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PASBA 2010 presentation

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This deck was presented to the Pennsylvania School Boards Association (PSBA) in 2010. It addressed some commonly overlooked critical items in the planning and execution of construction projects which could improve the overall performance of the project and reduce the risk of disputes and claims.

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PASBA 2010 presentation

  1. 1. A Primer of Commonly Overlooked Issues in Construction Projects Presentation for
  2. 2. Introduction Presentation Goal: This session will address some commonly overlooked critical items in the planning and execution of construction projects which could improve the overall performance of the project and reduce the risk of disputes and claims. Presenters: Jake Ortego, PE, CCA, CCP, CCE President – JA Cost Engineers and Advisors, Inc. BS – Mechanical Engineering, Boston University 15+ Years in Engineering, Construction and Consulting www.ja-cea.com j@ja-cea.com David Anderson School Board Member –Kiski Area SD BS – Chemical Engineering, The Pennsylvania State University MBA – Robert Morris University 12+ Years in Engineering and Consulting A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 2 of 28
  3. 3. Construction Goals Construction Projects follow the principle of the triple constraint of Quality (or Scope), Cost and Schedule. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 3 of 28 Quality/Scope CostSchedule An emphasis on any one of the constraints will have an effect on the other two.
  4. 4. Who’s Who? There are many parties involved in a construction project that have different skill sets and knowledge. Below is a quick guide to the major groups beyond the Owner and Contractors. The focus of this guide is related to advocating the Owner’s Interest. Architect (and Engineer) – AKA “A/E” – They are responsible for the artistic and technical design of the building. The design quality from the A/E firms can greatly influence the total cost of the project. A/E firms typically have limited hands on field experience and limited knowledge of contract language. Solicitor (Legal Council) – This is the main advocate for the Owner’s legal interests. The Solicitors should have a detailed knowledge of local, state and federal codes, mandates and precedence regarding construction law. Although many solicitors have knowledge of the law, very few have experience in the execution of a construction project. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 4 of 28
  5. 5. Who’s Who? (cont.) Construction Manager – If used on a project, the CM should protect the Owner’s interest while coordinating all of the contractors, vendors, consultants, etc. to bring the project to a successful completion. In today’s construction market, many CM’s are general contractors who are expanding their capabilities. Clerk of the Works – The intent is for the COTW to protect the interests of the Owner in regard to ensuring the quality of both materials and workmanship are in accordance with the design information such as specification and engineering drawings. Many COTW’s have construction experience, but limited design or contract training and/or experience. Owners Representative – This role could include duties ranging from a CM to a COTW to a advisory consultant. An Owner's Rep services is not a substitute for an architect, contractor, legal counsel, or Owner themselves. There is no clear standard for this role. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 5 of 28
  6. 6. Ability to Influence Costs The ability to influence project goals diminishes with time. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 6 of 28
  7. 7. What is the Cost of Work? Cost of Work (“COW”) is an term which can have multiple meanings and interpretations. • Typical Contracts define the COW as all costs except for the Contractors Fee. • Many insurance companies define the COW as all costs except for the insurance. • Some parties see the COW as the total cost of the contract including fees and insurances. The difference can be seem trivial, but become material when calculating Fees, Insurances and Tax (where applicable) for change orders. It is important to clearly understand and define COW on every project. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 7 of 28
  8. 8. What Causes Overruns A common perception is that the primary driver to project overruns is due to the contractors. This is only part of the story Owners are a major source of change due to • Undefined Scope • Modifications made during construction Architects are also a major source of change due to • Incomplete designs • Overdesigning • Performance to the Standard of Care Depending on the state, it is accepted that the an Architects standard of care is between 3% to 5% of the construction costs. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 8 of 28
  9. 9. Avoiding Disputes and Claims Disputes and claims are often the result of: • Miscommunication • Unclear Expectations • Unrealistic Expectations • Poorly defined scope • Different interpretations of the Contract Avoiding disputes and claims can often be done with: • Open Communication • Explicit Definitions • Mutual Understanding What follows are areas that are commonly overlooked by owners while planning, designing and executing a construction project. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 9 of 28
  10. 10. Define the Expectations (part 1) As an Owner, you have responsibilities to the project. During the project you will need to clearly establish the expectations of your team regarding: • Clear lines of authority for providing direction and approval for project decisions • Time to review and approve design/drawings • Time limits on responding to Requests for Information (“RFI”) • Time limits on responding to Change Orders • Time limits on reviewing and approving Applications for Payment (“Pay Apps”) A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 10 of 28
