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Construction is messy

The typical way to build buildings is through a design-bid-build approach. The way this works is that you first design stuff and create drawings. You then ask people to price the stuff that you have drawn. And then you proceed to build what is on the drawings and what has been priced.

There are a number of possible risks with this approach. For one, the design/drawing phase is sometimes/often done in isolation without a lot of feedback from the contractor and/or subcontractors. So you might be designing and drawing things that aren’t all that feasible or constructible. Pre-construction involvement helps address this.

Another risk is that you’re buying what is on the drawings. So if the drawings suck or aren’t properly coordinated, then you are likely opening yourself up to a barrage of change orders and lots of additional costs.

In theory, it all sounds fine. Here are my drawings and specifications. Give me a price. And then let’s build. But as many or most of you will know, it’s generally never that simple or easy. Though it will, of course, depend on the type and complexity of the project.

Another consideration is the kind of contract you enter with your constructor. Is it a cost-plus contract, where the constructor simply charges a percentage on top of whatever the costs end up being, or is it some kind of lump sum or guaranteed maximum price (GMP) contract?

While I was in architecture school I decided to take a class on construction delivery methods. The instructor was, in my mind, your quintessential construction person. He was built like a brick shithouse and he never minced words. He also had a voice that sounded like a subwoofer.

I wouldn’t say I’m an expert, but I do remember him hammering home two points. One, GMP actually stands for guaranteed minimum price. This is forever imprinted in my mind. You’re never going to pay less and you’re almost certainly not going to pay the “maximum” number. You will end up getting change ordered and paying more.

Two, lump sum and at-risk contracts create a very different relationship between owner/developer and constructor. In his words, it is adversarial.

Because if I’m a constructor and I’ve promised a specific number, I’m likely going to do a few things. I am going to inflate the numbers to make sure my profit margin is protected throughout the project. And if my profit margin gets squeezed, which it likely will, I’m going to look for other ways to make money.

Personally, I side towards cost-plus and construction management arrangements. I don’t want an adversarial relationship. I want a partnership where there’s as much alignment as possible around a common set of project goals. Let’s ride or die together.

Similarly, when it comes to the actual procurement and delivery methods, I find that we are often using more integrated approaches as opposed to cut and dry design-bid-build approaches. You want the competitive pricing that comes with bidding, but you also want collaboration. It’s about striking that right balance.

The construction process is a messy one. These are just some of my thoughts this morning. If any of you have any insights, I would, of course, welcome them in the comment section below.

3 Comments

  1. Then, of course, comes the “input” from community boards, politicians, activist groups, zoning bodies, etc. etc. Especially in dense urban areas like NYC (and probably Toronto), this can derail even the most high-performing development.

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  2. Anthony

    Long time reader, first time commenter. I’m hearing you and I tend to agree with a lot of what you are saying however while I would also advocate for a partnership and collaborative approach is cost-plus the best approach? My question is – how do you protect against the risk of having your construction cost inflated by a contractor taking you for a ride (inflating ‘at cost’ prices to increase their margin)? Some claims will be legitimate or course, but I dare say others will be a ‘Hail Mary’.

    Of course you can have a quantity surveyor on board to assess and verify all claims but if you are disputing and reducing a contractor’s claims often enough you may find yourself quickly losing the collaborative partnership you yearned for. It’s a real balancing act for sure but I’m of the view that lump-sums have their place in the world as they insure against complacency and keep builders on their A-Game. I offer this devil’s advocate view from the builder’s side, having worked in the construction industry for the last 6-7 years after finishing architecture school.

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  3. Also a consistent reader and follower. Keep up the good work. I understand and appreciate your thoughts.

    Construction CAN be messy, but that’s not always a forgone conclusion. I believe there to be an inherent bias where real estate people tend to keep construction people far away, and don’t involve them until it’s necessary. We believe the biggest value construction practitioners bring is when they are involved at the project outset, even at the acquisition & due diligence stage. That’s what we advocate at Cavalieri & Associates. Have everyone at the table, even in an ex-officio capacity: development, architect, consultants, project manager, property manager, etc.

    In recent years, we have been favoring the CCDC-5B Construction Management approach for the reasons you suggest. It’s absolutely a more collaborative approach to construction.

    Contractors get the blame a lot, but relationships are two-sided. As owners, one has to set up a project for success. If you choose the CM approach, it says something about how you’d like to accomplish your goals. Contractors will act accordingly.

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