Prepare accurate and comprehensive daily construction reports
4. Notify the owner of issues
5. Keep track of costs
6. Maintain inclusive documentation

From an owner's position there are six similar rules of engagement that are also critical to know and understand when entering a contract. These rules provide a concise strategy for administering a construction contract. The six rules include the following:

1. Read and know the contract documents

2. Understand and analyze the contractor's construction schedule
3. Prepare accurate and comprehensive daily construction reports
4. Respond appropriately and timely to contractor's notification of issues
5. Analyze and research contractor's cost for performing extra work
6. Maintain inclusive documentation

If the owner and contractor both know and understand the rules of engagement for administering a construction contract, then they should know what to expect should a claim arise from the occurrence of a disruptive event.

Chapter Two: The Contractor's Rules of Engagement

The contractor that enters into a construction contract with an owner assumes that the owner has accurately and completely defined the entire scope of work. This enables the contractor to project costs and profits and successfully complete the project. This assumption is made on the basis that the plans and specifications are complete and accurate, nothing is left to guesswork, and the contractor is allowed to accurately price the work. An additional assumption made by the contractor is that the owner has fulfilled any requirements necessary to proceed with construction. Such requirements may include the following: the plans are permitted, the land upon which the project is to be constructed is available and free of obstruction, financing is secured, and everything is in place for construction. When assumptions such as these are not fulfilled, a claim will usually develop and the contractor must be ready. The six important rules of engagement must be understood and implemented by a contractor to effectively execute the contract.

Rule 1: Read and Know the Contract Documents

Reading and knowing the contract documents is a simple task but is, surprisingly, the most misunderstood task. Many contractors believe the contract documents simply include the basic contract and the technical specifications for the work. Many other contractors believe the contract documents are for the lawyers to know and understand as long as the contractor has the plans and specifications. It is important to convince the construction supervisors that the contract documents are not overly complicated and are intended to provide them with a roadmap to administer the contract. The contract documents will not build the project, but they will guide the building of the project.

The contract documents generally defined by the American Institute of Architects (AIA) as the requirements of a general construction contract include, at the minimum, the following:

1. The Agreement or Contract between the owner and contractor. This is the main component of the contract documents.

2. The Conditions of the Contract. These conditions provide basic definitions to words or terms used in the contract and set forth many of the rights, responsibilities, and relationships of the parties involved in the contract. These conditions describe provisions of the contract and can be supplemented or altered specifically for the project.

3. A Modification to the contract after contract execution. This is generally a written agreement signed by both parties that alters either the scope of work or scope of the contract and becomes a part of the contract documents.

4. Project drawings and technical specifications. These are generally included as a reference within the contract documents.

5. Addenda issued prior to the receipt of bids or execution of the contract. These are also included in the contract documents.

The inclusive contract documents act as a roadmap for the contractor to follow in regards to contractor's rights, responsibilities, and/or procedures to follow should an unexpected perceived change occur at the jobsite.

Rule 2: Develop a Comprehensive and Accurate Construction Schedule

Developing a comprehensive and accurate construction schedule is also an important task that is misunderstood. Whether or not the owner requires a schedule, a schedule is a valuable tool that every construction project needs, especially if an untimely incident should occur. These project schedules do not have to be complicated CPM-type resource loaded schedules; they must, however, be accurate and current.

A comprehensive construction schedule notifies the owner, as well as the contractor, what construction tasks have been performed, are being performed, or are planned. Should the owner desire to change the scope of the work or add or modify the work, the owner must be given the opportunity to know when or if the work task is scheduled to be accomplished should the owner desire to change it.

A comprehensive construction schedule informs the contractor of when specific material, equipment, or labor is needed to perform a specific work task. The accuracy of the schedule must include any updates to the schedule should changes or plans regarding a specific work task change. It is critical to inform the parties regarding the reason for the schedule change, whether it is a work task scope change or a modification to the execution of a work task. Even if the contractor was responsible for changing the timing or execution of the work task, an explanation is necessary in case other work tasks are affected. Should the scheduled time of project completion be impacted and become an issue regarding accountability, a complete tracking of all work task items is necessary to evaluate which work task may have contributed to the impact. Without a well-documented current construction schedule, the contractor and owner are left to recreate an impacted schedule analysis.

Rule 3: Prepare Accurate and Comprehensive Daily Construction Reports

The third rule of engagement recommends that the contractor prepare accurate and comprehensive daily construction reports. These daily reports should be inclusive of any and all issues affecting the project regardless of responsibility for the issues. These reports should accurately and comprehensively outline work progress. This allows the contractor to provide daily updates on productivity as necessary. Complete daily reports allow others to update construction schedules rather than consuming the valuable time of the superintendent/foreman.

