Know When to Hold, Know When to Fold

For nearly two years, ERMCO’s engineers and executives met with the team’s representatives, with potential partners, and with vendors. All told, the firm spent more than $100,000 on developing a bid — making it that much more bittersweet when it ultimately chose not to submit one. “It could have been a fantastic opportunity for us,” says Greg Gossett, ERMCO’s senior vice president of construction operations.

As it turns out, the liquidated damages for not meeting certain schedule milestones were just too great for the contractor to stomach. “If we can control the risk, we don’t have nearly as much concern,” Gossett says. “But we have a hard time accepting things that an owner or a construction manager includes in a contract that are outside of our control if we’re relying on them to ensure that things don’t go sideways.”

Yet that’s just the kind of cold calculus a contractor must rely on to minimize risk (or eliminate it altogether) on any project — even the ones that seem too good to pass up.

Know thyself

Risk — recognizing it, planning for it, weathering it when it morphs into an unfortunate reality — has always been an issue in construction. What happens if the general contractor falls so far behind that my firm falls behind? How do I get paid for my work if the general contractor doesn’t get paid? How will change orders be handled? How do I maintain workplace efficiency if my vendor can’t deliver supplies on-time? These concerns aren’t new, and the economic slowdown of the Great Recession only intensified them. But they’re no less important to acknowledge now that the recession is over. In fact, says Dr. Mark Federle, a false sense of security born out of plentiful work can cause contractors to overlook warning signs that might have been glaring in the past.

Federle, a professor and the McShane Chair in construction engineering and management at Marquette University, says now is the time for contractors to be especially choosy. “One of the criteria that they ought to use in looking at the work that they do take is, ‘How do we take work that we can manage the risk for?’” he says. “You want to step back and say, ‘Are we taking work that can meet our organizational strategies, our organizational vision, and our organizational profit goals — or are we taking this work just because it’s more convenient?’”

As obvious as it seems, the first and most important step in avoiding risk is fully vetting the general contractor (GC) who will manage the project. “Eighty percent of your profits probably come from 20% of your clients, and 80% of your headaches probably come from 20% of your clients,” Federle says. “So if you can get rid of the 20% that are giving you the headaches, you can now focus on what’s important: making money with the clients you can depend on.”

Even that won’t solve all of your problems, though. Because while you may have established good working relationships with a handful of GCs, with each new project those GCs are working for new clients, with new contract language that will no doubt get passed down to you, which means you can’t be afraid to push back on terms weighted heavily in the GC’s favor.

At ERMCO, contract review may ultimately be the responsibility of the firm’s risk manager, but the project manager in charge of the job is first required to read it front to back as well, noting any potential concerns, which then get passed on to the risk manager. “If it’s a customer that we’re on great terms with and have a history of positive results, we might try to go through and get some things negotiated differently,” Gossett says. “You’ve just got to look at every opportunity and see if there is a chance to negotiate these terms to something more palatable.”

There’s really no limit to what the general will try to put in a contract, says Joel Moryn, president of Parsons Electric in Minneapolis. “You’ll see things like, ‘You’re responsible if the schedule gets behind — even if it’s not your fault — and not only can we make you speed up, but we also don’t have to pay you for the extra work.’ It’s like, really?”

Parsons’ general counsel reviews every contract, and, in cases where terms are especially difficult to accept, the issue will be escalated through the GC’s organization in order to find some kind of resolution. “Even then, some of the big ones are starting to say, ‘That’s our deal. If you don’t like it, go work with someone else,’” Moryn says.

Regardless of how contract disputes are resolved, though, everyone on the project needs to know the score once the terms are finalized. That becomes especially important when you’re simultaneously managing multiple projects — each with its own contract, with its own rules for change orders or penalties for falling behind schedule. That’s because something as simple as the process for notifying the GC of an issue can spiral out of control if not handled properly. “The contract will say very specifically, ‘If you bump into something, you need to follow these procedures in order to have a valid claim at the end of this process,’” Federle says. “And there’s a long history of contractors who were legitimately owed money but didn’t follow the contractually obligated notification process that they have agreed to — because they have 60 projects, and there could very well be 60 different criteria that are used on each one of those projects.”

In other words, a lack of organization is no excuse for leaving money on the table.

Keeping time

If reviewing and understanding the contract is the most important step prior to starting the project, staying on schedule is most important during the project. Unfortunately, there’s only so much an electrical contractor can do if the GC is chronically behind. Without question, documenting issues with the schedule is critical, particularly when it comes time to settle claims at the end of the project. But virtually everyone agrees that open communication from the beginning is infinitely more effective.

