I have to laugh as I start this webpage, because I can picture my son reading this. There are so many possible pitfalls on a large construction project, that most sane individuals would never consider the construction business as their primary method of making money! I mention my son, because I was the one to recommend him to a contractor that I have known for several years, for possible employment. My son decided to accept a position with this contractor, and he is now on his fifth year of involvement in construction. I anticipate, that after he reads this webpage, he will only shake his head and say ” no kidding” ! The basic problem with construction is that if you love to build and achieve, then the industry will devour you, no matter how well aware of the pitfalls you are. Your only possibility of survival is to understand all the different aspects of the business that can and will cause you to lose money, and constantly fight the good fight to remain solvent and successful.
I apologize for editorializing, but the construction industry is full of very arrogant, sure of themselves individuals, who in many cases, do not have the knowledge, or the experience to justify their arrogance. On the other hand, there are also several outstanding contractors that understand the obstacles to success within the construction industry, understand their role and their trade, and attempt to legitimately and honestly make a decent living in construction. Unfortunately there are far more individuals attempting to maneuver their way through the industry, making as much money as well as turmoil as possible.
In this webpage, I will attempt to summarize some of the most difficult and frustrating construction pitfalls that will occur, if you decide to make this business your occupation.
This webpage may not be quite as professionally developed and presented as some of the other web-pages within this website, only due to the fact that I am trying to make the reader, clearly understand my points regarding these pitfalls without worrying about the nuisances of my vernacular.
1.) Smarter and more important than you, the owner.
Unfortunately the construction industry does not have a very positive reputation. We are considered pirates, out to take everyone’s money as well as intimidate and bulldoze our way to wealth and riches. This reputation has been developed and maintained by a small number of contractors that yes, intimidate, manipulate and ruin the reputations of countless other construction contractors. But like everything else, the rotten apple will spoil the barrel, and our construction industry has been spoiled by a few rotten apples.
Based upon this realization, there are owners that feel they have the right to basically cheat the contractor. Unfortunately this behavior is justified by their interpretation that all contractors are only after their money, and they, the owner, must strike first.
If you are unfortunate enough to encounter one of these owners, you will immediately know it based upon the following methods of manipulation and less than professional business practices.
a.) Self important attitude during negotiations and final contract award. This is the type of attitude that makes the contractor feel that they are being given the job as a favor, and that they should be honored to have been awarded the work. This an unhealthy way of starting a construction relationship.
b.) Constant indecision by the owner because they are too busy. Again, this is the start of a very bad relationship that will cost the contractor money. It is vitally important that the contractor insist, that decisions on changes or issues with the construction scope, be dealt with immediately. The contractor must relate to the owner, that time is money, and that indecision will cost the owner, not the contractor money. The contractor cannot allow lack of decisions to cost them money. If this occurs, financial disaster is in the near future!
c.) Continuous changes by the owner. This is another way an owner can cause the contractor to lose money. Lack of timely decisions and lack of formal instructions to resolve construction issues will cost the contractor money, the owner must be cognizant of this fact.
How does the contractor prevent these ( 3 ) situations from occurring with the owner.
First, it is important that the relationship between the owner and the contractor be on a balanced playing field. It is essential that the contractor acknowledge the importance of the owner as well as their appreciation for the work, but it is also important that the contractor convey an attitude of confidence and importance as well. The contractor must push back during contract negotiations by presenting confident and accurate projections of both time and money, at the onset of contract development, and then during the actual work phase.
Second, it is vitally important that the contractor establish, from the very beginning, that time is money, and lack of decisions will cost the owner money, not the contractor. It is essential that the contractor make the owner understand the following;
The contract value is based upon the most reasonable and economical cost to complete the scope of work, as stated within the construction contract. There is NO additional money built into the contract for additional work or lack of decision making. The schedule is also based upon the most economical use of time and the most aggressive method of completing the scope of work as identified within the contract. There is NO additional time built into the contract for indecision or additional work. If either additional money or time was actually available, then the contract value would not be what the contractor is representing, the most value for the buck!
This concept is vitally important for the contractor to make the owner acutely aware of from the onset of the project.
Failure to drive this concept home by the contractor to the owner, will result in a never ending fight for favors, as well as no reason for the owner to make a decision. Again this is important!
