Ten Warning Signs A Project Is In Trouble and What To Do About It

17 Dec Ten Warning Signs A Project Is In Trouble and What To Do About It

Construction Industry has been
extremely active stretching the resources of the contractor and designer’s
staffs.  One common cause of project
disputes is that the industry attempts to put a “B” team on a project that
requires the “A” team.  This often
results in project difficulties or worse – disputes.  

The topic of this newsletter is the
most requested client handout and we are republishing for reference.  Over the years we have assembled these simple
keys to alert our clients and staff to recognize an issue before it becomes a
problem and affects the outcome of the Project. 

As an Owner, Developer, Designer
or Contractor, it is important to recognize the leading signs that a project is
in trouble. 

A project is in trouble when:

1. The excavation is 50% of the total project cost and the electrical work is for free.

Cash flow — the two words
that drive a contractor to perform.  At
the outset of a project, the contractor prepares a schedule of values from
which his progress payments are measured. 
The fact that the Owner pays the cost of the work less 10% for retainage
means the contractor will get less than his cost as reimbursement for his
progress.  The strategy is for the
contractor to “front end load” this payment schedule to off set the cash
shortfall. 

Several comments regarding the schedule of values:

Compare the schedule with
the estimator’s budget for the Project. 
The contractor’s schedule of values should closely align with the
estimate.  Watch areas such as concrete
work, sitework and mobilization fees. 
These may be overstated to generate the cash flow.  Plumbing, fire protection and electrical work
are normally understated.  Because the
line items within the schedule of values have been adjusted, never accept a
line item in the schedule of values for a credit on the Project.

Every Owner should be
concerned about timely payment by contractors/ designers to their
subcontractors/consultants.  Slow or
non-payment of a contractor by the Owner (or the contractor’s slow payments to
the subs) will result in delays to your project.  The Owner must establish prompt payment
procedures for his contractor. Many Owners also insist on prompt payment by the
contractor to the subcontractors.  The Owner
of a multi-use project in Georgia learned this lesson the hard way.  His architect failed to pay consultants on
time, and even though the Owner was aware of the problem, he took no steps to
protect himself. The architect went out of business and to complete his
project, the Owner had to pay the consultants the balance left on their contracts.  The original funds paid to the architect for
the consultants were never recovered. 
Double payment and delays are the last thing any Owner wants.  Simple use of lien waivers could have
protected the Owner from this catastrophe.

Pay applications that are repeatedly changed by the architect to accurately reflect the work performed is an early warning sign that the contractor may be having cash flow problems.  As the Owner, seek a meeting with the contractor to address the issue and insist on performance by the construction team.  As an Owner, assist in expediting payments. However, rarely is it in the Owners best interest to provide advance payments to the contractor for work not yet performed.

2. You find a sign in the contractor’s office that says “An RFI a day keeps the architect at bay.”

The RFI process was first
established as a simple method to convey information to the contractor that may
have been unclear or omitted on the drawings. 
In recent years, some contractors have abused this process.  The abuse takes on several forms.

Too many RFIs – This indicates several causes for concern.  The Owner should review the RFIs to determine if they could have been easily answered had the contractor reviewed the drawings.  The type of questions will indicate the level of understanding of the Project.  If the RFIs are unrealistic or repetitive, the contractor may have done a poor review of the documents or may be causing a level of involvement on the part of the Owner’s design team that keeps them from performing their normal functions.  The converse of this maybe the design team’s documents lack sufficient detail to complete the Project, or the scope of work has been poorly defined.  This will result in a significant amount of change orders.  The Owner must focus on this problem immediately and proactively resolve the change orders before they result in claims.

This indicates several causes for concern.  The Owner should review the RFIs to determine if they could have been easily answered had the contractor reviewed the drawings.  The type of questions will indicate the level of understanding of the Project.  If the RFIs are unrealistic or repetitive, the contractor may have done a poor review of the documents or may be causing a level of involvement on the part of the Owner’s design team that keeps them from performing their normal functions.  The converse of this maybe the design team’s documents lack sufficient detail to complete the Project, or the scope of work has been poorly defined.  This will result in a significant amount of change orders.  The Owner must focus on this problem immediately and proactively resolve the change orders before they result in claims.

