September 24, 2018
Author: Joel Heusinger
Organization: Woods & Aitken LLP
Managing the Project during Construction
1. Cost Control and Recording
The estimate provided by the contractor and accepted by the owner during the bid phase represents what the project will cost the owner.159 In other words, this bid, once accepted, becomes the budget for the project. In addition, it provides valuable limits to the project designer, knowing how much the owner intends to spend and what can be afforded. Prior to submitting a bid, it is therefore important for the contractor’s estimator to consider the full scope of the work required for a project. A review of all plans and specifications is necessary in order to provide an accurate estimate. If the estimate is not accurate but is accepted by the owner in the bidding process, then any additional costs that arise based on the initial plans will have to be absorbed by the contractor.160
Once the plans and specifications have been reviewed, the estimator then must begin to determine exactly how much work must be performed and how the work should be priced. The estimator must take into consideration any of the bids provided from any subcontractors used and consider the order in which the work must be completed.161 In addition, the estimator should look for any cost-savings alternatives that would allow for the project to be completed by the same time but at a lower cost to the customer.162 The estimate is also closely related to the schedule as the estimator must consider the capabilities of the equipment to be used, the intended set-up and needs of the various crews, and how the approach to the project is planned.163 In some projects, the estimator might also have to consider any contract limitations established by unions (hours worked, numbers of individuals on crews, etc).164
Prior to even beginning construction, the estimator should identify into small segments, no more than a length of 10 days, each task that must be completed as a part of the scope of the project.165 Upon reviewing each task, the estimator must calculate the anticipated costs, including labor, that will be incurred in order to complete such task. Additionally, the estimator and project manager must determine a logical sequence for the tasks to occur, maximizing efficiency in the use of resources as well as the potential for profit for the contractor, while minimizing the cost to the owner.
One responsibility of the project manager and any job site supervisor includes performing regular comparisons of initial estimates to the actual costs incurred.166 Invariably, some tasks are completed ahead of schedule and for a lower cost than estimated, while others are delayed for a host of reasons or may cost more than initially anticipated.
Updates to the budget of various tasks and to the schedule should occur on a regular basis for purposes of tracking the profitability of a project and of those costs, such as labor, that can be highly volatile.167 Reports should be made on a weekly basis by job supervisors and should be reviewed by the project manager. While some variances are bound to occur between the budget and the actual cost of any given task, particular attention needs to be given towards those variances that are deemed trends and those that are of a more permanent nature that can dramatically affect the outcome of the overall project.168
Because the actual costs vary, the initial estimate provided should be updated continually so that it reflects current and anticipated expenses.169 In addition, any change orders that have been approved should be represented in the updated estimate. An updated budget and estimate serves as a way to monitor the gross profit of the project.170 The communication of this updated information to all project personnel provides feedback on work that has already performed and provides a direction for the remainder of the tasks that need to be completed.
As a way to control the progress of any given project, it is helpful to establish a baseline that all parties can review periodically throughout the process.171 A baseline is essentially a target and provides various goals to be achieved. These goals could pertain to the cost of the project or it could be related to the schedule of completion. Regardless, having a baseline serves in the overall goal of minimizing the actual cost of the overall project and maximizing the efficiency of the time it takes to get the work performed. At the end, the baseline serves as a good measure of how the project was planned at the outset.172
The estimate serves as a basis for the cost baseline, which once defined by the architect or designer of the project, is the operating budget during the entire process.173 In the eyes of the contractor, this budget serves as a number to measure against when determining whether or not the project was a success. As the project moves into the construction phase, the need for control and monitoring of the budget becomes critical. Making sure that there is a tight control over the cost of materials, labor, equipment as well as any overhead is necessary.174 Additionally, communicating that information to all of the parties involved can only help to achieve success.
The schedule defined by each of the project managers at the outset serves as the basis for the time baseline.175 Here, managers provide goals regarding the time and resources anticipated in order to complete the project. Again, it is necessary to have a strong monitoring system in place, keeping track of what tasks are being worked on and where they fit in relation to the goals established prior to the commencement of construction. The goals generally reflect key milestone dates of the project and also indicates key material delivery dates.176 Planning out the sequence of when subcontractors should begin and finish also appears on the schedule which assists in the overall efficiency of the project.177
Once baselines have been established, each project manager must be informed and more importantly must understand the meaning of each of the budgetary and scheduling goals. From there, it becomes the project manager’s responsibility to measure results and take corrective action when it is necessary.178 Field performance can be measured by comparing the actual results to the baselines as well as comparing the variances between the two against performance indices.179
Productivity performance should also be measured and adjustments should be made accordingly.180 The communication of any decisions made by management must occur as swiftly as possible to all of the key participants. The timelier the communication, the better chance there is for the participants to implement those of the decisions in the field.
