LESSONS LEARNED FROM 2011

By: David L. Simmons

I recently participated on an industry panel at the Indiana Construction Management Summit sponsored by ABC Indiana and Somerset CPAs. We heard from economist Anirban Basu and other panel members on what happened to the construction industry during 2011 and what we should expect for 2012. Suffice it to say that the news from 2011 was rather gloomy and the outlook for construction during 2012 remains muted.

One message came through loud and clear: Construction companies need to implement best practices in order to survive a market plagued with thin margins, stiff competition, and slow pay cycles. Here are some suggestions that could add value to your business during the coming year:

1. Foster a Collaborative Project Team—Low margins mean low margins for error as well. A contentious project environment does not encourage efficiency, and often makes the construction process more expensive for everyone. Avoid draconian contract terms and adversarial actions that impede project relationships.

2. Confirm Project Funding—Project collaboration includes assurances of project funding, starting with the owner and continuing downstream. Red flags should be raised when a party refuses unreasonably to share information about the funding of the project or its ability to perform the contract.

3. Prequalification of Subcontractors—Contractors should continue to emphasize the prequalification of its subcontractors, and subcontractors should request assurances of financial ability from their contractors. Prequalification remains an important issue since subcontractor defaults are expected to increase during the coming year.

4. Low Bid is Often Not Best—Contractors need to consider pricing as just one component of many in determining the value a subcontractor brings to the project. Subcontractor default is projected to be a continuing problem, and a low bid that originally seemed reliable may turn out to be much more costly than a reasonably priced bid from a financially secure subcontractor.

5. Experience and Expertise—Contracting parties need to thoroughly investigate the expertise and experience of their counterparts. Unsophisticated owners can cause significant problems during construction, while contractors and subcontractors operating outside their customary expertise may not be able to perform the work as efficiently as planned.

6. Contract Terms—Owners and their consultants frequently try to minimize the cost of contract administration by using contract terms that were prepared for an entirely different project than the one being built. Contractors should limit onerous and inappropriate contract provisions that increase the risk of performance and reduce profitability. This is also true of provisions that are incorporated into a contract by reference without being adequately reviewed.

7. Unfamiliar Work—Some contractors have adapted to difficult times by expanding into unfamiliar types of work, different project delivery systems, larger jobs, and new geographic areas. This diversification into unfamiliar areas along with tighter margins often creates the perfect storm for change order and scheduling disputes.

8. Systems and Controls—Contractors and subcontractors need to pay special attention to the requirements of their contracts regarding payment, change orders, delays, and defaults. The time limitations for providing notice and asserting payment remedies should be carefully reviewed and calendared.

9. Materials Escalation—Contractors and subcontractors will likely continue to face severe and rapid increases in construction materials during 2012. The challenges created by volatile material costs have been magnified as projects are bid with thinner margins. Contractors and subcontractors should try to negotiate material escalation provisions that allocate the risk of escalation in material costs, since the courts generally enforce the contracts as they are written.