The contractor must be disciplined in the management and supervision of the project. It is essential that the contractor have a site representative that monitors the contractual scope of the work, and clearly and precisely identifies all additional work. In addition, any decisions that are necessary by the owner must be documented clearly and accurately, with dates and times necessary to remain on schedule, or to support any additional time that the contractor is claiming.
It is humorous that in ancient times of no computer, the construction industry, especially the residential marketplace seemed to do a better job of documenting additional cost and time on projects. It was much more time consuming and difficult to identify the accuracy of additional work, as well as the time it would require to perform the work. With the computer and the numerous computer programs available, the accurate identification and management of additional cost due to additional work, change of scope of work or indecisions by the owner is easily managed and documented.
Contractors / document everything!! and report everything!!
If the contractor starts the relationship by fully documenting all additional scope and additional time, from the beginning, the owner will NOT have the opportunity to not make a decision and not be aware of additional costs. Make the owner sign the change orders / again, make the owner sign the change orders!! Make the owner aware of everything – Documentation is KEY!
2.) Lack or delay in payment.
The lack, or delay in payment is a method used by owners to get more than the contract entitles them to. Unfortunately our industry has evolved into an industry that NEVER PAYS. The owner slows the payment to the contractors and the contractors slow the payments to the subcontractors and the subcontractors slow the payments to the suppliers. The payment cycle in the construction industry is a vicious round robin of slow payments, causing delinquent receivable accounts, and even more delinquent payable accounts. All contractors, subcontractors and suppliers throughout the country complain continuously that payments are non – existent, or phenomenally slow.
It is my personal opinion, that lack of payment, together with slow payments is the most significant pitfall on any construction project. If the industry could turn this tendency around, and start to demand that payments be made on time and that payments accurately reflect the work that has been completed, the construction industry would benefit substantially.
It is extremely important that any contractor that is performing work for an owner, be aware of the problems of cash flow. There are several different techniques and scenarios that can be put into place that can minimize the industries noted cash flow problems. Each area of the country has different laws to protect contractors from owners who don’t pay their bills, however, summarized below are several methods of trying to expedite proper payment.
a.) During the contract negotiations allow your lawyer to become involved with the specific legal clauses regarding payment. Although many contractors do not want to spend the money required to involve a lawyer at this point in the process of securing a construction contract, this is when it makes the most sense to spend the legal dollar. With the advice of your attorney, each contractor should demand that special payment clauses be included within the initial construction contract. These clauses should include language that will identify the following;
1.) Specific timing of all invoicing and payments. It is recommended that the contractor push for a ( 2 ) week billing cycle. Try not to allow a monthly billing cycle, due to the fact that on many smaller projects there will only be one or two billings. The project could be complete, prior to the issuance of any payments to the contractor.
2.) Specifically identify the terms of payment. If the invoice is submitted by the 1st of the month, the payment must be received by the 15th of the month. It is imperative that specific dates be established for invoice submission and the subsequent payment of this invoice.
3.) Action that will be taken upon any failure of the owner to pay the invoice in accordance to the contract. The contractor must insist that specific actions be identified, that they can and will take, if the owner fails to pay the invoice in accordance with the construction contract. These actions could include, the ability of the contractor to limit the manpower on the project or even leave the project, or an action, such as a payment penalty based upon a percentage to be added to the payment if it is delinquent. There must be some type of legal action that the contractor can take, if the owner, simply does not pay or is late in payment. Payment is the fuel that allows the work to continue, lack of payment should automatically limit the work.
4.) If the owner is delinquent in paying the invoice, then the contractor is legally allowed to extend the contract time, in accordance with the same period of time as the payment is delinquent. In addition, any extension of time to complete the contract must be associated with additional general condition time, as well as supervision time that will be added to the invoice to the owner. It is unfair to allow the owner to delay the project due to payment, and for the contractor not to be compensated for this delay.
It is important that the contractor start, from the initial contractual negotiations, to express concern and awareness regarding payment and the importance of timely payments. The contractor cannot allow the owner any option but to process payments on time and in accordance with the contract. Any owner that is allowed to delay payments will automatically delay the next payment for a longer period of time. This is the way of the world, and in construction, it is even worse. I cannot stress enough, the importance of indicating to the owner that payment is mandatory, and timeliness of payment will directly correlate to timeliness of the construction completion .
3.) Insincere signing of additional work tickets.
