Pmnetwork AUGUST 1993 p. 53 Concerns of Project Managers
Dispute Avoidance
S. Leonard DiDonato, Hill International, Inc., Willingboro, New Jersey
INTRODUCTION
The traditional partnership on a construction project has included the triangle of the owner, the architect/engineer and the contractor. Considering the complex technical projects that are being designed and constructed in our very competitive industry, this arrangement may no longer be a viable alternative.
About 25 years ago, the practice of engaging a construction manager to work in a cooperative effort with the architect/engineer to administer the contracts of one or more construction contractors began to become a widely accepted procedure in the industry. However, with the increase in cost overruns and time delays, the substantial damages that one or more of the parties could incur caused each of them to slip back into a protective shell whenever a major problem occurred on a construction site. When that happened, the owner was usually left to fend however rather than having an active agent on the construction site protecting the owner's interest.
Recently, project management has become a popular procedure wherein the owner engages a construction consulting firm to manage the project and administer the contracts of both the architect/engineer and the contractors. In this arrangement, the owner should always indemnify the project manager so that if problems occur on the site, the project manager, not fearing liability, is concerned solely with protecting the owner's interest at all times. Both the designers and the contractors appear to enjoy this relationship since the project manager is a professional who manages the project effectively while isolating them from the whims of the owner.
More recently, federal government agencies have been issuing contracts for various versions of project management oversight (PMO). In this arrangement, the traditional team (or one of the others) proceeds in an active role to design and construct the project, while the PMO consultant acts in the passive role of oversight advisor to the owner. In this role, a PMO consultant provides the owner with an "early warning system" as to potential problems that can cause major cost overruns and time delays. The PMO consultant will also advise the owner as to alterna- tives for the solution of the problems facing the project. Although the other participants may be a little wary of the PMO consultant in the beginning, in a very short time they will recognize that the PMO consultant is a constructive force on the project who can be of great assistance to each of the participants towards achieving the successful completion of the project on time and within budget.
PARTNERINGA new dispute avoidance procedure (or philosophy), which is probably based on the "good old-time way of doing things," partnering is based on trust between the parties and constant communications to keep all of the parties informed. The construction process is not a difficult one. The owner wants quality work while the contractor wants to provide a quality product since it is the source of pride. The owner wants to maintain the project costs within budget while the contractor wants to remain within the cost estimate in order to earn a reasonable profit. The owner wants on-time delivery while the contractor wants to deliver on schedule, knowing that time delays will reduce profit. The owner wants the work done right the first time and the contractor wants no rework since it will reduce profit.
The owner wants no disputes or claims and the contractor wants no litigation because the delay and/or the outcome may put both parties in financial jeopardy. The owner wants a safe and clean work site while the contractor also wants a safe and clean work site because it increases productivity and reduces inspectors' interference. The satisfaction of these interests can only produce satisfied customers and repeat business for the contractors.
OUR PLEDGE AGREEMENT
We agree to communicate and cooperate on all matters. We will develop a specific action plan to bread down barriers, improve procedures, and ensure the product is completed in a manner that meets the customer's requirements.
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FOR THE OWNER: |
FOR THE CONTRACTOR: |
Partnership Pledge
Why, then, cannot the owner, architect/engineer and the contractor enter into a partnership from the beginning of the project wherein they sign a "pledge" to assist each other in the successful completion of each other's responsibilities, resulting in a successful project on time and within budget? The pledge must include an effort to prevent disputes before they occur and to work very hard towards eliminating any adversarial relationship between the parties. This can only be accomplished by creating trust and by working at cooperation and teamwork in order to promote each other's mutual and beneficial goals.
With most owners, designers and contractors, partnering requires a major change of existing mind sets and attitudes in the industry. "We shall share the risk on this project, not you alone," has to be the new motto. Partnering can only succeed with the support of top management in the organization of each of the parties. That support must include training on a continuing basis throughout the project. Individuals who fight this new direction must be removed from the project or they will weaken the overall effort.
Partnering is different from what has been the practice in the past. Responsibility formerly given only to supervisors and upper-level management is allocated to team members and those on the field level so that the flow of information is enhanced (communication).
Reliance on partnering teams is a clear indication that management respects its employees so that the staff puts forth more effort when they recognize that their organizations value them and their talents. Ironically, top management does not need to impose directions on a continuing basis because the team and individual staff members will establish and meet their own goals once they are convinced that all of the parties are committed to partnering (trust).
