Commercial Investment Real Estate March/April 2019 | Page 32

But there are ways to reduce risks. Any job will have its
share of difficulties. Not all of them will be foreseeable, and
many will be unpreventable. While full-scale litigation is
not inevitable, some of the most expensive cases have started
with a small problem that escalated due to mismanagement.
A variety of factors can cause a job to break down. The
most common are contractors being overextended, inade-
quate job administration by architects, and poorly organized
owners. An owner can’t do much about the contractor or
architectural issues beyond ordinary due diligence at the
time of hiring. However, even the most diligent of processes
ultimately cannot prevent breakdowns by the contractor
(including related subcontractors) or by the architects and
engineers. But you can prepare and be suitably organized.
Identifying the Problem
The first step is understanding the source of your prob-
lem. The truth is, an overextended contractor or a major
subcontractor can derail a project. Overextension of con-
tractors is not tied to how many projects they currently
are working; it is a function of cash flow. Contractors and
their subs typically are thinly capitalized. A simple adverse
change in materials pricing can be fatal to a subcontractor
operating at 5 to 10 percent margins.
How you handle the problem will depend on the specifics
of the situation. But, as a rule of thumb, structural inflex-
ibility is not favorable. Risks usually are passed down the
food chain because the party with the most leverage can
pass the risks of adverse circumstances to the party with
less. But there’s a problem: The party that ends up bearing
the burden is often the one that can least afford it.
For example, say there is a price change in materials that
would be inconvenient for the owner. It can be the death
knell to the drywall subcontractor. This mushrooms into
a major problem for the owner if the sub fails and the gen-
eral must find a replacement, which always costs more and
tends to cause delays. Each, in turn, can put the general
under stress. If the general fails, then the owner must find
Whether you build
subdivisions, luxury high-rises,
or shopping centers, your
two most impactful tools are
the contract forms at your
disposal and your sales force.
30
March | April 2019
a replacement, resulting in higher costs and likely more
delays. For many owners, delays in completion translate
into lost revenue from tenants.
In most cases like this, the general contractors and
their subs bear the risk of material price changes. Struc-
tural inflexibility by the owner on that point could cause
a domino effect of failures. To steadfastly maintain pric-
ing, per the contracts, the sub is bound by its bid and must
bear the costs. But that bid does not bind any replacement.
Likewise, the general is stuck with its bid even if it replaces
a sub at a higher price. But again, any replacement is not.
What started as a minor price issue has ballooned into a
significant cost to the owner. Having surety bonds at one
tier or another may provide some cover. On the other hand,
the owner may just wind up litigating with a well-funded
surety instead.
Then consider project administration — a task most
design professionals offer as part of their services. Use them.
In one example, litigation resulted over a simple structure
— so simple that it didn’t require design professionals in an
oversight role. To save on costs, the owner nixed them. A
year or so after the building was completed, cracks devel-
oped. The design professional would have discovered the
error (no rebar in the block walls) by simply looking down
into the cells. The cost of remediation was almost equal to
the cost of building. Litigation costs over who was respon-
sible were even more. So much for the owner saving himself
money by not having monthly site visits by the architect.
Owners should not hand out money happily to any and
all contractors and designers. The point is to look at each
situation as what it is. There is a huge difference between a
sudden adverse market change and a sub that is simply not
doing its job in a timely manner. Likewise, most jobs do
not require daily oversight; monthly reviews may do. The
goal is to avoid decisions based on stubbornness or to save
a marginal sum (“marginal” being measured by the overall
cost of the job).
Avoiding Disaster
Whether you build subdivisions, luxury high-rises, or
shopping centers, your two most impactful tools are the
contract forms at your disposal and your sales force. The
first may seem obvious, the second not so much. But either
can turn a small inconvenience into a mega-disaster on
your project.
Some owners have a standard contract they use with
every contractor on every project, while others are happy to
use whatever their architect pulls off the shelf. While both
approaches are understandable — and in many instances
perfectly fine — both can lead to trouble. Developing a
new contract unique to each project also can lead to woe.
It is safer to use the American Institute of Architects form
that is most suitable under the particular circumstances of
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