PASBA 2010 presentation

A Primer of Commonly Overlooked
Issues in Construction Projects
Presentation for

Introduction
Presentation Goal:
This session will address some commonly overlooked critical items in
the planning and execution of construction projects which could
improve the overall performance of the project and reduce the risk of
disputes and claims.
Presenters:
Jake Ortego, PE, CCA, CCP, CCE
President – JA Cost Engineers and Advisors, Inc.
BS – Mechanical Engineering, Boston University
15+ Years in Engineering, Construction and Consulting
www.ja-cea.com
j@ja-cea.com
David Anderson
School Board Member –Kiski Area SD
BS – Chemical Engineering, The Pennsylvania State University
MBA – Robert Morris University
12+ Years in Engineering and Consulting
A Primer of Commonly Overlooked Issues in Construction Projects
School Design and Construction Conference
Slide 2 of 28

Construction Goals
Construction Projects follow the principle of the triple constraint of
Quality (or Scope), Cost and Schedule.
Slide 3 of 28
Quality/Scope
CostSchedule
An emphasis on any one of the constraints will have an effect on
the other two.

Who’s Who?
There are many parties involved in a construction project that have
different skill sets and knowledge. Below is a quick guide to the
major groups beyond the Owner and Contractors. The focus of this
guide is related to advocating the Owner’s Interest.
Architect (and Engineer) – AKA “A/E” – They are responsible for
the artistic and technical design of the building. The design quality
from the A/E firms can greatly influence the total cost of the project.
A/E firms typically have limited hands on field experience and limited
knowledge of contract language.
Solicitor (Legal Council) – This is the main advocate for the
Owner’s legal interests. The Solicitors should have a detailed
knowledge of local, state and federal codes, mandates and
precedence regarding construction law. Although many solicitors
have knowledge of the law, very few have experience in the execution
of a construction project.
Slide 4 of 28

Who’s Who? (cont.)
Construction Manager – If used on a project, the CM should protect
the Owner’s interest while coordinating all of the contractors,
vendors, consultants, etc. to bring the project to a successful
completion. In today’s construction market, many CM’s are general
contractors who are expanding their capabilities.
Clerk of the Works – The intent is for the COTW to protect the
interests of the Owner in regard to ensuring the quality of both
materials and workmanship are in accordance with the design
information such as specification and engineering drawings. Many
COTW’s have construction experience, but limited design or contract
training and/or experience.
Owners Representative – This role could include duties ranging
from a CM to a COTW to a advisory consultant. An Owner's Rep
services is not a substitute for an architect, contractor, legal counsel,
or Owner themselves. There is no clear standard for this role.
Slide 5 of 28

Ability to Influence Costs
The ability to influence project goals diminishes with time.
Slide 6 of 28

What is the Cost of Work?
Cost of Work (“COW”) is an term which can have multiple meanings
and interpretations.
• Typical Contracts define the COW as all costs except for the
Contractors Fee.
• Many insurance companies define the COW as all costs except for
the insurance.
• Some parties see the COW as the total cost of the contract
including fees and insurances.
The difference can be seem trivial, but become material when
calculating Fees, Insurances and Tax (where applicable) for change
orders.
It is important to clearly understand and define COW on every
project.
Slide 7 of 28

What Causes Overruns
A common perception is that the primary driver to project overruns is
due to the contractors.
This is only part of the story
Owners are a major source of change due to
• Undefined Scope
• Modifications made during construction
Architects are also a major source of change due to
• Incomplete designs
• Overdesigning
• Performance to the Standard of Care
Depending on the state, it is accepted that the an Architects standard
of care is between 3% to 5% of the construction costs.
Slide 8 of 28

Avoiding Disputes and Claims
Disputes and claims are often the result of:
• Miscommunication
• Unclear Expectations
• Unrealistic Expectations
• Poorly defined scope
• Different interpretations of the Contract
Avoiding disputes and claims can often be done with:
• Open Communication
• Explicit Definitions
• Mutual Understanding
What follows are areas that are commonly overlooked by owners while
planning, designing and executing a construction project.
Slide 9 of 28

Define the Expectations (part 1)
As an Owner, you have responsibilities to the project.
During the project you will need to clearly establish the expectations
of your team regarding:
• Clear lines of authority for providing direction and approval for
project decisions
• Time to review and approve design/drawings
• Time limits on responding to Requests for Information (“RFI”)
• Time limits on responding to Change Orders
• Time limits on reviewing and approving Applications for
Payment (“Pay Apps”)
Slide 10 of 28

