Change Order. Perhaps the two dirtiest words in commercial real estate and construction. Everyone involved with a construction project wants to avoid them.
- Owners don’t want the additional costs added to already stressed construction budgets
- Architects don’t want to be seen as the cause of the additional costs
- Most General Contractors, contrary to popular belief, don’t want them because of the high administrative costs, the delays they cause, and the bad feelings they create.
While some change orders are inevitable, they can be significantly reduced by taking actions in advance. Change orders have different causes so they need to be combated in different ways. Owners and their teams can totally avoid or certainly minimize the impacts of most change orders.
The “I Wish I Had X-Ray Vision Change Order”
If you can’t see it, measure it or test it, it’s a mystery. In new construction this is limited to what happens from the ground down. In renovation, alteration or adaptive re-use projects, information or access is often limited and assumptions must be made when pricing work. If those assumptions turn out to be incorrect, a change order ensues. Try these steps to help take the mystery out of existing conditions.
- Find and Make Available Original Construction Documents. The original construction documents provide a wealth of information. The time spent locating them is very often well worth it.
- Perform Exploratory. Ensure your design or construction team is given the time and resources to expose hidden areas, perform demolition as needed, record video of pipes and difficult to access cavities, and take multiple soil borings. Eliminate as much mystery as possible.
- Test and Inspect. When applicable, ensure your project team is testing existing materials, inspecting their condition and that they know up front what will need to be modified or replaced.
90% or more of hidden condition change orders can be eliminated by identifying the work before contract values are established. Sometimes this requires early engagement of the contractor and collaboration between contractor and design team. It is a matter of pay now…or pay more later.
The “This Is Hardly Up For Debate” Change Order
The design team and contractor are not the only players in a project. There are multiple authorities that have jurisdiction (AHJs) over construction work and their decisions are often final, can have a significant impact and sometimes cause change orders. Inspectors, utility companies, health departments, and accrediting agencies can each unilaterally issue a directive or require a process that was unexpected. The key to eliminating or minimizing this type of change is to have the right design and construction team that will expect the unexpected and be proactive when something arises. Try these to eliminate surprise decisions from AHJs impacting the project.
- Hire the Right Team. There is no substitute for experience in your design team and contractor when it comes to knowing the way AHJ third parties typically act and how to react. Experience in the work sector and the jurisdiction is absolutely critical.
- Get Some Face Time. While not always the easiest thing to accomplish, with the right approach most third parties can and will meet and review plans and provide early feedback. Make sure your GC makes this a priority. Focus up front can save time and money later.
- Address Issues Early. Adopt a posture of bringing issues or concerns to the attention of the AHJ as soon as they are identified, instead of hoping they won’t have issue, or that they will entirely overlook it. There is only a fractional chance your team will be bringing up something that might not raise its head eventually and the proactive approach typically promotes goodwill and respect that positively influences the outcome.
The “That’s Not What I Expected” Change Order
Many change orders are initiated by owners who are either surprised by the information documented in construction drawings long after they are issued, or simply change their minds about the desired final product. At times this is understandable. Organizations requiring construction are dynamic. It makes sense that needs can change between the time drawings are created and actual construction occurs, so some changes are unavoidable. Many however are the result of a failure to fully understand what is being built or a failure to think through needs thoroughly and communicate them to the rest of the team. Try these to minimize the disconnect between what is desired and what is delivered.
- Don’t Shortcut at the Front End. Initial concept plans are developed with minimal information. Sometimes the process to advance them to final construction documents can be rushed with not enough time spent reviewing each and every aspect of the work. Instead, carve out the time to review as drawings are developed and less time and money will be spent correcting errors. Make sure all of your goals and requirements for the project are known so others on the team can help you achieve them.
- Get Guidance. Owners shouldn’t be expected to understand construction drawings any more than a lay person should know how to read an MRI. Either the design team or GC needs to be engaged to “walk” you through the drawings, explain, interpret and do whatever it takes to foster an understanding. As the owner, you need to provide the focused time.
- Make Regular Site Visits. Construction drawings are two dimensional and our world has three dimensions. Some things are difficult to see on paper but come to life in person. By regularly visiting the site and observing progress, expectations can be verified, and adjustments can be made before it is too late. Walk the project with the site supervisor or project manager and have them point out items and explain what is going on.
Every participant is better off when change orders are avoided. It is the responsibility of the entire team to take a proactive approach and utilize suggestions like those offered to promote success.
Today’s commercial construction and real estate industry has been significantly changed by the post-pandemic economic realities. These realities require thoughtful new approaches to ensure success. Stronger partnerships between owners and their GCs are at the center of an important market shift occurring to manage this new commercial real estate reality.
- Fluctuating Costs and Inflation – Historically, construction proposal costs were routinely held for 30, 60 even 90 days. Today, certain components of pricing are stale the day after presented. This has been magnified by inflation driven by supply shortages and high demand which are driving construction prices to record highs. The price changes are large and unpredictable.