Lack of RFIs – This could indicate that the contractor is not reviewing the drawings and may start a “flood” of questions late in the process.  Normally this approach shows a lack of planning on the contractor’s part.  The review and questions only when the information is needed tends to cause delays should the response time be longer than the time allowed.

The solution includes a
review of the RFI log.  Also review
actual RFIs for content.  Statements like
“This is the sorriest set of plans I have ever seen” do not reflect confidence
in the design team.  Let the architect
know that you will not entertain any claim for additional review of RFIs unless
notice is promptly given when the review actually becomes excessive.  When it is clear that you are receiving a
flurry of RFIs, your claims team should be brought in and an investigation
made.

3.   The workers using the porta-john must climb
over stored materials.

Site organization is a
simple early warning sign as to the potential success for your
construction.  Should an Owner find that
his site is disorganized, chances are that the superintendent’s approach to the
Project will also be disorganized.  

Construction is a dusty,
dirty, multi-facilitated operation. 
Material is delivered daily.  Tens
to hundreds of workers must also come together to complete their
assignments.  When the superintendent is disorganized,
he rarely understands his progress against the schedule and more importantly,
is destined to fail.  Our experience has
been when we find a disorganized site, we will also find the project paperwork
in the same disorganized fashion.

Warning signs include – a disorganized site or trailer; lack of procedures and meeting minutes; the superintendent is absent and/or personality conflicts between the Owner, architect or contractor’s personnel. 

The solution involves the Owner,
architect and the contractor’s project executive meeting to discuss the lines
of communication and concerns and establish the necessary corrective actions
and dates for them to be completed.

4.  The contractor asks you how to spell “CPM”.

Fail to Plan and You Plan to
Fail – Once the contract has been
awarded, the contractor’s first instinct is to start construction activity and
generate cash flow.  Yet the simple act
of planning and scheduling the work can save money and time.  Ninety percent (90%) of the value of the
construction schedule happens during the planning process.

The contractor scheduling their own work and that of the key subs is extremely important.  Several warning signs are:

• The CPM submittal is slow to be received.  This could indicate that the contractor might
  not be planning the work in-house or with a professional consultant.  A slow submittal may also indicate a slow buy
  out with a lack of subcontractor input into the schedule.

• Schedule updates – Are updates performed often?  The most common requirement is for monthly
  updates.  The Owner probably paid for them
  as a general conditions line item.  If
  you are not getting them, expect trouble ahead.

One solution is the development of a recovery
schedule.  This process requires the
contractor and his key subs to demonstrate how they intend to return to their
original schedule, no matter who may be at fault for the delay.  It will help keep the team focused on
completing the Project. 

Another solution is to determine the level of
subcontractor participation by the Owner participating in the
contractor/subcontractor meetings.  At
these meetings the Owner may get an understanding as to the level of
subcontractor commitment to the schedule.

Shop drawing and material submittals – A slow submittal process raises several concerns. 

• This could be a preliminary indication that the contractor has not
  completed the buy-out process.  As noted
  above, this may be a sign that the contractor may have a budget or staffing problem. 

• Multiple submittals raise a different warning.  Check the clarity of the design drawings or if the contractor and subcontractor are attempting to substitute materials or details.

5. The schedule shows the final carpet is installed
before the roofing subcontractor gets to the job site.

An experienced project manager once stated
“Construction is like putting together a series of cars on a train.  Each car has its place and when they are out
of order, things start to screw up”. 
This is a good tenet to follow!

Good, aggressive project
management ensures that subcontractors all push the trades ahead of them while
being pushed from those following.  This
keeps up the pace.  When there are gaps
between the trades, this usually signals a problem.