Architects and Engineers (“A/E”) are design professionals. Most have
limited to no experience actually managing a construction project.
Most people expect that the Architects will be involved in nearly every
aspect of the project and will represent the Owner’s Interest.
It is recommended that open discussion are held with the Architect to
discuss each of the following:
• Establishing a budget that the A/E is to design to
• The level and detail that the A/E will review the Pay Applications
• The level and detail that the A/E will review the Change Orders
• The frequency and expectations of site visits
• The basis of the fee and what will constitute a change
• The schedule expectations
Slide 11 of 28

Understand your Accuracy
Misunderstanding an Estimate can set a project up to fail.
Construction costs can vary greatly due to time, location and resource
availability. As a result Construction estimates are only 100% when
the project is complete and final costs are submitted.
It is important to understand the accuracy of your estimates to help
plan for the potential costs of a project.
The following is an example of the accuracy to expect from estimates.
Slide 12 of 28
Estimate from SQF Est 75% Dwgs 90% Dwgs*
Architect ± 30% ± 25% ± 20%
Independent Estimator ± 25% ± 20% ± 10%
CM or GC ± 20% ± 15% ± 5%
*Note: for this example, 90% are considered “Issued for Construction”

Contingency vs. Allowance
Allowances and contingencies are used to plan for items that are not
clearly defined or for unknown circumstances.
Allowances are for “Known Unknowns”.
Example: Landscaping will be performed at the conclusion of the
project, but the exact configuration and selections have not been
finalized.
Contingencies are for “Unknown Unknowns”.
This should be reserved for items that cannot be clearly identified
at the planning, design and bidding of the project.
A common mistake is to use contingency for items that should be an
allowance. This can exhaust the contingency before it has a chance
to be used for truly unforeseen events.
Slide 13 of 28

Plan for Unexpected
In addition to accuracy of the estimate, owners should add costs to their
budgets for the following:
• Quality of the drawings
• Price Escalation and Inflation for projects over 1 year
• Increase labor rates for projects over 1 year
• Potential changes requested within the school district.
Most projects should carry a 10% contingency on top of any estimate.
In the rare cases where the drawings are complete and the scope is well
defined, contingency should not be any lower than 5%.
Slide 14 of 28

Value Eng. Vs Scope Reduction
Value Engineering and Scope Reduction are different!
Value Engineering is the practice of altering the scope to achieve the
same performance goals at a lower installation or operating cost.
Example: Replacing Wood Framed Windows with Vinyl Framed
windows could result in a savings in material while still achieving
the desired lighting.
Scope Reduction is the practice of removing items from the scope of
work to lower costs.
Example: Removing windows in lieu of a wall will save material and
installation cost, but also not achieve the desired lighting.
Slide 15 of 28

Independent Estimates
Having an independent estimate performed on the Construction
Drawings prior to sending them out for bid can be valuable in
identifying the possible ambiguity in the drawings. The independent
estimate should be configured to cleanly match the A/E’s estimate.
Major variances exist between the A/E Estimate and the Independent
Estimate can be addressed in the following way:
• Require the Architect to review the basis of bid to determine the
cause of the differences. If it is an issue of interpretation, the
A/E should update their drawings to alleviate any ambiguity.
• Isolate the major differences and ask that bidders provide a
breakout price for this area.
• Remove any major difference from the bidding documents (or
place them on hold) until the drawings are further developed.
Slide 16 of 28

Details in the Bids
It is easier to ask questions and state expectations during bidding
than it is after the award. The words “Lowest Responsive Bidder”
does not prevent the Owner from requiring bid details.
Examples include:
• Requiring Bidders to acknowledge that all change orders will have
no more than a 15% markup for the prime with a total mark up
not to exceed 20% of the base cost of work
• Requiring Bidders to acknowledge that all change orders will be
submitted with complete supporting information for cost, labor,
subcontractors, fees and insurances
• Requesting bidders to provide add and deducts for any areas of
the scope that may not be well defined.
• Requesting the bidders to identify any areas of the bid documents
which are unclear or unbuildable.
Slide 17 of 28

As with the project team and architect, it is prudent to define your
expectations for the Construction Manager, General Contractor or
and/or Prime Contractors including:
• Change Management
• Change Multipliers (or Markups)
• Reporting Requirements
• Scheduling Requirements
• Substantial Completion
• Invoicing Requirements
• Incentives or Liquidated Damages
• How Contingency is to be Spent
Any agreements to these types of discussions
should be included as part of the contract.
Slide 18 of 28