- Lead-times for Basic Materials are Unpredictable – Lead times on materials (the time it takes to procure and arrive at the site) has always been an issue for specialty items incorporated into projects. Now even basic commodity items such as insulation, drywall and fasteners are problematic.
- Commercial Owners’ Focus on the Lowest Rent Costs is Increasing – Commercial rents, particularly in the office and retail sectors are not keeping pace with the cost of construction which demands owners drive to the lowest possible price. Increasing interest rates are placing further pressure on owners.
- Construction Lenders Need Greater Contingencies – In reaction to price uncertainty lenders are looking for larger contingencies in contracts calculated into their numbers.
Owners’ clearly need the lowest possible construction prices to make their numbers work. Conventional wisdom seems to suggest that creating hard bidding competition can reduce prices, but the best approach to success is to engage a GC partner upfront. Partnering much earlier in the cycle, with a qualified contractor that provides enhanced services and adds value, while making a fair and reasonable profit is critical to succeeding in this difficult climate.
How Partnership-Focused General Contractors Meet these New Challenges:
Not all GCs are focused on the success of the project and the owner. Those that are take a partnership approach and meet the market challenges with extra effort and attention. For example:
- Staying informed on pricing trends on key construction components by establishing ties to industry indicators, manufacturers and suppliers rather than waiting until a new problem presents itself.
- Ramping up the analysis of even the most basic materials early in the pricing process so that realistic and reliable schedules can be developed rather than providing schedules that sound great but are impossible to meet.
- Properly identifying current price increase risks and trends and proposing purchasing strategies to ensure best value rather than simply waiting for the actual materials’ price and passing it onto the client.
- Timing the start of projects to ensure that the construction process works much like manufacturing’s “Just in Time” approach, rather than allowing job sites to sit idle while materials are on order.
These new strategies place great stress on GC firms not accustomed to delivering these value-added services. At KasCon, we have always believed in careful planning, partnership and creative problem solving and have seamlessly added these services to our standard offerings to better serve our clients.
The world has changed and with it, so has the commercial real estate and construction industry. This new reality may be with us for a long time, possibly indefinitely. With these changes, success will depend upon innovating and reacting to the new challenges in a proactive and thoughtful manner.
Today’s construction environment is nothing short of crazy. Inflation, supply chain problems, labor shortages. you name it. But work still needs to go on and projects continue to move forward at a fever pace. Figuring out what a project will ultimately cost and how long it will take to design and construct has always been essential to clients during the early concept stages. In today’s world, this is much more difficult, and not all contractors will take the time to do it right. Clients looking to hire a general contractor should use this initial process to evaluate their potential partner for overall approach, attention to detail and willingness to tell it like it is, even if it may be hard to hear.
Projecting a Realistic Cost
No one wants their project’s cost to be more than their budget will allow. An experienced contractor can take limited conceptual information available in a preliminary stage and use their knowledge to read between the lines and extrapolate to the eventual project. The issue is most often not what is on the concept drawing or space plan, it’s what isn’t on the drawing. Owners should be able to rely on a general contractor’s expertise to think beyond what’s on paper, look for the pitfalls, price accordingly and then transparently share that information. Here are a few reasons to start with a real, well thought out value.
- Inflated values that cover any and every contingency can kill a deal unnecessarily. Beware of round number $/sf estimates that show little or no thought.
- Lenders are wary of price creep. They want to see detailed estimates and contractor credentials to build confidence and prevent the need to add large contingencies of their own. With interest rates rising, this issue is compounded.
- The amount and timing of cash outlay has become more critical. Long lead-times mean purchasing as early as possible, sometimes spending well in advance of the project’s physical start to assure materials are on hand when needed.
- Change orders are no one’s friend. A realistic price helps keep unexpected change orders in check.
Determining a Realistic Timeline
The “how much” is only half the battle. When will it start and how long will it take are key factors that owners need their contractors to get right. As with price, getting into the details and having experience with all of the project elements is essential to making accurate timing predictions. Everything is taking longer, from permitting to inspections to material acquisition and labor. No one wants to hear how long it is taking to execute work these days, but banking on an unrealistic date has some negative consequences. Here are a few reasons to start with the right schedule.
- The construction delivery schedule has a lot of other elements that wrap around it: moving; IT; product stocking; and other transitions that need to take place in conjunction with construction completion.
- In rental situations many hold-over provisions can be punitive. These can often be negotiated in advance to the benefit of both landlord and tenant.
- Knowing when a revenue stream will start is incredibly vital to any new venture or expansion.
- Getting timing accurate will help owners manage the expectation so third parties like lenders, their clients and suppliers have a realistic expectation from the start.
Will your contractor take the time to come up with realistic answers or tell you what you want to hear? We believe that being informed and transparent, even if it includes bad news, is the best approach. This is a time for contractors to be fully disclosing information to clients, making them aware of the uncertainties and working together to solve the problems. This fits well with KasCon’s approach as it’s always the way we behave. We would rather lose an opportunity than win it and be unable to meet expectations. In our experience the successful client wants to hear it all, good, bad or indifferent and the relationship now more than ever requires us to be in the same boat rowing in the same direction.