  11. 11. Define the Expectations (part 2) Architects and Engineers (“A/E”) are design professionals. Most have limited to no experience actually managing a construction project. Most people expect that the Architects will be involved in nearly every aspect of the project and will represent the Owner’s Interest. It is recommended that open discussion are held with the Architect to discuss each of the following: • Establishing a budget that the A/E is to design to • The level and detail that the A/E will review the Pay Applications • The level and detail that the A/E will review the Change Orders • The frequency and expectations of site visits • The basis of the fee and what will constitute a change • The schedule expectations A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 11 of 28
  12. 12. Understand your Accuracy Misunderstanding an Estimate can set a project up to fail. Construction costs can vary greatly due to time, location and resource availability. As a result Construction estimates are only 100% when the project is complete and final costs are submitted. It is important to understand the accuracy of your estimates to help plan for the potential costs of a project. The following is an example of the accuracy to expect from estimates. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 12 of 28 Estimate from SQF Est 75% Dwgs 90% Dwgs* Architect ± 30% ± 25% ± 20% Independent Estimator ± 25% ± 20% ± 10% CM or GC ± 20% ± 15% ± 5% *Note: for this example, 90% are considered “Issued for Construction”
  13. 13. Contingency vs. Allowance Allowances and contingencies are used to plan for items that are not clearly defined or for unknown circumstances. Allowances are for “Known Unknowns”. Example: Landscaping will be performed at the conclusion of the project, but the exact configuration and selections have not been finalized. Contingencies are for “Unknown Unknowns”. This should be reserved for items that cannot be clearly identified at the planning, design and bidding of the project. A common mistake is to use contingency for items that should be an allowance. This can exhaust the contingency before it has a chance to be used for truly unforeseen events. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 13 of 28
  14. 14. Plan for Unexpected In addition to accuracy of the estimate, owners should add costs to their budgets for the following: • Quality of the drawings • Price Escalation and Inflation for projects over 1 year • Increase labor rates for projects over 1 year • Potential changes requested within the school district. Most projects should carry a 10% contingency on top of any estimate. In the rare cases where the drawings are complete and the scope is well defined, contingency should not be any lower than 5%. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 14 of 28
  15. 15. Value Eng. Vs Scope Reduction Value Engineering and Scope Reduction are different! Value Engineering is the practice of altering the scope to achieve the same performance goals at a lower installation or operating cost. Example: Replacing Wood Framed Windows with Vinyl Framed windows could result in a savings in material while still achieving the desired lighting. Scope Reduction is the practice of removing items from the scope of work to lower costs. Example: Removing windows in lieu of a wall will save material and installation cost, but also not achieve the desired lighting. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 15 of 28
  16. 16. Independent Estimates Having an independent estimate performed on the Construction Drawings prior to sending them out for bid can be valuable in identifying the possible ambiguity in the drawings. The independent estimate should be configured to cleanly match the A/E’s estimate. Major variances exist between the A/E Estimate and the Independent Estimate can be addressed in the following way: • Require the Architect to review the basis of bid to determine the cause of the differences. If it is an issue of interpretation, the A/E should update their drawings to alleviate any ambiguity. • Isolate the major differences and ask that bidders provide a breakout price for this area. • Remove any major difference from the bidding documents (or place them on hold) until the drawings are further developed. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 16 of 28
  17. 17. Details in the Bids It is easier to ask questions and state expectations during bidding than it is after the award. The words “Lowest Responsive Bidder” does not prevent the Owner from requiring bid details. Examples include: • Requiring Bidders to acknowledge that all change orders will have no more than a 15% markup for the prime with a total mark up not to exceed 20% of the base cost of work • Requiring Bidders to acknowledge that all change orders will be submitted with complete supporting information for cost, labor, subcontractors, fees and insurances • Requesting bidders to provide add and deducts for any areas of the scope that may not be well defined. • Requesting the bidders to identify any areas of the bid documents which are unclear or unbuildable. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 17 of 28
  18. 18. Define the Expectations (part 3) As with the project team and architect, it is prudent to define your expectations for the Construction Manager, General Contractor or and/or Prime Contractors including: • Change Management • Change Multipliers (or Markups) • Reporting Requirements • Scheduling Requirements • Substantial Completion • Invoicing Requirements • Incentives or Liquidated Damages • How Contingency is to be Spent Any agreements to these types of discussions should be included as part of the contract. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 18 of 28
