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I Forge Iron

Who pays the price for being wrong?


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I've spent most of my working life in the construction industry and it's a rare day when everything goes to plan.  Mistakes, misunderstandings, or simple lack of thinking things through causes a whole lot of negotiation about what comes next.  Change orders can be immensely profitable, indeed many businesses depend on them to be profitable.  That being said, negotiations don't always land in your favor so it's important to understand what's at stake.

I've seen situations that escalated because one or more parties lost sight of the bigger picture.  For example, let's say the client is on a shoestring budget.  The design team didn't get paid to investigate existing conditions, so lots of surprises are popping up.  Further, let's say the client decided to purchase salvaged materials that turn out to be different from what they told the design team to include.

So far, it sounds like this is all clearly the client's fault, and they'll have to pay to remedy the situation.  

Let's say this client is desperate to open on time because they would otherwise miss out on peak revenue season that accounts for nearly all their annual revenue.  To protect themselves, the client required a payment and performance bond for everyone on the job and stipulated liquidated damages of $10,000 per day for being late.

The client is in a tough situation, so they're particularly concerned about overpaying on change orders.  This leads to squabbles that go on much longer than they should.  To be efficient and productive, the work at issue needs to happen before other tasks so the job doesn't progress like it should.  A lot of low-budget construction clients aren't very experienced.  They're not concerned with how this squabble is affecting the overall job because they have contract terms and bonds ensuring their deadline.

So who pays the price for being wrong?  In situations like this, the immediate answer depends on timing.  If the squabble drags on long enough, the client may call in the bonds to replace the contractors and get their project built.  The replacement contractors aren't going to be cheap because they're getting paid for by the bonding agency who can (and likely will) seize assets to settle the exorbitant tab. 

Now I'm not a lawyer, nor do I play one on TV so none of this should be misconstrued as legal advice.  I suppose it's possible that a contractor could win a case against the client, but that will take a lot of time and money.  Keep in mind that said legal battle would probably take place after you've had assets seized by your bonding agency which likely preclude you from conducting business anywhere else.

For most contractors, getting their bond invoked is an "extinction level event".  I've seen situations where a particularly malignant client drove the project into delays, then used the thread of invoking bonds to demand extreme discounts.  Over the years I've had several situations where it was considerably cheaper to pay for the clients mistake so we could avoid more costly problems.  That's something to consider the next time the client wants to change something on the project.

I've found that more contractors go out of business because of problems with a job they won, than from all the jobs they lost. 

 

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So with this information presented..     " What is your take on how to avoid these kinds of things? "

Do contractors have an insurance company to help with matters like this? 

Being that I specialized in hardware, gates, hand railings and such I used to be the last person called before the project came to completion.. This left little extra money from the client as it was usually and after thought and usually at that point they were always looking to scrimp though they wanted quality work.. 

How does one address this with budget restraints and still make a profit making the job worth doing at all? 

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JLP, That's an excellent question.  For starters, I would say that the single best approach is to avoid clients with low-budget jobs and high penalty contracts.  "Helping" a broke client is usually bad business.  If they can't/won't pay what you're worth, they can't/won't recognize the risk they're creating for you.  

Once you're already under contract it's just good policy to document absolutely anything that hinders workflow.  Generate timely and consistent reports that are shared with everyone involved.  If you're working for a GC, send a copy to the client or their representative as well.  Be circumspect about starting a premature "blame war", but don't shy away from accurate communication.  I've found that pictures do wonders for saying things diplomatically.  Sometimes, I'll put arrows and notes on the pictures to draw attention to the issue so that laymen can understand what's going on.

When you're asked to price change orders, put a deadline on the proposal.  If you can't hold the project deadline without a go-ahead answer in three days, give them two days to make a decision.  Wherever possible, avoid Friday deadlines because feckless clients and design teams will send a partial answer three hours after quitting time, then later claim they answered "that week".  If the change order work would exceed your remaining time on the job, write in a provision clearly stating how much additional time the change order work will add.  As your change order deadlines approach, send reminder emails to all parties the day before.  If a proposal deadline expires, send a follow-up email explicitly stating that.  If the client gives you a verbal approval, politely remind them that no work will proceed without a formal contract change.  This is the single most common cheat in the construction industry.  They "approve" change work off the record, then refuse to pay after the work is done.

If you're up against a stopping point, communicate that to everyone involved.  Take the schedule and work backwards to determine the last day you can get an answer and still make the deadline.  Inform all parties that they're encountering a day for day delay on the project deadline from that point forward.

Be sure to include all relevant documentation like the Request For Information (RFI), the day it was sent, etc.  Don't volunteer to manage other trades, but be responsive and cooperative with them.  Above all, be careful about things you don't know for certain.  I've had projects where a trade wasn't performing and the rumors going around were scandalous compared to the truth.

There are clients and Project Managers who like to "hide" whenever there's a problem.  They don't answer their phones or emails, but they do make sure that site supervisors are loudly yelling to "just get it done".  If they do actually communicate, they prefer to do so over their cell phone where you are the only witness to what was said.  Be particularly careful about what you say on the phone because it's fairly common practice to have you on speakerphone without telling you who else is listening.  Avoid giving any off the cuff prices because they'll be stripped of context and used in whatever way suits their interests.

After such calls, I email a quick re-cap of everything that was discussed with special emphasis on my understanding.  Where appropriate, I copy or blind copy the email to anyone who was mentioned in the discussion.  Again, remember that rumors aren't proof of anything.  Sometimes I'll ask the recipient to confirm my understanding of a particular issue.  If they later take a different position, I can re-send the email with "second request" appended to the title.

Some clients will quit dithering when they're aware that their behavior is being documented.  Others will become more hostile because they feel "rushed".  In those cases, I ask for a meeting and approach the problem differently.  A lot of construction contracting is set up so that subs "do what they're told".  Design teams tasked with solving the problem aren't suffering if the remedy proves too expensive.  They can always claim the contractors are ripping the client off.  I use the meeting to flip that relationship on it's head.  "What can you afford?" defines the available remedies without all the needless pricing exercises.

Listen to what people are saying.  More than once a "simple fix" wasn't as obvious as I originally thought.  Also, listen to what matters to the decision-makers.  If you get your answer and your change order, it doesn't matter if the Client thinks they "told you what for".  I'm paid to do work for money, not for correcting the Client about semantics.  A word to the wise here, there's a fine line between allowing a slight misunderstanding and lying by omission.  Don't do anything that wouldn't look good in court.

Along those same lines, we sometimes encounter situations where the dysfunction jeopardizes the job.  In those cases, we "make a deal" where necessary to get out of the jam and blackball those clients going forward.  

Hopefully that helps.

 

 

 

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