Any issue that affects productivity should be itemized on the daily reports to establish a record. Should the owner affect the contractor's productivity a record can be established. If a subcontractor causes an issue, it should be recorded. If the contractor causes an issue, it should be recorded. Accurate, unbiased daily reports are creditable sources for establishing a record of events affecting daily work productivity. These comprehensive daily reports notify the owner of issues that may be referenced in a dispute situation. If accurate daily reports sink a contractor's claim against an owner for lost productivity, then the contractor likely had no claim against the owner in the first place.

Rule 4: Notify the Owner of Issues

If a construction issue outside the expected occurs on a project, the contractor generally notifies the owner. The construction issues or discovery may or may not affect the contractor's overall project productivity, but if there is the possibility of a productivity impact and the issue is not the contractor's responsibility, the owner must be notified. What is important to understand about notification is the fact that most contracts define when, how, and why that notification is made. If this requirement is not followed, then any claim concerning the issues may not be valid. The timeliness and accuracy of the notification is important to the owner as well because it allows the owner the ability to correct the detrimental impact of the construction issue or, at least, understand the potential consequences of the construction issue.

The owner must be notified in the specific manner outlined in the contract. This is also why a job foreman or superintendent must be familiar with all of the rights, responsibilities, and relationships of the parties involved in the contract. The one contract requirement that is generally not available at the time of notification is the cost impact of the construction issue. Even though the contract may require the contractor to provide within the notification process the cost impact of the construction issue, it is a generally accepted practice that the potential cost impact can be estimated. This potential cost impact is necessary for the owner to be allowed to make a realistic judgment call about the impact of the issue. If the issue is an extra work item, the owner may decide to perform the work later. If the issue is going to affect the timely completion of the project, the owner can weigh any alternative opportunities. Either way, the owner has the right to be properly notified of a detrimental construction issue impact.

Rule 5: Keep Track of Costs

An obvious rule of engagement that is usually understood and complied with by most contractors is keeping track of all costs; however, the method of tracking costs differs from contractor to contractor. Even the simplest costing system can be utilized if the lowest level of tracking is comprehensive enough to establish the actual cost of specific issues that need to be evaluated.

Correct cost system application is based on the accurate and complete input of data; therefore, the personnel inputting the data must understand the cost system. The data input must be done at a level where one understands the reason for and results obtained from accurate cost information.

In many contracts, the owner is allowed to audit the costs of the contractor. Thus accurate and comprehensive cost reports are paramount should extra costs incurred by the contractor be claimed for extra work. Though it is not recommended that the owner be issued contractor cost reports, the costs for change orders cannot be disputed if the change ordered work was performed efficiently and the specific costs recorded accurately.

Rule 6: Maintain Inclusive Documentation

Maintaining inclusive documentation, the last rule discussed in this chapter, is certainly not the final rule of engagement for contractors. It is, however, an inclusive rule that incorporates most of the previously discussed rules. It goes without saying that accurate and timely documentation of detrimental construction impacts should assist in the mitigation of construction claims resulting from such impacts to a project.

A job documentation accounting system is paramount, even if the project runs smoothly and completely without any lost productivity or cost overruns. An ideal project is the best training tool for the next one, and a complete and inclusive document history is necessary.

Many project management software systems incorporate documentation identification and numbering systems. It is critical to maintain inclusive documentation using the system designated for the project. This document maintenance includes adding information from written notes and conversations. This way, once a claim is established, all information is documented in the system and not on pieces of paper. The contractor who maintains inclusive documentation can more effectively establish entitlement for costs.

Chapter Three: The Owner's Rules of Engagement

The owner, like the contractor, enters a construction contract with some basic assumptions. The first assumption is that the contractor is qualified to complete the work accurately, has sufficient support staff to manage the project effectively, and has financial support necessary to work within the payment provisions of the contract. The owner also assumes that the contractor can schedule its work appropriately and efficiently to complete the project within the time limits allowed by contract. Finally, though no less significant than the other assumptions, the owner assumes the price the contractor proposed and contracted to build the project is the total amount to be paid. When these assumptions are incorrect, a claim will usually develop and the owner must be ready. An owner must understand the six important rules of engagement to effectively execute a construction contract. This paper identifies the owner as the management team established to execute the contract.