Increased personal commitment in goal setting by every individual involved in the process creates a sense of ownership of the mission and the successes arising therefrom.
On most projects where partnering is implemented from the beginning, along with signing the contract, the parties sign an agreement pledging to work together as a cohesive team to produce quality results, on time and within budget. That environment will provide an opportunity for the contractor to earn a fair profit. The "pledge" agreement is signed by all owner and contract managers assigned to the new project.
The key to preventing major claims for delays and damages is anticipation and recognition of the early warning signs. What are those signs? Some examples of actual troubled construction projects with major problems will highlight the critical need to recognize the early warning signs.
A national hotel chain was constructing a $22 million economy mid-town hotel in a major north- eastern city and had signed a Guaranteed Maximum Cost (GMP) con- tract with a single local general contractor that called for the completion of the facility within 20 months. When I was contacted, they were in the 30th month of construction, had already approved and paid ap- proximately $1.5 million in change orders, and the owner was deeply concerned about the fact that the general con- tractor had just delivered a claim, bound in nine volumes, which totaled$9.6million in value. The owner had redesigned the hotel from an economy to a luxury facility while con- struction was under way. The result was an 18 month delay and $3 million in delay damages.
We could review several other examples, but the story is almost always the same. The real question is, "Why didn't these owners recognize earlier that they were headed for disaster?" The answer is that they ignored, or did not recog- nize, obvious waming signs that could have triggered the early recognition of trouble.
The Warning Signs
There are five obvious signs, any one of which usually serves as a warning that a project is heading for major trouble:
Each of these early waming signs deserves a closer look.
Delays
When the progress of the work begins to move into a delayed mode, be alerted that trouble is brewing on your project.
Scheduled time overruns. The periodic review of the schedule, whether it be a CPM or a simple bar chart, is your first sign that delays are occurnng.
Requests for time extensions. Contractors will begin asking for extensions of time in writing or they will be an- nouncing at job meetings that they are incurring delays and they will provide notification in a more fommal manner once they detemmine the extent of the delays.
Work force reductions. During the first two-thirds of the project, the total number of the work force should continue to grow month by month. If that pattern of growth stops or reduces in the number of workers on site, there are problems which are causing the change in the normal pattern.
Disorderly construction site. When I walk onto a site and see disorder in the storage of materials, the maintenance of equipment and tools, and the organization of the work force, I know there is trouble. A sloppy, disorganized work site is not only a symptom but also a cause of a troubled project.
Change Order Requests and Claims
All projects have their share of change orders and minor claims over disputes with contractors regarding interpreta- tions of the contract documents. However, when there is a substantial increase in the submission of change order requests or claims, that is a clear sign of trouble. In addition, a substantial backlog in the number and dollar value of change orders that are in porcess is not only a symptom of a troubled project but also can contriubte to its cause.
Change order backlog. The backlog of unapproved change orders will usually be in one of three categories:
Disputed claims. Claims for time extensions and delay damages usually involve:
Failing project communications is a symptom as well as a cause of a troubled project. These failures usually fall into the following categories:
Field communications. The day-to-day flow of field communications is crucial to the successful conduct of a project. One troubled project site I visited had a row of trailers each about ten feet apart. The first was for the construction manager, the second was for the project engineer, and the third was for the general contractor. Instead of walking to each other's trailers or calling each other on the telephone, each of the three participants mailed each other letters through the U.S. Postal Service.
Owner to/from contractor. Most of the correspondence on a project between the owner and the contractor is between the owner's representatives on site and the contractor's field superintendent at the field office. When you begin to see an increased flow of correspondence to and from the home office of both the owner and the contractor, trouble is on its way.
Architect/engineer to/from contractor. Crucial to the success of a project is the constant productive communication flow between the contractors and the architect/engineer or construction man- ager, who is administering the project for the owner. When that flow of communication becomes adversarial and more formal in nature, you can expect trouble.
Attorneys and surety. When attorneys representing one or more of the parties begin to send letters on behalf of their clients or when letters are addressed or copied to attorneys or bonding companies, once again you can expect trouble.
Quality of Work
Good quality workmanship and materials in construction is the clear sign of a healthy project. On the other hand, deteriorization of that standard reflects a project with failing health. Beware of:
When a contractor or subcontractor begins to submit an abnormal number of requests for material and equipment substitutions, something is wrong.
Design problems.
When the number of RFIs (Requests for Information) from a contractor or subcontractors and material/equipment suppliers begins to in- crease, the contractors are either in trouble or there are major problems with the design documents.
