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A terrific book has hit the shelves recently. It is titled “Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry.” This short tome is written by Barry Lepatner who is a construction attorney who has apparently seen enough.

I read the bulk of the book on a plane ride home from Denver and about wore out a high-lighter on passages that reflected experiences I have suffered through in getting buildings built. “On budget” and “on time” are two terms that only appear in the vocabulary of construction companies when they are bidding the job. These two terms are quickly replaced with terms like “change order,” “over budget,” and “past due.” When tempers flare to the boiling point, new terms get introduced into the equation like “arbitration” and “law suit.”

Lepatner calls out both sides in this issue. Owners/developers with unrealistic expectations and general contractors with hidden agendas. Sadly, any developer who has been in the business for more than a couple of years has been screwed  by a contractor AND any contractor who has built more than an outhouse or two has been had by a developer. The two sides enter the arena with suspicion and distrust. This potential poison in the relationship is strengthened by the fact that the information flow is so asymmetrical – i.e. the contractor has all the data and the developer has butkis. What the developer does have is a spreadsheet and a loan commitment that tell him/her the numbers that have to be hit in order for a profit to be made. This doesn’t do much good as he/she walks a site that is supposed to be bustling with activity and finds it a ghost town and the envelope from the bank arrives with the latest request for interest on the loan.

What has happened to America’s construction industry? The Empire State Building was delivered in one year. You are lucky if you can get a balloon framed 1,200 square foot house delivered in that time frame. Lepatner asserts that the root of the problem is in a lack of investment in technology and management on the part of builders and a lack of focus on the part of owners and developers. But an industry that consumes $1.23 trillion a year and wastes an estimated $120 billion of that is obviously in sore need of a turnaround. The end users are paying for this waste in higher prices and higher taxes (civic construction).

One of the great games played by contractors is to “buy the contract” early by offering up “pre-construction services.” This is simply a way to eliminate competition according to Lepatner. Owners think they are getting a good deal by bringing the contractor in early and having them work with the architect towards a design that fits in the owner’s budget. Balderdash! The game is to get rid of the competition and then wait for a pricing set of drawings to be delivered. Lepatner encourages owners to pay for real pre-construction services. This is a business opportunity for seasoned construction project managers – align yourself with the owner and really shepherd the drawing and bidding process in exchange for a percentage of the savings. Allowing competition to stay in the bidding up until the end is one way to sharpen the pencils and minds of the construction industry. The firm that gets the reputation of living up to a stipulated price contract without change orders will get a lot of business and force others to follow suit.

Owners should also bear the up-front cost of getting to a complete set of plans for pricing according to Lepatner and I would tend to agree with him. It is hard to shoulder that cost, but if you have someone on your team truly looking after the pre-construction process, you will more than be rewarded with a budget that is real and fully financed before you break ground. You will also remove about 95% of the opportunity for change orders.

Lawyers, owners and contractors need to work together to develop a contract that is superior to the current industry standard AIA document_ This “contract” is so full of contradictions and double-speak that it really does come down to which attorney is better at convincing the judge that his interpretation of the phrase is more accurate than the opponent’s. It should not have to be that way.

Another area Lepatner covers in depth is the opportunity for mischief caused by “self performed” work. Contractors will often get bids from subcontractors and then inform the owner that they can do better than the sub. What owner wouldn’t jump at the opportunity to save money? Caution! There’s more to the process than just lowering the cost. Does the general contractor really understand the work he is self-awarding? Do they have expertise and a proven track record? The cost may be lower on paper, but if they can’t perform and they cause the job to be late, you pay more in the end. The builder likes to self perform work because those dollars are billed through the general conditions line item, typically not subject to the retainage agreement between the two parties. On a recent job, we had a subcontractor that bid the job for slightly more than the builder’s self performed cost. Sadly, the timing on that piece of the scope went from 83 days to a staggering 212. All savings from the cost of the job were lost in interest carry. We can do better!

If both sides enter the arena with respect and trust, following a truly competitive bid process and enter into a clearly stated contract, the opportunity for lawyers to make a lot of money will be greatly diminished!

If you are in the real estate business at all, you need to put this one on your “must read” shelf. I wish I had this field guide 5 years ago – could have saved myself a lot of money!

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