Delaying a job makes it more expensive

[rockstar.esq]

At least once every year, I'll have a situation where one or more of the jobs will encounter a delay at the start which leads to a pile up of manpower with nowhere to go.  I'm very careful about what I bid to ensure that we can always deliver the necessary manpower and resources to honor our commitments to our clients.   This leaves few options on how to proceed.  Layoffs are a non-starter because our people are our product.  If I want the best work from them, I have to offer them security and opportunity to earn.

In the rare case that a client is forthcoming and accurate about their actual start date, I can sometimes find a quick-hitter project to fill in the gaps.  That's seldom the case, so surplus manpower ends up going to whatever ongoing jobs we have, which in turn makes those jobs less profitable.

Every month brings increases in material prices, and lead times on everything we use.  To varying degrees, clients have accepted the additional material costs associated which result from delaying the project start.

It's often significantly harder to convince clients and the contractors they hire, that delaying the start (or end) of a job has any punitive effect on their subcontractors.  

Here's a brief list of their most common arguments.

The scope of work did not change. This one get's repeated in many different ways.

There is no change to the number of man-hours required to build the job.

The contractor/client, believes overhead is a static figure or a percentage of the total contract value which was included in the subcontractor bid.

Taking these in turn, I'd like to suggest some useful responses to argue your case.  None of this should be construed as legal advice as there is no substitute for a qualified legal representative when they're needed.  My intent here, is to share some arguments and strategies I've found to be successful for negotiating acceptable terms.

OK, so the scope of work didn't change.  While it's true that the delay didn't alter the plans, or specifications, it's super-important to recognize that the "Scope of work" section of a contract often does include a reference to the project schedule.  Even if it doesn't, there's usually a "changes to the contract" section which expressly defines contract changes in terms of time, quality, and cost.  Simply put, if the contract has a schedule, any change to that schedule, should result in a change order to the contract.  

Following on this, is the claim that man-hours didn't change on the job.  This argument is often tied to the first claim that nothing in the project scope changed by the delay.  I suppose their assumption is that labor costs are exclusively driven by the man-hours to build the job.  The reality is that wages must rise in competitive labor markets.  This means that the labor rate is rising as a function of time.  When bidding a job, I have to account for the wage increases we expect to incur through the duration of the project.  When a project is delayed in a competitive labor market, the labor rate for the remainder of the work is higher than the bid day labor rate.  

Next we get to overhead costs.  It's here that we typically run into one of the most consistently stupid contract practices.  Many to most construction contracts will have a "changes to the contract" section where they stipulate the maximum allowed percentages of overhead and profit for change orders.  There are some variations, but the most common are 10% overhead, and 5% profit.  Some, but certainly not all, contracts will stipulate that the profit percentage may not be applied to overhead.

Either way, there's this incredibly stupid article of faith that every business enterprise magically exists in a situation where all their overhead costs are perfectly paid for by applying 10% to their job costs.  This is not true, it's never been true, it's completely stupid and should never under any circumstances be done.

The harsh reality for anyone with even a passing familiarity of how rent, insurance, utilities, etc. are priced should know is that overhead is a function of time, and overhead costs will accrue regardless of the company revenue.  Your rent will be due regardless of whether you're working or not.  

If a job runs one month longer, you'll have to pay one more month of overhead.  Let's simplify it to just rent.  Does 10% of whatever they're letting you charge for equal your rent?  Sometimes yes, sometimes no.  Your overhead is a (mostly) fixed cost which accrues by time.  Anyone claiming otherwise is uninformed or dishonest.

It's really important to separate overhead from what is commonly called "General Conditions".  Greatly simplified, "General Conditions" are direct job billables that aren't related to labor or material actually building stuff.  Management, accounting, etc. will fall under General Conditions.  You can often apply stuff that goes along with a manager, like their car, fuel, phone, office supplies, etc. but only to the extent that those things are inseparable from the job.  If the manager is handling several jobs, these figures must be factored accordingly.

Beyond all of this, a project delay denies the subcontractor an opportunity to pursue other profitable opportunities.  This is known as an "opportunity cost".  Opportunity costs can be mitigated in situations where the client/contractor accurately communicate the delay in a timely enough fashion to permit subcontractors to pursue replacement work.  

With all of this being said, I've found a few key phrases are uniquely helpful to negotiation.  

Time is money.  Anything that takes longer, costs more money.

All actions have consequences, and there are some actions which cannot be undone. 

Virtually all economic propositions are subject to diminishing returns.  You can't always dig your way out of a hole with a bigger shovel.

Actual labor cost is driven by time and rate.

Overhead is driven by time, not percent of revenue.

 

In summation, I'd like offer some personal observations which might apply to a situation you find yourself in.

Developer clients are the most likely to delay the start of their projects.  In ordinary market conditions, it's pretty common for developers to break ground a full year after they last bid the job. From my desk, it sure looks like they're always paying "last year's  prices" for whatever they actually build.  If and when markets tighten up, developers are often the very first to "take their blocks and go home" in terms of canceling contracts.  

Charity clients are the second most likely to delay their jobs.  The odds of delay double and triple if the building involves kitchens or clinics respectively.   I believe this is due to the exponential increase in regulatory agency involvement, coupled with design teams who aren't paid well enough to coordinate their efforts.

General Contractors in joint-ventures with investors, managers, etc., are the third most likely to delay their jobs.  Their slice of the total pie is often contractually tied to their actual job costs (overhead and general conditions) which they can drive up by creating delays.  There is a pervasive belief among General Contractors that they "prove their value" by fighting subcontractor change orders.  As a result, there are often penalties to the General Contractor for change orders that draw excessively from the contingency fund.  The General Contractor can't afford to admit that the delay they caused has knock-on effects for the subcontractors, because that would draw from the contingency, resulting in penalties to their final fee amount.  It's nasty businesses dealing with these people because they have no financial incentive to let the suffering end.  I believe they operate this way because the high cost of litigation makes it financially impossible for most subcontractors to pursue justice.  We had a small measure of success negotiating against one such General Contractor, but it was incredibly contentious, and we've blacklisted them ever since.

I hope this helps some of you.