Holloway Consulting is a Construction Services Firm providing consulting, expert witness, advisory and management services to the construction industry. Based on our continuing analysis of construction project and industry data, a disproportional amount of disputes will arise in 2012 from both owners and general contractors buying-out work at below market prices.
CONSTRUCTION CONSULTING SERVICES
BUYING-OUT WORK
The construction market already has squeezed about all it can from labor costs, materials prices and contractor margins. But with the housing rebound fizzling and the non-residential building market recession deepening, there appears nowhere for costs to go: neither up nor down. Selling cost indexes, which, in part, reflect shrinking subcontractor margins due to extreme competition, are starting to see year-to-year cost changes flatten out after a series of steep double-digit annual declines. This flattening of construction cost indices reflects a bottoming process wherein the normal pricing systems have been exhausted.
However, in markets where contractors chase fewer and fewer projects, both general and trade contractors can be attempted to go beyond reasonable pricing by intentionally offering and buying out below market pricing. How and why does this occur?
BUYING WORK AT BELOW MARKET PRICES
FEE REDUCTIONS
The intentional reduction or elimination of fee or markup in the bid or contract price can be driven by any number of factors. One of the most common is the contractor’s desire to retain key personnel and maintain operational status and market position. Of course, this strategy is most often implemented on a temporary basis, unless the contractor has another means of paying for general and administrative expenses.
On the other hand, if the contractor has carefully reviewed the plans and specs and concluded that they are deficient, he/she might conclude that the reduction in contract fee can be made-up via fee in approved change orders. Following this strategy, a contractor would attempt to negotiate higher change order markup for OH&P.
REDUCED GENERAL CONDITIONS COSTS
The conscious reduction of job site general conditions in the bid and/or contract price is all too common in both good and bad market conditions. This practice can result from a wide range of motivations. On a positive note, if the contractor can successfully complete the project with reduced staff, costs would have been reduced and there would a greater likely hood of profitability.
In the context of disputes, prices based on reduced general conditions can contribute to circumstances wherein the contractor brings in additional management and supervisory staff to complete the job, and then submits a change order request or claim to the owner for these costs, based on some unsupportable entitlement. This strategy has also been employed by contractors who have a limited number of projects and want to keep their excess supervisory staff working.
EARLY FINISH SCHEDULES
Most contractors can only dream of completing jobs earlier than required using budgeted staffing. A recent trend is to adopt an early completion schedule and file a general conditions claim when the schedule is not achieved. The law on early completion claims varies from state to state, and should be discussed with counsel prior to implementing such a strategy.
WITHHOLDING PAYMENTS
The practice of unreasonably withholding or reducing periodic and/or final payments to vendors and subcontractors is perhaps more common today than ever. Depending on the financial condition of the subcontractor, this practice can sometimes be profitable for the general contractor. However, many times, the subcontractor files a lien and recovers these monies while both parties incur legal fees. Nevertheless, this practice is part of many of our disputes.
BID ALTERNATE PRICING
Yet another risky practice associated with today’s below market pricing involves the aggressive pricing of bid alternates. A common approach is for the contractor to find a bid alternate product that is more profitable than the specified product. The next challenge is for the contractor to convince the architect and owner that the alternate product is acceptable. Again, the wisdom of this practice is questionable, and can result in non-excusable delivery delays to the specified product if the alternate is rejected.
CLOSING
Owners can also buy work at below market prices. Sophisticated owners who are always in the market often employ an in-house CM staff to manage their projects. These owners tend not to play the below market pricing game, and instead rely on dependable contractors to provide reasonable pricing. Less sophisticated owners and those rarely in the market tend to be less discriminating, often to their determent.
Contact Steve Holloway – Toll Free – at 888-545-0666 about your requirements
Holloway Consulting
Construction Claims Consultants
12081 W. Alameda Pkwy., #450
Lakewood, CO 80228-2701
Denver Phone: (303) 984-1941
International Toll Free: (888) 545-0666
Fax: (303) 716-0432
Email: steve.holloway@disputesinconstruction.com
Blog: disputesinconstruction.com
Web: hcgexperts.com
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