There is a tendency in construction, similar to the tendency to accept late payments, that it is OK to sign additional work tickets to get the work completed, and then negotiate later on, regarding payment of this additional work. As with the payment issues, the signing of additional work tickets is an acceptable means of getting the work completed, yet is widely accepted as not a method of securing additional payment. Unfortunately this is another of the illegitimate methods that owners secure additional work without paying for this additional work.
A knowledgeable and experienced owner, will attempt to explain to the naive contractor, that they will pay for the additional money out of the contract line items for the original contract work. In other words, the owner will allow a larger draw of money from the contractual line items, to finance the additional work performed during that pay period. The contractor must resist this emphatically. A seasoned contractor understands that it is essential to think of the contract as a wallet full of money. This wallet full of money is only intended to pay for the established work scope, as contractually obligated. To use this money to pay for additional work, that was not a part of the original contract, is a fake payment by the owner. If the money in the wallet is NOT increased, with signed and executed change orders for the additional work, the money will simply run out, prior to the completion of the contractually obligated work. The owner at this point can simply force the contractor to perform the contract scope of work for no additional compensation. Work equals money, if additional work is performed, additional money must be added to the original sum of money in the wallet. Just because the owner claims they are paying for the additional work, by allowing the original line item to be overly compensated, when the money is still available in the line item, does not have anything to do with the total amount of money available to compensate the contractor. The contractor MUST insist on the executed change orders as the additional work is completed! This MUST happen, if it does not, the contractor is accepting the fact that the owner has now received the benefit of the additional work, and the contractor is still obligated, legally, to perform the original scope of the contract line items without any increase in the value of the contract!
4.) Owner supplied material, equipment or subcontractors.
If the owner demands that they be allowed to supply material, equipment or subcontractors to work under the direction of the primary contractor on the project, the primary contractor must be compensated for this supervision and management. It is recommended that NOTHING be provided by the owner. All contract obligations and responsibilities to complete the construction project should be under the direction, control and management of the contractor.
Why is this important?
a.) Scheduling management and coordination is an important element to the success of any construction project. All material, equipment and subcontractors need to be managed and scheduled in accordance with the entire project schedule. The inability of the contractor to control all the elements of the contract, will allow the contractor, as well as the owner, to find endless excuses why something was not performed. It is much better and easier if all obligations fall under the direction of the contractor.
b.) Any subcontractor that is working directly for the owner and not the contractor will be obligated to the owner and not the contractor. This subcontractor will want to satisfy the owner, prior to the contractor, and will basically set up the contractor to fail, to allow themselves to look better to the owner. I have witnessed this time and again. The owner feels that they are saving the management and supervision fees that the contractor will charge, to coordinate individual subcontractors that the owner can employ themselves. This is a very short sighted attempt to save money, and will eventually succeed in losing money for the owner in the final analysis of the project.
c.) Conflict of interests abound with any material, equipment or subcontractors that are supplied and managed by the owner. There are so many different difficult scenarios that can, and will develop as the materials are delivered out of sequence, the equipment is incorrectly ordered or doesn’t have all the parts required to complete the installation, and the subcontractors are leading the show instead of following the needs of the general contractor. The involvement of the owner with material, equipment or subcontractors will be nothing but a nightmare for the general contractor on any project.
How can the contractor attempt to negotiate this situation out of the contract? It is imperative that the contractor convince the owner that this is NOT a good idea. Try to identify the various issues that will result, and the difficulties that will be encountered regarding schedule and cost, if the owner insists on providing material, equipment or subcontractors.
If the owner is adamant and convinced, that the interaction by the owner regarding major purchasing will result in substantial savings, then it is imperative that the contractor insist on a management fee for supervising and managing the work. If a management fee is provided, then the contractor must legally insert language in the contract that will identify their responsibilities in regard to the delivery, management and responsibilities assumed.
Again, this is a very slippery slope for any contractor, and the allowance by the contractor to the owner, to actually purchase material, equipment and hire subcontractors, will normally lead to negative issues and difficult interpretation of responsibilities.
5.) Inherent selective loss of memory by owners, architects and engineers.