  19. 19. Modify the Contract The contract is the place where all of the agreements governing the execution of the project are captured. Consider the following: • AIA Contracts are written by Architects • ACG are written by Contractors • There are no standard contract templates that advocate the owner The standard templates are meant to be flexible. But in doing so, they often are ambiguous. Ambiguity leads to the possibility of different interpretations which can lead to claims. Ambiguity is typically construed against the drafter. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 19 of 28
  20. 20. Modify the Contract (cont.) Recommended areas to focus on that are typically ambiguous include: • Mark ups for changes and for pay applications • Rates for additional work • Pay Applications being percent complete or substantiated (Cost Plus) • Basis of Allowances • Expectations and Agreements they may have been verbally discussed. • Any part of the contract that uses the word “reasonable” should be explicitly defined. All contracts can be modified, but not all modifications are legal. Discuss any modifications with your legal council before implementing. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 20 of 28
  21. 21. Fast Track vs. Fast Pace The two terms are often confused and interchanged. “Fast Track” is a method of staggering the sequence of a project to achieve a shorter total design – construct duration. Construction Starts as the drawings per discipline are issued. The inherent risk is that the items typically designed last (MEP) have more stringent constraints due to the physical completion of the earlier items such as Civil and Structural. “Fast Pace” or “Accelerated” is the method of compressing components of the schedule to achieve a shorter duration for any part(s) of the project. The risks lie in over congested project sites, overtime, shift work and lowered quality. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 21 of 28
  22. 22. Expect Change Change is a normal and expected part of every project! No design is perfect and changes help all parties adjust the design to meet the physical expectations of construction. A well planned project is designed to absorb a certain level of change. When evaluating and approving changes, consider each of the following: • Was it in the base scope? • Is it needed or wanted? • Are the costs supported and reasonable? • Is there any impact to the duration of the project? Always get a change in writing and never authorize a blanket change order without costs and/or limits. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 22 of 28
  23. 23. No News can be Bad News One of the methods to manage the risk of overruns and delays is to proactively identify potential issues before they escalate. Here are some recommended methods to do this: • Question the contractors and their subs to identify unknowns and possible risks on a weekly basis. • Encourage the contractors and their subcontractors to submit their invoices on the regular cycle. Work the Construction Manager and Prime Contractors to forecast the project’s workload and cash flow. • Encourage Requests for Information (“RFI”) to be submitted for all design and specification questions. • Keep the contractors informed about any owner related items that will affect their schedule or activities. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 23 of 28
  24. 24. Errors and Omissions The is one of the most commonly misunderstood aspects of increased costs to a project. It is expected that A/E firms have up to a 3% error and omission rate. In some states, this value may be as high as 5%. Errors are items that are incorrectly designed and require rework to correct if construction on this item has started. Example: A set of stairs ends 2 ft under the landing. To correct, the stairs may have to be re-fabricated. The price of fixing an error is made up of costs directly related to fixing this issue. This could involve other ancillary work that may be affected by the corrections A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 24 of 28
  25. 25. Errors and Omissions (cont.) Omissions are items that have been either unintentionally omitted from the design. They may require rework to incorporate the omission. Example: A set of stairs does not have any hand railing in the design. To correct, the handrail will have to be fabricated and installed. The Owner must still pay for the base item regardless if it was not in the base design and estimates. The cost of the omission is considered to be any additional costs required to include the omitted scope that is greater than what would have been paid if the scope was included in the design. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 25 of 28
  26. 26. Errors and Omissions (cont.) From a contractors perspective, the Owner is required to pay for the entire amount to fix an error or omission. As long as the item is not included in the scope of work to the contractor, then this assumption is correct. The owner may attempt to pass the cost on to their A/E Firms. Most A/E firms have insurance for errors and omissions. The insurance is only intended to cover the added costs for correction. It is rare for claims to be awarded if the total cost of errors and omissions is under 3% of the construction costs. A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 26 of 28
  27. 27. Conclusion It is reasonable to discuss any and all items in this report with your Architect, Solicitor and Construction Firms. In general, you can increase you chances of a successful project by: • Good Planning • Defining Expectations • Clarify Assumptions • Communicating with the Team Another equally good way of executing project is to: • Be Definite • Be Clear • Be Fair • Be Careful A Primer of Commonly Overlooked Issues in Construction Projects School Design and Construction Conference Slide 27 of 28
  28. 28. QUESTIONS

This deck was presented to the Pennsylvania School Boards Association (PSBA) in 2010. It addressed some commonly overlooked critical items in the planning and execution of construction projects which could improve the overall performance of the project and reduce the risk of disputes and claims.

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