Optimizing relationships with the general contractors

GLOBAL REPORT – Building a successful construction project requires effective collaboration and communication between various project stakeholders. Preparation for success should occur at the earliest possible time, while there is ample ability to negotiate, review, and craft solutions which will help all parties work effectively towards the completion.

Engage a contractor early

The entire construction industry is experiencing tremendous cost pressures due to labor availability and supply chain disruptions. Managing a project budget from initial underwriting to a ready-to-sign construction agreement can be extremely challenging for many real estate developers.

Engaging a contractor early in the development process while various design decisions and options are being considered can majorly benefit owners in controlling construction cost increases. Utilizing the preconstruction services of a contractor and offering them a seat at the table to provide constructability and budget feedback can greatly reduce the chances for cost surprises or design rework.

Additionally, the institutional project knowledge gained by being involved throughout the design process allows contractors to provide a comprehensive final cost proposal than if they were only engaged in a more traditional bid process. In today’s environment, construction costs are more unpredictable than ever and managing this risk early with key construction partners is critical to achieving success and keeping project costs aligned with budgets.

Construction agreements are for everyone

It is important to recognize that while a construction agreement is a serious legal document, it is equally importantly as a business document. For most construction projects, the debates to be found on a construction project will not be negotiated by lawyers in a courtroom, but by architects, contractors, and owners inside of a construction trailer.

It is not uncommon to find areas of many agreements which have fully satisfied all legal considerations, but in practice create an impossible process or obligation for the contractor, owner, or architect to comply with. During the negotiation of any construction agreement, make certain that each major deal point has discussions based on possible scenarios and conflicts that could arise later. To the extent possible, it is preferable to eliminate ambiguity and provide simple, clear, and easy-to-understand language.

Don’t value engineer general conditions

Every development manager seeks to find the most competitive cost, especially when price escalations are being felt in every budget line item. However, ensuring that a contractor has the proper team in place to manage the daily complexities of commercial construction is one cost area that should remain off the chopping block.

Take the time to review with counsel the major risks that are shifted between owner and contractor and ensure that the contractor fully understands those differences, even when utilizing common construction industry agreement templates.

Brent Hardy

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General Conditions — the cost team members are allocated within a contractor’s proposal — is one area that should be reviewed to ensure the right quantity and type of personnel are being proposed. Development managers should review the contractor’s proposed team structure to consider whether those personnel are dedicated to the project or are a shared resource, general experience levels, and if the team members have worked together previously to successfully deliver similar types of projects. Great teams achieve great results. And investing precious budget resources into General Conditions is one successful strategy that will always result in better outcomes.

What is a GMP?

Commercial construction agreements are complex documents which are critically important to properly allocate risks and obligations between the owner and contractor. Unfortunately, many CRE professionals do not fully appreciate the major differences and risks between the common types of construction agreements.

No type of agreement is more misunderstood than the Guaranteed Maximum Price (GMP) contract. GMP agreements tend to have a much greater amount of complexity than other forms of agreements, which can result in a large gap of expectations between owner and contractor. Many of these pain points will only show up once the project is well into construction, and contractual roles and responsibilities have already been mandated.

The important lesson for owners – take the time to review with counsel the major risks that are shifted between owner and contractor and ensure that the contractor fully understands those differences, even when utilizing common construction industry agreement templates.

Know the jargon

All construction agreements define a role for an owner representative who is responsible for providing key decisions and direction during construction. Unfortunately, those roles are sometimes assigned to personnel who do not possess any technical design, construction education or work experience.

Most commercial construction projects are administered by agreements which are built around AEC industry norms and process that can often be lost in translation when attempting to simplify or explain to non-experts.

Most contractors will have three to five times the personnel dedicated to a specific construction project than the owner. The owner needs to have a proper advocate with the technical background and knowledge to parse the flood of information quickly and effectively, making critical decisions that are in the best interest of the owner to keep the project on track.

The “devil is in the details” and allowing the project team to work through complex technical issues without the need for simplification creates more opportunities to properly identify and resolve potential project risks, ensuring that the owner correctly understands those risks and can make the best business decisions.

When to pull the plug

One of the toughest decisions an owner can make is to terminate a non-performing contractor.

Every construction project begins with optimism and confidence. The cold reality is that some contractors, despite their best intentions, are unable to fulfill promises, resulting in escalating costs, missed schedule deadlines, and poor quality control. These failures can be attributed to any variety of root causes, but ultimately result in a pattern where results continue to erode over time without any sign of improvement or recovery.

These failures are also commonly presented with continued lack of accountability and excuses by the contractor. Every effort should be made to allow a contractor to be successful, but not waiting to change a failing contractor is equally important. Most owners who have had the unfortunate experience of having to terminate a contractor will agree that they wish they had done so sooner.

Optimizing the owner-contractor relationship is the cornerstone of a successful project. In embracing strategies and fostering open communication, both parties can forge a strong alliance that not only ensures the seamless execution of projects but also paves the way for collaborative success in the dynamic world of construction.

Contributed by Brent Hardy, AIA, ISHC, president, The Hardy Group, Atlanta, Georgia

The opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.