Facilities: Construction or Confusion?
by Paul Rivetto
Credit Union Advisor, 2007 Spring
Five thousand years ago, the Babylonians encountered mass confusion with the construction of the Tower of Babel. Today, confusion still exists unless owners understand project delivery methods. Facility owners have a variety of construction delivery methods, contracts, and agreements at their disposal. While these choices exist to make a property owner’s job easier during the construction process, most owners simply don’t have the time or expertise to make an informed decision. After all, when it comes to the project delivery method, there are a number of things that owners must take into consideration when determining which method best suits their projects, including project size complexity, schedule, and budget.
There are many project delivery methods used today.
The three most popular are traditional (design/bid/build), construction management, and design/build. Each of these methods has distinct advantages and disadvantages. The difference primarily involves the level of risk and control the owner assumes. The traditional method will provide the owner the most control over the design; however, the schedule can be compromised. The construction management method will typically be faster, but an owner won’t identify the actual cost until much later into the process. The design/build will typically be the fastest of the three, but the owner’s control of the design is sacrificed.
There are risks in selecting a contract.
Once a project delivery method is selected, an owner is still faced with which type of contract to use. Oftentimes, contractors will recommend a contract that may not be completely owner-friendly. There are a multitude of contracts that need to be evaluated and typically modified to suit the project. Three organizations, the American Institute of Architects (AIA), the Association of General Contractors (AGC), and the National Society of Professional Engineers (NSPE), have standard contracts for construction projects. Each of those organizations has tried to consider owners’ needs, but the contract still contains language that doesn’t benefit owners. Most owners aren’t aware of the risks they accept when they execute the contract, only to find out after construction has started, and it’s too late to rectify anything.
Three areas that often surprise owners and need to be clearly defined in the contract are change orders, standard of care, and sworn statements. Many change orders are often necessary, but the methodology for pricing these change orders must be well defined for an owner’s benefit. Standard of care will protect an owner from cost overruns due to design issues. The Michigan State Sworn Statement/Lien Act was modified on January 3, 2007 and contains owner requirements. If these rules aren’t followed explicitly, an owner is responsible financially for default of the contractor.
An owner representative can help.
As construction projects become more complex, the contracts that owners should execute also become more complicated. It’s imperative that an owner review all aspects of a contract. Most owners “channel surf” this process and typically end up with a contract that doesn’t serve their project well. Planning for how to deal with the issues mentioned above is a very important part of the project. A professional owner representative with expertise in these areas can help credit unions anticipate these issues, aid in evaluation of methods, and assist in drafting the proper contracts. If you need help, call Paul Rivetto at 248.223.3252.
Risk of "Channel Surfing" Contracts
- Unaware of the amount of financial risk you assume
- Unfamiliar with the term “unforeseen conditions”
- Uncertain of the requirements of revised Lien Act modified on January 3, 2007
- Unaware of change order requirements
- Unfamiliar with “standard of care” clause