For years, Parsons Electric would count on the GC to set and keep the schedule; as long as their crews kept up, everything would work out fine. But that all changed a few years back. That was when more and more projects started falling behind through no fault of the electrical contractors, yet the firm would end up being forced to devote more manpower — that the GC wouldn’t pay for — to make up the difference. Ultimately, efficiency suffered.

As a result, Parsons now develops its own schedule, and, in many cases, holds the GC to it. “If we need a generator pad poured on Date X, we put it right in our schedule, ‘This is when we need it poured,” says Moryn, who has found that being proactive about the schedule and watching interim milestones have not only proven to be effective, but they’ve also been accepted by the GCs. “They look forward to the input. Our project managers worried that the GCs wouldn’t like it, but that’s all gone by the wayside.”

Ted Garrison is a firm believer in speaking up. He consults on and speaks about construction management and job-site efficiency. Although it may be easy to convince yourself that as a subcontractor you’re entirely at the mercy of the whims of the GC you report to, he says that’s just not the case. “You may not have as much control as you would like, but it’s not completely out of your control.”

In fact, it’s to a GC’s benefit to listen to what subs have to say. But that starts with identifying issues. Where is the project breaking down? What could be done to fix the problem? It’s not about pointing fingers; it’s about identifying bottlenecks so that everyone can get more done, faster. From there, all you can do is pass that information up the chain and hope it has an effect. “You can’t force anyone to do anything,” Garrison says. “But what happens is, other crews on the job start to see you being successful — and your costs coming down because you’re getting done on time — and then they start buying in.”

Of course, sometimes the issues aren’t as easy to spot. At Parsons, in addition to a rigorous monthly review, projects that are identified as “high-risk” get a quarterly peer review. Senior leadership and project managers not working on the job look for red flags and other issues that have been shown, over time, to be bad trends. “Project managers tend to get into the project so deeply that they don’t see the death-by-a-thousand-cuts style of things that are happening to them,” Moryn says. “So we do that review to stay out of trouble.”

Talk it out

No matter how much you plan, some problems are unavoidable. And, as Federle points out, when that happens, it’s imperative to speak up. “Contractors have to be willing to have the bad-news conversation with folks immediately after the bad news occurs,” he says. “Too often, they’re hopeful that the bad news won’t be as bad as it is, or they want to avoid the conversation altogether.”

How you say it can be just as important as what you say. “We’re in a relationship business,” says Gossett of ERMCO. “You’ve got to maintain really good relationships, so you try to recognize where you have to bend in order to maintain a relationship that’s going to be beneficial to you throughout the course of the project. There are a lot of things in a contract that you could hold the individual’s feet to the fire on, but you recognize that throughout the course of the job, they could make your life miserable in other places.”

Or, as Federle puts it, “It’s possible to present the information in a non-abrasive, non-confrontational way that’s like, ‘Here are the facts.’ And you don’t have to raise your voice or use language that construction is famous for.”

Gossett is very familiar with those kinds of conversations, but thanks to the extensive pre-bid, risk-identification processes ERMCO has in place, he was able to avoid them altogether on that stadium project he didn’t pursue. And, in the end, he didn’t lose any sleep over it. “We put a great deal of time into chasing that opportunity,” he says. “But once the contract came out, we recognized the risk was far greater than the reward.”                                                    

Halverson is a contributing writer based in Seattle. He can be reached at [email protected].

SIDEBAR: Risky Business

These mistakes are all too common on construction projects and can lead to big problems down the line. With a little common sense and a lot of forethought, you can avoid them.

• Treating routine expenses and insurable risk as losses: It’s easy to tell yourself, “Oh, we have insurance for that,” or “We’ll write off those lost tools as a business expense.” But why pay for new tools or higher insurance premiums when you can manage the risk?

• Working with a supply house that routinely under-delivers: It may not seem like a big deal to not receive 50 items out of a thousand-item order. But one of these days, those 50 items will create a work stoppage.

• Work from your gut when managing risk: You could get lucky once or twice — or OK, several times — but the law of averages will catch up to you. The more data you can use to make a decision, the better.

• Accept verbal agreements: Sometimes work moves so fast that getting the terms of a change order on paper can be difficult. But if there’s no paper trail to prove what you’re owed, that’s just bad business.