Contract Formation, Construction Planning and the Impacts of Change on Your Construction Projects

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With many constructions project cases, thousands and up to millions of dollars are put at risk primarily due to at least one of these three items: 

1. Failure to read or comprehend a contract
2. Failure to plan the scope of work
3. Failure to manage change in an instinctive manner

Reading and Comprehending Contracts

Starting with the tender or bid package, this binding document will ultimately set the stage for the scope and commercial terms of the contract.  This is the best time to review not only pricing in detail, but what is being considered as far as risk and potential rewards.

While assessing project risk, this is the time to take exceptions, offer alternatives, or simply accept the risks proposed, while pricing in contingencies, without losing the work.  Managing risk, particularly in a lump sum environment, can realize huge up-side financial gains when managed well.  This is the time to review the scope of work, assemble a division of responsibility, RACI, and/or form contracting quilt (self-perform v. sub-contracts), while deciding who is best suited to perform the scope. This helps reduce the risk of a project and enhancing the chance of schedule and financial success.

In many cases, both small and large, the parties “at fault” failed to perform these basic project formation good practices. 

From the commercial (terms and conditions) perspective, this is the best and most cost-effective time to engage a legal opinion.  These professionals see well positioned contract clauses on a regular basis.  Being proactive with the terms and conditions and even offering more equitable terms for both parties will be viewed as a positive by clients.  Work with attorneys at this stage and form win-win, and perhaps innovative, agreements that all stakeholders can sign up to, both figuratively and emotionally.  This proactive approach should be thought of highly by clients and prevent problems in the future.

Councils work in a very proactive manner to not only identify problems with proposed language but propose better alternatives to offer to a client. 

A good example of this is force majeure and current supply chain issues.  Many contract terms did not foresee such events; thus, terms did not deal with these.  The number of cases regarding delays due to “supply chain COVID strain” are on the rise, considerably.  There are some effective commercial mechanisms being scribed which contain an understanding amongst all stakeholders as to who owns the risk of material and equipment delays on the overall project.  This dialog must happen prior to contract award, else all parties who suffer such delays put themselves in significant risk.  Ultimately each party has risk, no matter who is purchasing the goods or services.  If this is the case, shouldn’t everyone share in this risk and acknowledge it during contract formation?

Consequential damages can also be handled in a manner which creates more of an all for one, one for all v. a non-productive combative approach.

One should read and understand their contracts carefully, not prior to execution or after claims are flying around you, but prior to submitting tender to their client.  It is also advisable that one engages council at this stage and have them give their opinions on good contract practices.  Then one can have the vast knowledge necessary to make a professional position as to what strategic tact to take regarding pricing, resource allocation, milestone sequencing and overall construction planning.   And it’s OK to submit “alternatives” with some winning approaches.

Understanding and Planning the Scope of Work

Most constructors would agree that the adage that “what gets planned gets done” is good industry practice.  However, many past witness engagements have not been planned well and inevitably the contractual scope is not performed in the contractually agreed upon time and price. 

Understanding the scope of work and the path of construction prior to bid submission is a must, even if it is a daunting task.  Those who do not perform this task are often surprised by rising costs and extended durations of the project.  These surprises often create tough situation for not only the offending party, but all of the parties involved.  This situation starts a waterfall effect which can become unmanageable.  In one significant case, it resulted in the owner “directing” work of their contractor, thus they assumed responsibility of the contractor’s poor performance, significantly swinging final judgement.  So, it is critical that not only the contractor plan their scope in detail, but the client also needs to insist, via contractual mechanisms, that the planning of the scope be performed per industry “good practices”.

Poorly planned or unplanned projects will result in the “blame game,” which most likely will lead to arbitration or litigation. 

Root causes regularly found in cases include:

• Untimely, or inaccurate, material and equipment deliveries
  • Inaccurate take offs of materials and labor tasks
  • Not understanding specifications related to each scope of the project
• Not understanding the impact of the client’s milestones imposed on the project
• Underachieving labor performance
  • Not understanding or respecting labor density and its impact on productivity
  • Not appreciating the impact of planning and its effect on labor productivity
  • Not planning a proper site infrastructure and its effect on the flow of construction and productivity
  • Not factoring in the impacts of weather
  • Not being engaged with planning their work during design
  • Not planning for safety and quality during design and throughout the project
  • Not assessing direct v. indirect labor impacts (supervision, tools, equipment, and site infrastructure) project costs.

There is much more to drill into, but the bottom line is the need to ensure understanding of what to build, and how to build it, prior to submitting a binding bid offering.  There is a distinct advantage to engage a construction industry expert to obtain an outside opinion of the scope, construction methods, estimated costs, schedule durations, contracting strategies, etc. and their impacts to cost and schedule.  The return on investment (ROI) on this engagement of an expert will be huge.

Change is a Client’s Best Friend

Change Management is most often non-existent or left to the late stage of the project, blindsiding many leaders after the damage is done and the pain is irreversible. 

Transparently communicating change creates an environment of “change is our best friend.”  Change is inevitable in any project! Change of scope, additional parts, more complexity than initially thought, weather events, new components, etc.  Change is also often created by a third party who may not have a contractual relationship between contractor and owner, or contractor and sub-contractor.  The best and most frequent example of this is scope driven by the engineer(s) or architect(s).  Contractors are often at the mercy of these professionals who decide the financial state and who are often reluctant to engage construction expertise as they design the project.

So, all entities who are down-stream of engineering information need to:

1. Have well thought out change management provisions (based on zero hesitation communication techniques) and procedural flows built into contracts
2. Start each project with a spirit of “honesty without hesitation” when it comes to change.

Regardless of how simplistic or robust the change management process is, one needs to inform their contractual client and other stakeholders immediately upon discovery of the change of the project scope (addition, deletion, alteration, etc.), no matter the impact.

Why early engagement of the parties?

1. First and foremost, to minimize or eliminate impacts of the change on a project.  Collaborating resolutions are most effective.  It is most beneficial to be humble, letting pride down, and engaging with others.  Be open to listening to others when they have similar issues and be eager to jump in and try to find the best resolution when others are experiencing change.
2. Mitigate impacts by collaboratively finding the best solution(s).
3. All parties need to predict their project outcomes from the beginning.  Company leaders need to make decisions regarding investments, including decisions regarding their forecasted financial position on an on-going basis.  Having the knowledge of change throughout projects is vital to that decision making process.
4. Making the client aware of these situations immediately makes them part of the remedy, which everyone should welcome.
5. Bringing a contractual client or contractor in early should also ease the “notice” impact when honoring provisions in the terms and conditions.
6. Relationships with clients and subcontractors will grow in a positive manner and the risk of ending up in litigation will diminish greatly.

Summary:

1. Engage experts early and with the expertise required.  Legal experts for contract reviews and construction experts for construction means, methods, and plans.
2. Take the time to fully comprehend the contract, offer better alternatives and ensure alignment with the stakeholders, prior to executing the contract.
3. Plan who will do what and when.  Division of responsibilities, contracting quilts, detailed scheduling and workface planning will all help make a project succeed.
4. Plan work based on the contract requirements.  Leverage the contract, and its appendices, establishes scope and project goals, thus being beneficial to success.

Make change the client’s best friend!