The construction contractor will constantly be evaluating the project in terms of design, engineering, scheduling, procurement, manpower, etc. It is the responsibility of the contractor to maintain a thorough understanding of all the specific particulars of any construction project. When a party responsible for the completion of a construction project is intimately involved with the inner workings of the project, there will be a continuous list of thoughts, ideas, concerns, recommendations, etc. being realized, as the project advances, by the construction contractor. Unfortunately, human nature being what it is, as well as the nature of construction, there will be several observations and information that the contractor will realize as they complete the project. These observations will, in many instances, involve additional money or additional time. All the other parties on the side of the owner, the architect, the engineers as well as the consultants will be hesitant to present any of these observations to the owner, due to the fact, that in many cases, these professionals should have anticipated or designed for these observations.
In other words, in many instances, if the architects, engineers and consultants had done a complete, professional job on the project documents, these observations would have been designed out of the project or corrected on the documents. So, who is to fault? The contractor is in a position that they must either perform the additional work, or fail in the overall construction project. The architects and engineers or consultants want to make believe the issues are not there, or try to shift the blame for the additional work and time required, on the contractor. Neither case is a healthy one for the contractor.
This is exactly where the inherent loss of memory on the architect, engineer and consultant side comes into play. Understanding that the work will need to be done as well as additional time expended, the architects, engineers and consultants will calculate the timing of this selective loss of memory. By instituting this loss of memory at the convenient time, the contractor will be informed to solve the problem and the additional money and time will become available. In many cases, the signing of a change order will be promised by the architects, engineers and consultants without the owner’s knowledge or approval. This is done to allow the work to continue and maintain the status quo with the owner. Remember none of the professionals will want to admit a mistake, error or oversight.
The contractor will perform due diligence and perform the work. The contractor will absorb the additional general conditions and cost for the extension of time on the project based upon the positive indications from architects, engineers and consultants that the contractor will be compensated for this additional cost. This is where the inherent loss of memory comes into play. I will guarantee, that any of the difficult issues to explain to the owner, when it is time for additional payment, will be lost in the memory banks of those who indicated that the additional work and the cost for the additional time will be compensated for.
Realizing this concept of selective memory, what steps can the contractor perform to minimize their losses on a project?
DOCUMENT / DOCUMENT / DOCUMENT / DOCUMENT!
Yes, every contractor in the business understands the concept. Whether they perform the management required to document, is an entirely different scenario. Documentation on a construction job is essential to the success of the contractor on that project. It is so important that there are several computer packages available, by several top of the line computer software companies, that specialize in helping the contractor document all additional work and time. However, these are simply computerized programs that will assist the contractor in the documentation, they will not perform the task for them! What important elements are required to properly document all additional work and extensions of time on a project?
a.) Clear and concise explanation of the exact nature of the additional work.
b.) Contract document ( drawings ) referenced to clearly identify what was required by contract and what is necessary to complete the work.
c.) Specification referenced to clearly identity what was required by contract, and what is necessary to complete the work.
d.) Timing of the work required. The exact amount of time necessary to complete the additional work.
e.) All costs incurred to complete the additional work, including invoices, delivery slips, contractor labor time slips, etc. that have resulted from performing the additional work. These documents should be scanned into the computer or the hard copies collected in individual folders identifying the additional work.
f.) The daily report for the project should clearly identify the additional work, as well as any individual that indicated approval for the performance of the additional work.
As I have indicated countless time throughout this website, the need to present the change orders to the owner, architect and engineers in a timely manner is extremely important to achieve payment for this additional work. The contractor must develop a change order system, either with the use of one of the several software programs available, or even by the use of a paper and pencil. The important issue regarding additional work is the documentation, and timely submission of this additional work to the party that is responsible for paying the bills. In addition, the inclusion of all the additional work change orders, on each monthly requisition, is essential for a timely payment of the work. If the owner is presented with a myriad of change orders all assembled after months of work, they will react negatively as a knee jerk reaction to the amount of the additional work. If the owner is professionally presented with the additional work, change orders, in a logical and timely succession, the results, in most cases, will be much more positive and the chances of actually getting paid, that much better!
6.) Inability to secure FINAL PAYMENT
The efforts to secure the final payment on almost every construction project is one of the most frustrating elements of project close out! Ask any contractor that question.
