If You Build It, They Will Come

A review of the headlines suggests that anyone connected to the real estate and construction industry is cautiously watching the markets for a new “boom.” Those of us who have been around for more than one economic swing, however, are also thinking about the corresponding “bust” that comes with a rapid increase in projects: the real possibility of widespread claims and lawsuits.

A fixed economic reality was borne out during the recent Great Recession, when many long-time contractors either did not survive or barely survived by working lean while marketing their skills and niche effectively. Those contractors that have made it through are balancing the need to ramp up more quickly than anticipated, during a period after many of their senior-level employees or well-experienced field personnel may have retired or moved on to more secure paychecks in another field of work or another state. So, where does this leave the parties that are looking to start a new project? With less than optimal staffing, fewer skilled personnel, and less experience as to how to realistically bid and perform the work than they did a decade ago. And, there is greater competition for the reduced number of subcontractors that did survive the downturn (many of which are facing the same issues at the lower levels). 

Therefore, both owners and contractors must look not just to the current project or short-term effort to get and complete “this job,” but view the long-term protection of their entities and assets in a cost-effective manner to sustain growth and survive the next inevitable lull. So, how do you use your “lean and mean” recession-developed skills? By following these five core points with diligence:  

1. Pick the Right Partner. Nothing is more important than selecting a project partner with integrity. All must view the project as a true united team effort: design and build it well, for a fair cost and profit, and know what your goals are. The idea is for all parties to keep the reasonable profits they rightly have earned through their diligent work. No shortcuts. No one makes a quick buck. Through well set out expectations and using balanced contracts, everyone makes the project “pencil out.” Partnering should be with a long-term view. If the parties perform well and fairly, everyone benefits and does well. Trust is critical.

2. The Devil Is in the Design Details. As the market moves to different trends in projects and designs to accommodate sustainability, demographic desires, and needs, and provides protection for entities in the legal liability structure, it is ever more critical to vet the designs for both constructability and to ensure they have reasonable maintenance and operational expectations. As well, the design should consider from available historic information in light of the type and nature of the project what potential claims may arise in the two- and five-year window as well as within the statute of limitations period. For instance, has the project/design been built in this locale and this climate (including microclimate), and what lessons were learned during prior construction of this type of project? If it involves residential spaces, what have been the top 10 complaints or concerns during the sales/leasing period and/or the common warranty claims? Have livability issues—such as sounds, smells, and interactions with demographics (common walls/floor/ceiling)—been addressed? On all projects, has facilities management or O&M responsibility been properly laid out in writing and disclosed (with training where appropriate)? Is there an ability to reasonably maintain and repair the project, by both the contractor and the owner or subsequent owners?  

3. Determine the Risk Assessment for the Project. How does the risk affect the nature and type of insurance coverage or other asset and entity protection? Do the parties need to consider risk based on the entity model that owns the project? Is entity windup considered? Where will the risks go, or where will it try to follow if there are claims and lawsuits? Is there a need for bonding, and is that consistent with the contract terms?  
4. Contract Integration and Flowdown. Too often projects are put together piecemeal, and a global “front to back” view of the component parts, which includes the field-level daily operation, is not performed.  Are the contracts integrated for coordination and flowdown obligations from the owner to the contractor to the subcontractors? Are there state restrictions to the terms and how does that impact the contract expectations and course of construction management of the work, documentation, and warranties? Who is obligated to determine the cause and repair for a claim or defect? As to third parties that could be harmed, does the state law have differing liability standards as against the owner and the contractor, and how is that risk addressed in the contract and insurance/bond structure?
5. Post-Construction Coordination. The partnering must continue through the completion of construction and into operation in order to ensure proper transition, reduction of claims, and correct operation and maintenance of the project. Have the owner and the contractor established a course of construction and post-construction risk management process and QA/QC? How do the owner and the contractor verify that the project is built properly, and is there an incentive to report and remedy the natural challenges that arise during construction? Or is there a pervasive practice to avoid or cover up the problem (e.g., not my scope, just get this finished)? It is virtually always less costly to do it right and fix it during construction than to do so after the fact.

Risk rarely disappears; it just gets managed or moved. Each of these core points is intended to translate into an integrated project program designed to give the owner and the contractor (as well as the subcontractors and the project investors) confidence that reasonable risks are properly and economically managed to protect the entities and assets, both short term when it is more economical and post-project, by significantly mitigating against manageable claims.

"If You Build It, They Will Come" was originally published on January 16, 2015, by the Daily Journal of Commerce.