Most projects have a
sequence that, once started, is followed throughout the Project.  High-rise construction starts with the
foundation, then the structure.  The
exterior skin usually follows the structural frame by five to six floors.  A good management team will staff the crews
so that each trade will keep pace with the crew in front.  If the gap is expanded or closed, a problem
has occurred that should be investigated. 
By monitoring the sequences in the gaps, Owners will be able to detect
early warning signs, investigate the issues, and avoid problems before they
become critical.

6.   The architect asks, “what budget?”

Design is a project,
too!  Delivery of the design on schedule
and at the Owner’s budget is expected from the design team.  Some early warning signals that your design
team may be in trouble include:

Design schedules – Design schedules should be clearly presented in an organized format.  Designers should be able to clearly convey their plan as to how they will achieve their contract requirements.  Microsoft Project or some other scheduling program should be used.  The required design documents should be delivered to the architect at each milestone.  A suggested document list for each milestone is attached as an exhibit.

Numerous Drawing Changes – Denotes a bad set of drawings or poor thinking on the part of the design team.  Development teams sometimes try to expedite a project by forcing designers to provide bid documents before they are ready.  Many times, this necessitates another release of those documents after the bids have been received.  If the parties are clear that the job will be built on a fast track schedule, then only scope changes require additional dollars.  Refinements to plans do not involve increases in the contract amount.  If significant drawing changes are released after the bid (greater than 30% of total drawings), the Project may end up in litigation, or the Owner can be hit with numerous and/or costly change orders.

Denotes a bad set of drawings or poor thinking on the part of the design team.  Development teams sometimes try to expedite a project by forcing designers to provide bid documents before they are ready.  Many times, this necessitates another release of those documents after the bids have been received.  If the parties are clear that the job will be built on a fast track schedule, then only scope changes require additional dollars.  Refinements to plans do not involve increases in the contract amount.  If significant drawing changes are released after the bid (greater than 30% of total drawings), the Project may end up in litigation, or the Owner can be hit with numerous and/or costly change orders.

Designing to the Budget – Designers and Owners must reach an understanding of the balance between the budget and program.  The design team tends to include more than an Owner can afford.  This is often thought to be a method to test the budget validity.  The inverse is true when the Owner wants more than he can afford, and the design team does not tell him for fear of losing the commission. 

Another warning sign is when
the estimated construction cost constantly increases throughout the
design.  A solution is to be aware of who
is providing the cost information.  Challenge
their experience for providing this service. 
Many Owners accept a contractor as the construction cost consultant
because they do it for free.  Their
rationale is that because they are a contractor there should be a high
confidence in the accuracy of the original budget and each subsequent version.  Many contractors have the expertise for final
document estimates but fail miserably when dealing with concept or incomplete
documents.  Do a reference check on the
firm performing the cost model.  Whether
the firm is a contractor or a consultant, seek information from references as
to how the costs fared from the concept through final design. 

A third solution is that the
A/E contract should have a design to a budget clause. If the Project is over
budget, the architect should redesign for free or at least cost.  You will have their attention.

Design meetings – The design is a project, requiring all the project management expertise required of a contractor.  Communication between the design team members and the Owner should be documented.  Regularly scheduled meetings should be held and documented.  The team should have a design schedule with periodic updates reflecting where they are on the schedule and, if behind, how they intend to make up the time.  The Owner’s warning sign is when the major consultants are not at the design meetings.  As a solution, many Owners require the major consultants to attend the design coordination meetings and have a schedule that reflects when specialty consultants should be included in these meetings.  The Owner should attend the meetings and depending on the size of the Project his attendance should be bi-weekly or monthly.  The lack of attendance by key consultants at these meetings may be another warning sign of slow or non-payment to the consultants.

Job-site visits – When an architect is not coming to the job-site it may mean potential design team budget problems.

Code compliance – The design team should start this process early with code officials.  Code official approval can delay the design process, but more often, lack of a continuing dialog with the code officials leads to a delay in receiving final sign-off on the building and the certificate of occupancy.