What can be done to ensure that final payment will be issued in a timely fashion?
a.) Consistent management of project payments throughout the project. It is the contractors responsibility to manage the payments by the owner throughout the entire project. If a consistent process is established throughout the project that has resulted in consistent and timely payments, the final payment should simply fit into this accepted procedure.
b.) Assurance that the punchlist has been completed. Review the webpage entitled ” How to complete a punchlist ” for some assistance with the management of the final punchlist on a project. For purposes of this discussion regarding the final payment, an incomplete punchlist, is one of the principal reasons the owner will use , to not process the final payment to the contractor. If this does occur, the identification of each element of the punchlist and an assigning of a value to each item, will allow the contractor to argue the value of the incomplete items. Without the assignment of value to each item, it is difficult for the contractor to convince the owner, that the entire final payment shouldn’t be withheld until the full punchlist is completed.
c.) Completion of all guarantee and warranty information and the proper management of this information to the appropriate parties. In most construction projects there are several pieces of equipment and standard warranty requirements that must be processed by the contractor prior to final completion. These requirements must be fully managed and submitted to obtain approval by the owner.
d.) Final as-built documentation. Again, in most construction projects there is a requirement for the contractor to submit to the owner, a full as-built set of documents for their record. An as-built set of documents in most circumstances is the marking of the contract documents with any deviations in plumbing, underground, electrical, etc. that might have occurred during the construction process. This as-built set of documents is intended to allow the owner full disclosure regarding where the actual mechanical and electrical piping, conduit, ductwork, etc. is located, if the locations changed from the actual contract documentation.
e.) Owner’s manual. In most projects there is a requirement, that the owner receive from the contractor a book of instructions, warranty certificates, parts list, etc., for all the equipment and systems that have been installed as part of the construction project. The intent, is to provide all the maintenance information to the owner, for upkeep of the equipment as well as the proper operation of the equipment.
f.) On site instructions to owner’s maintenance department. On larger projects, there is usually a requirement for a general tour of the facility as well as a general instructional seminar presented by the contractor, or subcontractors to the owner’s maintenance department or maintenance person.
g.) Final certifications. On many projects there is a requirement that all contractors on the project submit final certifications indicating that they have performed the work in accordance with the plans and the specifications. This is a final certification by the contractor identifying their assurance that the work was performed correctly, and in accordance with the contract documents.
h.) Satisfaction of all liens. Final payment will not be issued until all final liens have been satisfied. If the contractor or subcontractor has had a lien placed on them, based upon the specific project, then all liens must be either bonded out, or satisfied. To bond a lien, is to take out a basic bond or insurance policy, that guarantees the money is available to satisfy the lien by the contractor or subcontractor.
i.) Satisfaction of all bonds. On projects involving situations that may have required a bond to be issued to a municipality or utility for landscaping, roadwork, etc., these bonds must be satisfied and closed out to allow the owner to submit final payment to the contractor. In many instances, a bond is required to ensure that certain elements of the project are completed, such as specific landscaping requirements or sidewalk improvements, etc. These bonds must be finalized prior to any expectation by the contractor of final payment on a project.
j.) Final lien waivers. A final lien waiver will be required from all subcontractors and suppliers, as well as the general contractor, to ensure that all payments to all parties have been made and properly acknowledged. No respectable owner will submit final payment to the contractor until they are assured that no additional payments to other parties are due and payable on the project.
k.) Final Change order management and agreement. All the final paperwork must be submitted by the contractors to the owner, inclusive of all additional work submissions. The owner will be very reluctant to offer final payment if the issue of additional work has not been resolved.
Even if the construction project has been properly managed and supervised, with the proper documentation presented to all parties, the issuance of the final payment is ALWAYS an adventure. The best advice that can be given to any contractor at the end of the project, is have patience! The final payment is not an easy task for even the best and most professional contractors. Make sure that all the final contractual documentation is in place, and continue to professionally document all final attempts at obtaining the final money.
GOOD LUCK ! / NO OWNER LIKES TO PART WITH THAT FINAL 10% !!
This discussion can go on and on because each project will present a new PITFALL that has not been experienced. This is the reason we are contractors, the excitement!
The bottom line for any contractor, is to record and document all issues on the construction project. The proper management and professional interaction with owners, architects, engineers and consultants will indicate your ability to conduct yourself in a professional and experienced manner. The use of software programs that will assist in the documentation of all issues, financial balancing sheets, procurement schedules, construction schedules, finalization of all paperwork, etc. will enhance your abilities to engage the owner in a reasonable and professional manner. Remain patient, remain vigilant, and continue to be consistent in change order presentation, payment processing, daily report consistency, etc. The key to success is, as we have already indicated!
DOCUMENT / DOCUMENT / DOCUMENT / DOCUMENT !!