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Construction’s “No-Win”

Construction’s “No-Win”

Risk Management/Transfer

 

 

A survey of 125 construction owners by Engineering News Recordfound that only half would hire the same construction firm again, a third of all projects were over budget, nearly half were completed late, and 13% were involved in litigation.

 

This dismal picture of construction industry outcomes has unfortunately become the status quo. Both clients and vendors view impending transactions with suspicion as they try to “outsmart” one another during contract negotiations in a “no-win” effort to transfer the risk of cost overruns and schedule delays to the other party.

 

Double Edged Sword

 

We’ve all lived through the comical contract scenario as the owner’s legal team tries to “write in” as much scope as possible while the contractor’s lawyers try to “write out” unrealistic promises the contractor’s sales team is accused of making. However, the idea that a owner can contractually transfer risk to their external contractor as a way to save money is fundamentally flawed. For every risk the owner transfers to the contractor, the contractor simply carries more contingency in their price. They price in contingency knowing that if the risk occurs, the money they priced in will pay for it. If it does not happen, the money becomes their profit. Either way, the owner pays. Only a very naive contractor fails at this game.

 

Take It or Leave It

 

Sometimes owners state upfront in their solicitation documents (Request for Proposal) that the contractor will be responsible for certain risk elements, saying in no uncertain terms, “if you want our business, you’re eating these risks.” This bold approach seems like a foolproof failsafe until the seasoned contractor “prices-in” this act of aggression and the owner ultimately pays anyway.

 

Who’s to Blame?

 

When it comes to risk management, the entire construction industry is barking up the wrong tree. The question is not who will be responsible for cost overruns and blown schedules, but who is causing them in the first place.The assumption that contractor incompetence or chicanery causes most unplanned cost increases and schedule delays is not supported by the research data.

 

Causes of Cost Growth

 

A study of 881 construction projects, 19 different owner organizations, and more than 100 different contractors analyzed 5,865 individual risk events that occurred and had potential to result in a change order. Here are the surprising findings:

 

  • 1% of cost growth comes from client scope changes.
  • 9% from client internal issues.
  • 7% is due to errors & omissions in the plans and specs.
  • 7% of cost growth comes from concealed and other unforeseen conditions.
  • 6% comes from contractor error.

 

Causes of Schedule Growth

 

  • 9% of schedule growth comes from owner scope changes and internal issues.
  • 0% from design E&O.
  • 9% from weather and other concealed conditions.
  • 3% from contractor failure.

 

Risk Minimization

 

Rather than trying to stick the “other guy” with the cost of unplanned schedule and cost growth, it is time for the industry to take a look at effective risk minimization. The metrics above tell a self-evident tale.

 

  • Most cost and schedule growth come from stakeholders and other factors the construction team has no control over.

 

The Irony

 

Unforeseen risk cannot be transferred to the construction team by the owner’s legal team during contract negotiations. The irony is that the construction team is the only one who can effectively minimize risk. The best construction teams excel at managing the chaos and uncertainty that surrounds construction projects. Owners must recognize that their only hope of minimizing risk is to hire not only technical experts but also contractors who know how to proactively plan for and manage non-controllable risks, owner created risks, deficiencies in design, and impacts from unforeseen sources. Risk is best managed through cooperationnot confrontation.

 

Expect more on this site from this ongoing research.

 

Read more about Recognizing Growth Risk , Risk Encounter . Learn more at Simplar Institute.