Rule 1: Read and Know the Contract Documents

Reading and knowing the contract documents is an unusual task for the owner since the contract is the owner's contract; however, the architectural or engineering consultant likely prepared the documents, and the owner's attorney likely developed the contract language. Some owners believe the contract documents are thoroughly understood by the contractor. The contractor, therefore, will abide by the contract making it unnecessary for the owner to be aware of the basic contract requirements. Other owners believe the rules are written only for the contractor and the owner has no requirements to follow. It is important to convince the owner that the contract documents provide a roadmap to manage the administration of the contract. These contract documents act as a roadmap that allow the owner to follow directions concerning the rights, responsibilities, and/or procedures to follow should an event occur other than what was expected by the contractor.

Rule 2: Understand and Analyze the Contractor's Construction Schedule

Understanding and analyzing the contractor's construction schedule is critical to an owner's ability to manage the project. Most owners require a comprehensive construction schedule to be developed and maintained throughout the progress of construction. These project schedules do not have to be complicated CPM-type resource loaded schedules; they must, however, be accurate and updated on a routine basis.

As long as the owner understands the construction schedule, the owner will know what construction tasks are completed, current, or planned. This allows the owner to better acknowledge the amount of work that has been performed, if the payment for such work is based on partial payment for work performed. A high risk an owner faces is over paying for work that is alleged to have been performed. The contractor's updated construction schedule also gives the owner the opportunity to know when or if a work task is scheduled for completion, should the owner desire to change the scope or work.

A comprehensive construction schedule also details when specific material, equipment, or labor is needed to perform a specific work task. An owner that understands the schedule can readily evaluate the timeliness and status of the contractor's performance based on the use of scheduled material, equipment, and/or labor. The contractor must maintain the accuracy of the schedule, and the owner needs to be assured that the schedule updates are accurate.

The owner should understand the reasons for changes in the timing or execution of the work task, should other work tasks be affected. Should the scheduled project completion time be impacted and become an issue between the owner and the contractor in regards to accountability, a complete tracking of work task items will help determine the work task that caused the impact. Without a well-documented current construction schedule, the contractor and owner are left to recreate an impacted schedule analysis.

Rule 3: Prepare Accurate and Comprehensive Daily Construction Reports It is not often that an owner takes the time to prepare accurate and comprehensive daily construction reports. This important task is often left to the contractor to perform. The contractor will generally write contractor-biased reports, even though biased reports tend to discredit the reports' accuracy. Even if the contractor writes non-biased reports, owners should take the time to complete their own written records of job progress. The owner's daily reports should be inclusive of any and all issues affecting the project, regardless of responsibility for the issues. These reports should accurately and comprehensively report work progress. The owner may not be able to accurately reflect all work progressed, however, the owner can generalize certain progress and as well as the lack of progress.

Should the contractor affect its own productivity by an act or omission, a record can be established. Accurate, unbiased daily reports are creditable sources for establishing a record of events affecting daily work productivity. These comprehensive daily reports notify the contractor of issues that may be referenced in a dispute situation. If accurate daily reports sink an owner's dispute with a contractor for lost productivity, then the owner should reimburse the contractor for its lost productivity.

Rule 4: Respond Appropriately and Timely to Contractor's Notification of Issues

If a construction issue outside the expected occurs on a project, the owner must be notified. The construction issues or discovery may or may not affect the contractor's overall project productivity, but if there is the possibility of a productivity impact and the issue is not the contractor's responsibility, the owner must be notified. What is important to understand about notification is the fact that most contracts define when, how, and why that notification is made. If this requirement is not followed, then any claim concerning the issues may not be valid. If the contractor's notification of an unexpected issue to the owner is timely and accurate, the owner also has an obligation to respond appropriately and in a timely manner. Proper notification allows the owner the ability to correct the detrimental impact of the construction issue or, at least, understand the potential consequences of the construction issue.

There are rarely definitions of what is considered a timely response to a contractor's notification of a detrimental impact on its performance. A reasonable response time is not an accurate definition, but the owner must be reasonable in its response. Generally, the owner, through its architect, engineer, project manager, or other technical expert must evaluate the issue, evaluate the timing and/or cost of the impact of the issue, and finally forward instructions to the contractor. These instructions are generally drawings or requests for a proposal of costs.

The contractor cannot usually wait until the owner has provided all of the required detail information. The contractor must, however, be advised as quickly as possible of the owner's intentions. A timely response from the owner allows the contractor to adjust the work schedule accordingly and prevent or decrease any loss to productivity. The owner must understand that it costs money to recover time lost by a contractor on a project.

