In the Spotlight: Ten Suggestions for Owners Starting a Major Construction Project

There comes a time in the life of almost every company when it will engage in a major construction effort. Often the investment in the project will be among the largest ever made and can run into the tens or even hundreds of millions of dollars. Yet, because the management is expert in its own business and only periodically ' or even rarely ' engages in construction, the organization has little or no experience to call on in this new and important endeavor. The task is daunting because we all know of the horror stories associated with construction projects and their seemingly chronic tendency to finish late and cost more than expected or budgeted. Add to that the problem of having to face design professionals and contractors who make their living in the industry and the dizzying array of choices for how to buy the project, and a daunting task may seem insurmountable. What is an owner to do?

Here are 10 basic suggestions from a seasoned construction litigator, who has spent 20 years working on the back end of troubled projects, to help you on your way to a successful ' even though it may, at times, seem stressful ' project.

1) Have some perspective ' good construction professionals are here to help. On projects with a budget over $100 million (and perhaps some smaller ones), using a strong program management firm, along with a design team, will save money in the end by providing continuity and allowing integration of design and construction expertise.

2) Recognize that the contractor and designer are in business to make a profit, not just to accept every risk; they have varying tolerances for risk and want it to be fairly allocated and compensated. The tendency of owners to try to achieve cost certainty, particularly on big projects where there is fierce competition among contractors for the work, by expressly allocating every risk to the contractor in a lengthy contract, is usually a recipe for contractor change orders and litigation. The most successful owners recognize that risk should be allocated to the party who is best able to control it ' even if that means taking on the risk themselves.

3) Pick a team of upfront construction professionals who reflect your business style and philosophy; if your organization is hard-edged, get a hard-edged group. If you favor a cooperative management style, get a team with a similar attitude.

4) Accept that there will be change, and that it cannot be planned for or dealt with before it arises. The bigger the project, the more complex and unpredictable the change. Heavy infrastructure projects, which increasingly are the collaborative work of government and private companies, are the best examples of this phenomenon. Since these projects serve so many constituencies and are massive, change in everything from the political climate to the price of raw materials to financing constraints will arise during design, procurement, and construction. The financial, management, and legal structure of the project must be sufficiently flexible to allow changes to be dealt with as they arise.

5) Be proactive. Do not throw up your hands and turn things over to the 'experts'; ask questions and seek to understand. All of us use the products of the most complex construction projects, things like subways, stadiums, and bridges. As a result, we know more about how they work or should work than we think. Often, the experts who live with a project on a daily basis are entangled in the details (as they should be) and can benefit from being questioned by people with a little distance. At worst, you will learn something basic about your project. At best, you will help to identify a potential problem.

6) Set reasonable time and cost goals. As projects get larger, the pressure to move faster and squeeze margins becomes greater. While there are, indeed, significant benefits to be achieved from fast tracking a project or insisting on tight design and construction schedules, these techniques require greater attention to planning and supervision. This leads to a trade-off between the cost of longer schedules and the cost of more intense supervision. On the cost side, too low a budget will attract only claim-oriented contractors to bid on the work.

7) Get a clear contract that addresses not only the normal construction issues, but also ones that are unique to your project ' there will be some. A project like a power plant, where many trades must work in the same space at the same time, presents different coordination challenges from those of a linear project like a highway. A tunnel project that runs through several political subdivisions has different permitting risks from those of a stadium that is located in a single city. These risks need to be studied for the particular project and sensibly allocated. There is no such thing as a 'one size fits all contract.'

8) Learn about project delivery systems. Pick one that matches your desire for control of the details (don't use design/build if you want to dictate toilet colors). These systems give owners varying amounts of control over the design and construction process. At one end of the spectrum is design-bid-build, where the owner hires a team to work with it to design the project and then has the contractor build what is on the plans and specifications. The owner can be as involved in the design as it wishes and even make changes during construction if it agrees to change orders reflecting the effect of those changes on the contractor's work scope. At the other end of the spectrum is design/build contracting, where the owner gives the design/build team a performance specification and then steps out of the process. There are many variations to each of these two basic systems and also other delivery systems that include construction managers in the process. Like so much else, the method of buying the project should be tailored to fit the specific needs of the owner and the project.

9) Use lawyers and consultants who are construction people ' not people who do construction as an adjunct to their other work; specialists are needed. Much of the success of a project depends on identifying risk and striking a balance between competing approaches to solving the project's issues. Having the input of people who are experienced with the issues at hand and who have the background to create solutions tailored to a particular project yields overall cost savings. The cost of hiring people with this kind of practical experience is small in comparison with what an owner will pay for a dispute resolution process, especially on large, complex projects.

10) Attend a basic seminar to gain an understanding of the process and how construction people make their living ' get a little into their heads.

In the end, recognize you are not blazing a new trail. Thousands of executives, from organizations of all sizes, have done this before and survived. Believe it or not, most projects are successful.

Philip R. White is Chair of the Construction Law Practice Group at Sills Cummis & Gross P.C., with offices in Newark, NJ and New York.