7. The architect says, “Coordination of details will
be done on the shop drawings.”

The low design fee is not always the best
fee.  Too often Owners select design
professionals based on the lowest fee but end up paying more in the end.  A good professional design or engineering
firm must be able to creatively solve problems by exploring solutions that are
not only economical from the first cost perspective, but also for ongoing
maintenance.  A design firm’s best
solution is not always the first choice of solutions.  Exploring all the alternatives can avoid
costly mistakes.

An example of the lack of
creative problem solving happened with an Atlanta
parking deck project.  The structural
engineer used a cost-effective computer model to size the parking
structure.  However, no two beams in the
entire structure were alike.  These
unique beams weren’t discussed during the bid or negotiation process but became
painfully evident to the contractor when he realized he couldn’t reuse the
formwork.  The contractor went into
bankruptcy, causing the Owner long delays in completion and extensive interest
carrying charges.

Although the Owner originally got the least
expensive design firm, which in turn used the least costly method of design,
the Owner ultimately paid more in construction fees and interest costs than what
he saved in design fees.

A clear understanding of the scope of the Project is important. When the Owner and architect have a poor definition of what is required, it results in multiple design and program revisions.  An early warning sign is that the design team’s process for finalizing the drawings appears to be inadequate.  Indicators include multiple design revisions, revisions that do not meet the directions given at the last meeting, or significant changes in the design budget between submittals.  

Architects stamp shop
drawings after review with “approved”, “approved as noted”, “revise and
resubmit”, “rejected”, or similar words. 
Look for other notations on shop drawings which would manifest that the
architect is attempting to make contract changes by notations on shop
drawings.  This is not acceptable. 

8.   The contractor states “I’ll fix it when we
get to the punch list stage.”

The Owner should start
looking at major checks for quality early in the process.  Examples would be interim sign-off of
building officials such as code enforcement and close in inspections.  If the contractor becomes adverse to
correcting the problem during construction – wants to wait until later,
establish a process of dealing with the problems during the progress meetings.  Should this approach not work, notify the
contractor by letter of the problem, and if necessary, withhold money from the
pay request until the contractor takes corrective action.  To avoid litigation, it is important to have
the Owner/architect in agreement on any payment withholding issue.

9.   The
contractor says he will finalize the GMAX when he believes the drawings are
done.

Low-bid contractors, coming in under all other bidders by more than 3% to 5%, need to be investigated completely and offered the option to walk away without penalty.  Remember the saying, “The low bidder is the one who made the most omissions in the proposal.”  The temptation to accept a significantly lower bid won’t save money.  The Owner who succumbs to this temptation will end up paying the difference in supervision, change orders, or worse — litigation.

Often you will hear that a contractor is
taking work at cost.  A contractor will
seek to make a fee (even after taking it “at cost”) by claims or
otherwise.  All Owners should ensure that
their contractor makes a fair return that will vary with the risk involved.  Taking a project at cost leaves no room for
error.  The Owner carries the greatest
risk and will ultimately pay the price through supervision, change orders,
delays, or completion costs when the original contractor is unable to complete
the Project on time and on budget.

An often-overlooked warning
indicator is back charges accumulated by the contractor towards the
subcontractors.  Owners should obtain a
copy of the schedule of back charges between the contractor and the
subcontractors.  If there is a
significant amount, then there may be a problem with pay, schedule, or
potentially a closeout issue.  This is a
great source of information and will provide an insight as to what is going on
below the surface.  For GMAX contracts,
this listing should be part of the open book philosophy.  When a lump sum contract is used, obtaining
the listing may be a little more difficult.

10. The
contractor starts sending delay claims the first month of the project.

When a contractor is slow to
obtain building permits this may be an indication of a lack of organization or
subcontractor buyout problems.  The Owner
should immediately investigate these questions to confirm the reasons and deal
with the issue. 

Claims can take on many
forms.  They can range from simple
requests for compensation to the contract to several volume claim submittals,
or anything in between.  It is better to
be an Owner who aggressively pursues the resolution of changes in design and
construction.  Open change order files
are like individual bottomless pits attracting surplus costs, schedule delays,
or any other conceivable problems. 
Owners who consider the delay approach to settlement of change orders
will pay a greater price for changes than if they had solved each
item as it came up.