Rule 5: Analyze and Research Contractor's Cost for Performing Extra Work

It is generally recognized that during the progress of a construction project, extra work items will be performed. During the time to contract, drawings are prepared and the contract is executed; except for the smallest of jobs, things can change. For example, the owner may change its mind about some items or innovations may motivate the owner to add additional work. Most extra work items are routinely cheaper to perform during the initial construction than after the project is completed. For these reasons, an owner should competently evaluate the cost of any extra work items.

In many contracts, the owner is allowed to audit the contractor's costs. If this provision is not allowed, the owner must have other resources to evaluate any cost proposals generated by the contractor for extra work. There are many resources available to the owner for this purpose. There are published guides on estimation such as those published by the R. S. Means Company. There is construction-estimating software available for the technically savvy owner. Whatever methodology the owner uses to verify and approve a contractor's cost proposal, a consistent record should be maintained to track labor productivity, hourly rates, labor burdens, equipment usage, and overhead and mark-up cost.

Rule 6: Maintain Inclusive Documentation

Maintaining inclusive documentation, the last rule discussed in this chapter, is certainly not the final rule of engagement for owners. It is, however, an inclusive rule that incorporates most of the previously discussed rules. Accurate and timely documentation of detrimental construction impacts should assist in mitigating construction claims resulting from such impacts to a project.

A job documentation accounting system is paramount, even if the project runs smoothly and completely without any lost productivity or cost overruns. An ideal project is the best training tool for the next one, assuming the owner will build another project.

Many project management software systems incorporate documentation identification and numbering systems, and an owner can specify a system in its contract that the contractor can use. It is critical to maintain inclusive documentation using the system designated for the project. This maintenance includes adding information from written notes and conversations. This way, if a claim is established, all information is documented in the system and not on pieces of paper. The owner that maintains inclusive documentation can more effectively establish entitlement for costs or defend against contractor claims.

Chapter Four - The Construction Claim

When both the contractor and the owner follow their respective rules of engagement, the resulting project is not assured to be claim free. A construction claim, on the other hand, does not necessarily result from disputes among the parties. A claim can develop concurrently with an event that disrupts the construction progress, or it can develop after the results of the disruption are thoroughly reviewed and all cost impacts are evaluated. Claims can develop from both the contractor's perspective and the owner's perspective. An owner's claim against the contractor is somewhat unusual, but it can occur.

There are many different approaches for administering a construction contract from both the owner's position and the contractor's position. If both the contractor and the owner follow their respective rules of engagement, the process of claim evaluation can be simplified. A concise strategy to administer a construction contract is important and should support a successful project. Knowing and understanding this strategy can support or challenge construction claims.

The basic theory behind construction claims remains simple; the claims, however, have become extremely complex. Successfully proving and pricing claims requires an extensive knowledge of key elements of the claim and the ability to illustrate the facts and/or position persuasively. Successfully challenging a claim also requires an extensive knowledge of key elements of the claim, the ability to illustrate the facts, and the ability to respond persuasively to the pricing of the claim.

Construction claims can result from many issues including the contractor's assumptions of the owner's duties as well as the owner's assumptions of the contractor's duties. When these assumptions differ, a claim results. Claims can result from impacts to the contract from delays, disruptions, or loss of productivity.

Chapter Five: Conclusion

If the previously discussed rules of engagement are followed, the contractor will have a thorough and complete knowledge of the contract requirements and will have preserved its contractual rights. Any disruption in the construction schedule would have been described comprehensively and accurately in the updated construction schedule and daily reports. Once the disruptive event occurred, the owner was properly notified of issue. An accurate and effective cost control program allowed the contractor to assimilate and document the costs of the disruption. This claim preparation activity was well supported by an inclusive documentation program that detailed each issue.

The owner, on the other hand, having followed the previously discussed rules of engagement, also had a thorough and complete knowledge of the contract requirements and would have preserved its contractual rights. Any disruption in the contractor's construction schedule would have been evaluated in the updated construction schedule and the owner would have a chance to evaluate the issues at the time of occurrence. The owner would have maintained its own daily reports that would be used to compare with the contractor's interpretation of the event and the effect of the event on its schedule. Assuming the notice of the event was properly disclosed, the owner would have quickly and thoroughly evaluated the event and mitigated potential cost increases at the time. The owner had effectively and routinely maintained an accurate methodology to verify and approve a contractor's cost proposal for previous extra work items and, by maintaining these records, should track labor productivity, hourly rates, labor burdens, equipment usage, and overhead and mark-up costs that would support an affirmative claim. This claim defense mechanism was well supported by an inclusive documentation program that detailed each issue.

Article PDF Part 1
Article PDF Part 2

Disclaimer:This article is intended to be a source of general information on a specific construction-related topic. Its content should not be considered legal advice. If you are seeking legal advice, please consult with professional legal counsel. For assistance in assessing a specific construction-related issue, please contact Interface Consulting directly.