Careless subcontractors.
When the nature of the operations of subcontractors and the quality of their workmanship and materials begins to deteriorate, they have problems under their subcontracts with the prime.
Deteriorating supervision.
When there is a deterioration of quality control and supervision by the prime contractors, or if there is a major change in the attitude of the owner's representatives towards being more strict or less observant, once again, it must be trouble or it will become the cause of trouble.
Complaining Subcontractors/Vendors
If either by reading mail or walking around the site, you begin to notice problems with subcontractors and/or materials and equipment vendors, beware.
If a subcontractor stops work and abandons the site, or if a manufacturer is delaying the shipment of equipment and material, there has to be a problem.
Payments and liens.
When the owner begins to receive liens, or notices that liens have been filed, against the property or payment demands are made directly to the owner, the prime is usually in the midst of financial problems.
Business failures.
When there are repeated failures of subcontractors of a financial nature, it usually means a cash flow problem. When a subcontractor tells you during a walk around the site that payments have not been received for several months, you have to suspect that the subcontractor is about ready to leave the site.
Supplies and equipment.
When manufacturers of equipment and material suppliers begin to send their products on a COD basis or if they demand payment before shipment, you can bet they are afraid they will not be paid.
Managers with experience can obtain a feel for a project by reading key correspondence, such as the job meeting minutes, by reviewing financial documents, by conducting periodic visits to the site, and by asking subcontractors, foremen, and even individual workmen for their impressions of the project. Those managers without the necessary experience or instinctive feel for problems should obtain the services of an oversight coordinator within the company or should employ a competent outside consultant. Careful monitoring or oversight can sometimes avert or alleviate project disasters.
Since the majority of troubled projects have experienced substantial design changes by the owner during the construction process, or suffer from ambiguous design documents, open and constant communication among the owner, architecht - engineer and contractor is essential. Scheduling of the project should be vigorously maintained and joint monthly up- date meetings are a must to keep all parties aware of the true status of the work.
Those of us who have spent most of our careers in construction on-site, develop a distinct talent for reading the conditions of a project from what we see and hear as we visit that site for a few hours. Subcontractors, foremen, and even individual workers are always ready to tell you exactly what they see as a problem on a project site. Most of them will also be just as quick to tell you what a good job it is, if in fact the project is moving along in good fashion.
Managers with experience can obtain a feel for a project by reading key correspondence, the job meeting minutes, reviewing financial documents and by conducting periodic visits to a site. However, those without that kind of experience should obtain the services of an independent source of information either within their organization or from without.
Occasionally, there are contractors who, either because of their inexperience or poor financial status, have taken on more responsibility than they can handle. However, we have found that the majority of troubled projects have experienced substantial design changes by the owner during the construction process, or suffer from ambiguous de- sign documents. There are other causes, of course, but these two happen far more than any of the others. We have also found that on most troubled projects, the participants have lost credibility; the owner no longer knows who to believe or trust, and the contractor may have resorted to over-stating claims in order to get the owner's attention. Finally, the scheduling has usually been in the control of the contractor, which has made it more difficult for the owner to moni- tor and determine the cause of delays.
Reading the conditions at a project site is a difficult task and requires a special talent. You cannot depend on what you are told by the front-line managers. They always believe that they will be able to overcome problems and make up for lost time. If you don't have the oversight talent on your own staff, then engage a competent consultant. If you don't, you will most certainly regret it.
Not all problems can be anticipated or resolved in their infancy. When disputes do arise during construction, swift recognition of the problem and a commitment to resolution is the key to a successful project. This principle is the reason that partnering and ADR have become the preferred methods of project problem resolution. Partnering can be even more effective because its successful utilization will minimize, if not eliminate disputes. With the number of construction disputes on the rise, it is imperative that the industry begin moving in the direction of partnering. A failure to address and solve the industry's present "adversarial attitude" now may be fatal to major projects. The end result could well be the financial failure of a greater number of contracting firms and also some of the commercial clients they serve.
S. Leonard DiDonato, senior vice president of the Project Management Group at Hill International, is an expert in contract administration, construction management and claims settlement. He has over 35 years of experience in the designlconstruction industry and has been involved in all aspects of industrial, commercial and institutional develop- ment and construction. Mr. DiDonato is a member of many related professional groups. He has been honored as "New Jersey's Master Builder" by former Governor Brendan T. Byrne, and "Construction Man of the Year" by the Subcontractors Association, American Concrete Institute, and The Society of American Military Engineers.