Plan Ahead for Project Challenges in 2020

Volatile national and world events can unexpectedly alter the best-laid project plans. For the time being, previous fears of a steep slow down or another recession seem to be put aside, but predictions remain that “[e]conomic growth is slowing [even if it] is not anticipated to contract next year. Construction starts … will decline but the level of activity will remain close to recent highs.” (Dodge Data and Analytics 2020 Dodge Construction Outlooks) And despite the “slowing” economy, to a level that “remain[s] close to recent highs,” the Associated General Contractors of America (“AGC”) forecasts that strong demand for workers will continue in 2020. (2020 Construction Hiring and Business Outlook Report)

According to responses received by the AGC, “81 percent of respondents say they are having a hard time filling positions. Almost two-thirds expect it will continue to be hard or become harder to hire personnel in the coming 12 months. Six of the eight top concerns among contractors relate to worker shortages, training and quality.” Significantly, these universal “staffing challenges are affecting project costs and completion times. Nearly half of respondents said costs were higher than expected, and almost as high a share of firms is now putting higher prices into new bids or contracts. Two out of five firms experienced longer-than-anticipated completion times, and more than one-fifth of firms are now quoting longer completion times in bids and contracts.” (Id.)

These risks exist in all new projects, but they can reverberate through ongoing projects if the labor shortage and cost increases are too great for a contractor to withstand. Trade defaults in 2019 appear to be on the rise, and defaults of general contractors may rise, due to the inability to absorb labor problems and the unexpected cost of additional oversight and warranty work. Contractors are often overextended due to the ongoing pace of the market. With less labor available and labor that may be under-qualified, the impact on quality, schedule, increasing overhead, and increasing general condition costs is exacerbated. Contractors without a pure cost-plus contract also have little or no ability to recoup these increased costs from owners and may be hit with an extended schedule and associated overhead and general condition costs because they cannot staff the project on the contract schedule. And while this is a significant problem for contractors, owners may not be immune from the financial impacts of these challenges either.

Owners and general contractors should consider managing the above risks by utilizing the following:

1. Contract terms allowing the right to require trade acceleration at the delaying party’s cost to bring the project current, including supplementation of workforce at the cost of the delaying party, takeover rights for delayed work, and optional assignment of contract rights; and
2. Payment and performance bonds at the prime and maybe subcontractor levels, possibly including subcontractor default insurance. These tools may not be possible for certain trades that cannot be bonded or do not have adequate financial strength.

The owner and the general contractor must be persistent and diligent in documenting the project schedule and performance on a daily basis to stay on top of trade compliance, or they must trigger the necessary notifications to allow an early resolution to a potential or actual default event. They must also consider the impact of a potential default on the project insurance as well. For example, is the project insured by an owner-controlled insurance program or wrap that may have a long tail or allow additional trades to be included? Are individual policies that have exclusions for incomplete or abandoned work by a defaulting trade provided? What risks exist if the defaulting party no longer secures insurance in subsequent years after project completion or abandonment?

The fewer contractual protections you have in place, the more diligent you must be to keep the project on schedule and on budget. Resolving delays and conflicts quickly is usually better than letting them fester for the remainder of the project.

Increasing market challenges in 2020 will require greater diligence to protect project success for everyone involved.

Originally published as “OP-ED: Plan ahead to handle project challenges that arise in 2020” on January 16, 2020, by the Daily Journal of Commerce.