30-Jul-07 11:00 AM

Claim Settlement Negotiations

Mon, 30 Jul 2007 16:00:00 GMT

If negotiations are stalled and litigation appears to be the only solution, follow these steps:

Re-evaluation

Re-evaluate your claim to determine if your demand is realistic. Research and prepare any new facts, explanations, or support. Advise opposition parties of new figures, facts, or other relevant information, and request further discussions based on the new information.

New Claim Review

Ask for a new claim evaluation by an unbiased claim administrator or review team. Be specific about why you want a change. Emphasize your intent to negotiate in good faith.

Meeting

Request a senior management meeting between the two parties in dispute. Have senior management meet to exchange viewpoints and to ascertain if any measures could or should be taken in order to settle the dispute without litigation. Senior management should be thoroughly briefed about the issues under discussion, the amounts claimed or counterclaimed, and the potential costs and chances for success during litigation.

Mediator

Have a mediator/third party meet with both sides to foster an objective approach to the conflict. The mediator will endeavor to learn the real issues, the impacts, and the objectives of the parties. Attempt to facilitate communication in an effort to reach an amicable settlement.

Prepare Support

If you must proceed to litigation, do so with a case that is accurate and can be supported. Be sure that you follow any special requirements of your contract, such as written notices within certain deadlines, arbitration requirements, and other contractual guidelines. If you proceed to litigation with a claim that should be settled or addressed under a different venue, or without contractually required notices, your proceeding could be stalled, circumvented, or defeated before the issues are given any appropriate consideration.

Disclaimer: This article is intended to be a source of general information on a specific construction-related topic. Its content should not be construed as legal advice. If you are seeking legal advice, please consult with professional legal counsel. For assistance in assessing a specific construction-related problem, please contact Interface Consulting directly.

30-Jul-07 11:00 AM

Interface Consulting Articles RSS Feed

Every Step Counts in Successful Project Management

Introduction

Step 1: Establishing a Project Plan

Step 2: Developing a Project Schedule

Step 3: Monitoring the Project Schedule

Step 4: Managing Change Events

Conclusion

Fire Rebuilds Stoke Flames of Claims if Not Handled Appropriately

In Construction Claims, A Picture is Worth More Than a Thousand Words

Figure 1

Figure 2

Figure 3

Figure 4

The Greening of the Building Codes

I. Introduction

II. Houston Building Code

III. Houston Building Code regarding Extreme Weather and Natural DisasterS

IV. The Development of Green Standards

V. The City of Houston’s Efforts to go Green

V.A. Green Building Resolution

V.B. The City of Houston’s “Quick Start” Program

V.C. Adoption of the IECC 2001 Energy Code

VI. 81st Legislative Regular Session – State of Texas 2009

VII. LEED Rating System

VII.A. LEED Tracks

VII.A.1. U. S. Green Building Council in Use

VII.A.2. U. S. Green Building Council in Pilot Phase

VII.B. LEED Categories

VII.C. LEED Point Allocation

VII.D. LEED Certification Levels

VII.E. Benefits of LEED

VII.E.1. Tax Incentives

VII.E.2. Lower Operating Costs

VII.E.3. Marketability

VII.E.4. Tenant Comfort and Health

VII.F. Criticisms of LEED

VIII. Alternative to LEED

IX. Comparison Between LEED and Green Globes

IX.A. Cost

IX.B. Program Fundamentals

X. Conclusion

XI. Notes

XII. Bio: Philip D. Barnard, PE, CCE

Keeping Proposal Promises from Becoming Contractual Obligations

A New Day Dawning for East End Students, part 2

The Cost of Doing Business – Is Your Company Suffering from Increasing Material Prices?

A New Day Dawning for East End Students

Pre-engineering Program Launches Star Students

Failing to Plan is Planning to Fail: Tips for Owners for Successful Projects

Increasing Impact of Late Changes

Opportunities Abound for Construction/Building Science Grads

Project Change: Deal with It

Effective Use of Experts in Mediation

Interpreting Force Majeure in the Wake of Disaster

Time Equals Money: Maximize Efforts to Resolve Project Changes

Increasing Material Prices Gouge Construction Industry

Risks of Differing Site Conditions

Ten Steps to Dispute Avoidance

The "Rules of Engagement" and Construction Claims: Towards a Smooth Construction Contract Execution and Responsible Claims Process

Claim Settlement Negotiations

VI. 81^st Legislative Regular Session – State of Texas 2009