There comes a time in the life of almost every company when it will engage in a major construction effort. Often the investment in the project will be among the largest ever made and can run into the tens or even hundreds of millions of dollars. Yet, because the management is expert in its own business and only periodically ' or even rarely ' engages in construction, the organization has little or no experience to call on in this new and important endeavor. The task is daunting because we all know of the horror stories associated with construction projects and their seemingly chronic tendency to finish late and cost more than expected or budgeted. Add to that the problem of having to face design professionals and contractors who make their living in the industry and the dizzying array of choices for how to buy the project, and a daunting task may seem insurmountable. What is an owner to do?

Here are 10 basic suggestions from a seasoned construction litigator, who has spent 20 years working on the back end of troubled projects, to help you on your way to a successful ' even though it may, at times, seem stressful ' project.

1) Have some perspective ' good construction professionals are here to help. On projects with a budget over $100 million (and perhaps some smaller ones), using a strong program management firm, along with a design team, will save money in the end by providing continuity and allowing integration of design and construction expertise.

2) Recognize that the contractor and designer are in business to make a profit, not just to accept every risk; they have varying tolerances for risk and want it to be fairly allocated and compensated. The tendency of owners to try to achieve cost certainty, particularly on big projects where there is fierce competition among contractors for the work, by expressly allocating every risk to the contractor in a lengthy contract, is usually a recipe for contractor change orders and litigation. The most successful owners recognize that risk should be allocated to the party who is best able to control it ' even if that means taking on the risk themselves.

3) Pick a team of upfront construction professionals who reflect your business style and philosophy; if your organization is hard-edged, get a hard-edged group. If you favor a cooperative management style, get a team with a similar attitude.

4) Accept that there will be change, and that it cannot be planned for or dealt with before it arises. The bigger the project, the more complex and unpredictable the change. Heavy infrastructure projects, which increasingly are the collaborative work of government and private companies, are the best examples of this phenomenon. Since these projects serve so many constituencies and are massive, change in everything from the political climate to the price of raw materials to financing constraints will arise during design, procurement, and construction. The financial, management, and legal structure of the project must be sufficiently flexible to allow changes to be dealt with as they arise.

5) Be proactive. Do not throw up your hands and turn things over to the 'experts'; ask questions and seek to understand. All of us use the products of the most complex construction projects, things like subways, stadiums, and bridges. As a result, we know more about how they work or should work than we think. Often, the experts who live with a project on a daily basis are entangled in the details (as they should be) and can benefit from being questioned by people with a little distance. At worst, you will learn something basic about your project. At best, you will help to identify a potential problem.

6) Set reasonable time and cost goals. As projects get larger, the pressure to move faster and squeeze margins becomes greater. While there are, indeed, significant benefits to be achieved from fast tracking a project or insisting on tight design and construction schedules, these techniques require greater attention to planning and supervision. This leads to a trade-off between the cost of longer schedules and the cost of more intense supervision. On the cost side, too low a budget will attract only claim-oriented contractors to bid on the work.

7) Get a clear contract that addresses not only the normal construction issues, but also ones that are unique to your project ' there will be some. A project like a power plant, where many trades must work in the same space at the same time, presents different coordination challenges from those of a linear project like a highway. A tunnel project that runs through several political subdivisions has different permitting risks from those of a stadium that is located in a single city. These risks need to be studied for the particular project and sensibly allocated. There is no such thing as a 'one size fits all contract.'

8) Learn about project delivery systems. Pick one that matches your desire for control of the details (don't use design/build if you want to dictate toilet colors). These systems give owners varying amounts of control over the design and construction process. At one end of the spectrum is design-bid-build, where the owner hires a team to work with it to design the project and then has the contractor build what is on the plans and specifications. The owner can be as involved in the design as it wishes and even make changes during construction if it agrees to change orders reflecting the effect of those changes on the contractor's work scope. At the other end of the spectrum is design/build contracting, where the owner gives the design/build team a performance specification and then steps out of the process. There are many variations to each of these two basic systems and also other delivery systems that include construction managers in the process. Like so much else, the method of buying the project should be tailored to fit the specific needs of the owner and the project.

9) Use lawyers and consultants who are construction people ' not people who do construction as an adjunct to their other work; specialists are needed. Much of the success of a project depends on identifying risk and striking a balance between competing approaches to solving the project's issues. Having the input of people who are experienced with the issues at hand and who have the background to create solutions tailored to a particular project yields overall cost savings. The cost of hiring people with this kind of practical experience is small in comparison with what an owner will pay for a dispute resolution process, especially on large, complex projects.

10) Attend a basic seminar to gain an understanding of the process and how construction people make their living ' get a little into their heads.

In the end, recognize you are not blazing a new trail. Thousands of executives, from organizations of all sizes, have done this before and survived. Believe it or not, most projects are successful.

Philip R. White is Chair of the Construction Law Practice Group at Sills Cummis & Gross P.C., with offices in Newark, NJ and New York.