Modify the Contract
The contract is the place where all of the agreements governing the
execution of the project are captured.
Consider the following:
• AIA Contracts are written by Architects
• ACG are written by Contractors
• There are no standard contract templates that advocate the
owner
The standard templates are meant to be flexible. But in doing so,
they often are ambiguous.
Ambiguity leads to the possibility of different interpretations which
can lead to claims.
Ambiguity is typically construed against the drafter.
Slide 19 of 28

Modify the Contract (cont.)
Recommended areas to focus on that are typically ambiguous include:
• Mark ups for changes and for pay applications
• Rates for additional work
• Pay Applications being percent complete or substantiated (Cost
Plus)
• Basis of Allowances
• Expectations and Agreements they may have been verbally
discussed.
• Any part of the contract that uses the word “reasonable” should be
explicitly defined.
All contracts can be modified, but not all modifications are legal. Discuss
any modifications with your legal council before implementing.
Slide 20 of 28

Fast Track vs. Fast Pace
The two terms are often confused and interchanged.
“Fast Track” is a method of staggering the sequence of a project to
achieve a shorter total design – construct duration. Construction
Starts as the drawings per discipline are issued.
The inherent risk is that the items typically designed last (MEP)
have more stringent constraints due to the physical completion of
the earlier items such as Civil and Structural.
“Fast Pace” or “Accelerated” is the method of compressing
components of the schedule to achieve a shorter duration for any
part(s) of the project.
The risks lie in over congested project sites, overtime, shift work
and lowered quality.
Slide 21 of 28

Expect Change
Change is a normal and expected part of every project!
No design is perfect and changes help all parties adjust the design to
meet the physical expectations of construction. A well planned
project is designed to absorb a certain level of change.
When evaluating and approving changes,
consider each of the following:
• Was it in the base scope?
• Is it needed or wanted?
• Are the costs supported and
reasonable?
• Is there any impact to the duration of the project?
Always get a change in writing and never authorize a blanket change
order without costs and/or limits.
Slide 22 of 28

No News can be Bad News
One of the methods to manage the risk of overruns and delays is to
proactively identify potential issues before they escalate.
Here are some recommended methods to do this:
• Question the contractors and their subs to identify unknowns
and possible risks on a weekly basis.
• Encourage the contractors and their subcontractors to submit
their invoices on the regular cycle.
Work the Construction Manager and Prime Contractors to
forecast the project’s workload and cash flow.
• Encourage Requests for Information (“RFI”) to be submitted for
all design and specification questions.
• Keep the contractors informed about any owner related items
that will affect their schedule or activities.
Slide 23 of 28

Errors and Omissions
The is one of the most commonly misunderstood aspects of increased
costs to a project.
It is expected that A/E firms have up to a 3% error and omission
rate. In some states, this value may be as high as 5%.
Errors are items that are incorrectly designed and require rework to
correct if construction on this item has started.
Example: A set of stairs ends 2 ft under the landing. To correct,
the stairs may have to be re-fabricated.
The price of fixing an error is made up of costs directly related to
fixing this issue. This could involve other ancillary work that may be
affected by the corrections
Slide 24 of 28

Errors and Omissions (cont.)
Omissions are items that have been either unintentionally omitted
from the design. They may require rework to incorporate the
omission.
Example: A set of stairs does not have any hand railing in the
design. To correct, the handrail will have to be fabricated and
installed.
The Owner must still pay for the base item regardless if it was not in
the base design and estimates.
The cost of the omission is considered to be any additional costs
required to include the omitted scope that is greater than what would
have been paid if the scope was included in the design.
Slide 25 of 28

Errors and Omissions (cont.)
From a contractors perspective, the Owner is required to pay for the
entire amount to fix an error or omission.
As long as the item is not included in the scope of work to the
contractor, then this assumption is correct.
The owner may attempt to pass the cost on to their A/E Firms.
Most A/E firms have insurance for errors and omissions. The
insurance is only intended to cover the added costs for correction.
It is rare for claims to be awarded if the total cost of errors and
omissions is under 3% of the construction costs.
Slide 26 of 28

Conclusion
It is reasonable to discuss any and all items in this report with your
Architect, Solicitor and Construction Firms.
In general, you can increase you chances
of a successful project by:
• Good Planning
• Defining Expectations
• Clarify Assumptions
• Communicating with the Team
Another equally good way of
executing project is to:
• Be Definite
• Be Clear
• Be Fair
• Be Careful
Slide 27 of 28

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