Dangers of Owner – Supplied Equipment and Materials
The Risks vs. The Benefits
Before agreeing to furnish materials for a construction project, owners must evaluate related risks and benefits to factor these into procurement decisions made during the sensitive preparation phase. Unfortunately, while the immediate monetary benefits of using owner-furnished items are easily ascertained, the risks are difficult to quantify. Owners often take on considerable liability in return for small, immediate gains. In effect, owners take on responsibility for timeliness and quality, over which they may have little control. They then can become mired in contract change orders, claims, or even litigation when their plans go astray. Frequently, the additional costs incurred by the contractor and the owner far exceed the potential gain envisioned by the owner through the seemingly helpful and economical act of furnishing contract items.
The owner’s decision to furnish items that could be procured by the contractor is usually based on one of the following reasons:
- a legitimate, significant price advantage or
- an early start-up or compressed construction schedule, usually relating to the purchase of items that require long lead times.
The risks the owner assumes in furnishing items can normally be identified. However, the costs associated with these risks are often difficult to estimate accurately even for the experienced contractor or construction consultant, let alone for the owner.
The Lesson to Be Learned
Owners should carefully evaluate the monetary and schedule benefit of supplying the contractor with owner-furnished material or equipment. The owner must also evaluate the risk to the project for problems such as late delivery or defective materials, which will be assumed by the owner. Lastly, the owner should develop a sensitivity analysis that contains numerous “what-if” scenarios.
The critical success factor of owner-furnished items as vehicles for cost savings is in understanding how the risks are shifted and what the monetary liabilities will be if the project does not proceed as planned. Owner-furnished items can reduce the contractor’s risk and save money initially, but they can also have a negative, long-range impact over an extended project, if delivery is not made as planned.
Our observations indicate that owner-furnished items have an exceptionally high potential for causing claim situations. Late deliveries and noncompliance with the contract requirements can delay and disrupt the project, leading to claims for the costs of corrective or additional work and/or schedule extensions due to delay. Any economic benefit realized from owner-furnished items can be overshadowed if a serious claim situation arises.
A contractor’s problems involving owner-furnished items can have a dramatic and costly impact on a construction project. When this happens, someone has to pay. On the other hand, properly managed agreements with suppliers and vendors that ensure timely delivery of materials and equipment can save the owner money and time and relieve the contractor of some overhead burden.
In summary, when contemplating furnishing items for a project, owners should assure themselves that the related risks and benefits have been considered and factored into the decision. Risk cannot be entirely eliminated, but through careful planning and coordination, the dangers can be substantially reduced.
Source: Interface Consulting International, Inc.
Released: July 30th, 2007 11:00 AM
Phone: (713) 626-2525
Fax: (713) 626-2555