Finally, management should continually report in on the progress of the project itself.181 These reports should reflect any key variances between the budgeted and actual amounts, should project any trends noticed, and should continue to forecast the project’s completion cost and date.182
2. The Role of Schedules
Many construction contracts include a schedule requiring the contractor to complete performance by a completion date or within a stated number of calendar days. In Nebraska, if the parties fail to include a contract schedule, the courts will imply a reasonable time for completion of the contract.183 In addition, the contract should explicitly state the date of commencement of construction. This date is important because it provides a point of reference for both the completion date and any liquidated damages attributable to late performance.
In defining the schedule, the parties should review the contract’s definition of substantial completion because this event directly affects other contract provisions such as final payment and the tabulation of liquidated damages. According to the AIA 201- 1997, substantial completion is defined as: “sufficiently . . . complete so that the Owner can occupy or utilize the Work or designated portion thereof for its intended use.” Under this provision, the defining characteristics of substantial completion are “occupancy” or “ability to utilize.”184
Today, the schedule is one of the most important aspects of any construction project, especially those that are fast-tracked. Thus, both the owner and the contractor should pay special attention to the schedule. However, several scheduling issues often develop during performance of the construction, most of which could be avoided. First, both the owner and the contractor should periodically update the schedule included in the contract documents to reflect both changes and progress on the project. All too often the parties enter into the original schedule and then disregard it in the field. In addition, both parties should be mindful of their obligations that can affect the schedule of other participants’ performance. For instance, suppose the schedule requires the owner (or contractor) to procure materials that are necessary for a subcontractor’s performance. Failure to follow the schedule can result in costly delays on the project and disputes with the subcontractor.
Additionally, the implementation of short interval planning can dramatically improve communication between “the office” and “the field.” One type of short interval planning is the 3-week look ahead schedule. The following list provides tips on how to implement your own 3-week look ahead schedule in order to facilitate weekly productivity feedback and assist management personal in supporting tasks on “the field.”
• Project manager and foreman should jointly prepare a new 3-week look ahead schedule each week.
• The 3-week look ahead schedules should answer the following questions:
o What is the construction plan for the next 3 weeks?
o How many workers will be required to successful complete the construction plan?
o What types of tools and supplies are needed in order to complete the construction plan?
o What tasks must be done by other trades in order to complete the construction plan?
o How does the 3-week look ahead schedule fit into the overall project schedule?
• The 3-week look ahead schedule should be submitted/communicated weekly to the general contractor, construction manager or owner.
• Each week the 3-week look ahead schedule must be compared and measured against the overall project schedule and the labor cost control system.
• The 3-week look ahead schedule should not be formulated by the general contractor, construction manager, or owner.
• The 3-week look ahead schedule should always identify and communicate the change order impact.
3. Recognizing and Pricing Impact
It comes as no surprise to those familiar with construction that changes to construction plans can and do occur at all stages of a project. In order to accurately track construction progress and costs, it is necessary to document and account for changes to specific activities in a way that does not attribute the costs or impacts of such changes to other activities. To do so, the impact of changes must be, first, recognized and, second, measured. For example, the cost and progress associated with the installation of an extra 400' run of electrical conduit should not be attributed to the 2000' of conduit included in the original plans. To do so would overstate the cost of the original activity and understate its progress status.
Among the factors to consider in recognizing and measuring the impact of project changes are (1) the cost of the changed work itself, (2) its impact on unchanged work or the change in conditions under which later work is performed, (3) the effects of multiple and overlapping or concurrent changes and delays, and (4) the schedule impact of the foregoing. The ability to recognize and measure the impact of project changes in these areas is a significant tool in the effort to save a troubled construction project. Although it seems self-evident, the ability to recognize and measure the impact of changes begins with the changed work itself. Even so, it is not uncommon to find that cost and schedule impacts of changed work are neither identified nor captured in a manner that attributes them to the change from which they emanate. Valid and reliable accounting procedures must be in place on the project in order to accurately record and attribute costs to specific activities. The ability to recognize and measure the impact of changes presupposes the existence and operation of such cost accounting procedures.
The costs of changed work are comprised, in part, of the direct costs of performing the changed work itself such as labor, material, and equipment. In order to distinguish them as such, these costs must be recorded and allocated to activities caused by changes to the project by persons well acquainted with the limits of the scope of work encompassed within the contract work. Individual cost codes and categories of work must be assigned to activities resulting from changed work and care must be taken to properly categorize the purpose for each cost generating activity.
In addition to the direct costs of performing changed work, it is necessary to recognize and measure the cost of supervisory and administrative activity involved in the administration of the changed work. These costs include both the field supervision and administration costs resulting from the field activity, as well as the administration of the paperwork and contractual activities resulting from changed work. The latter activities may include, among others, the costs of preparing and issuing additional notices, requests for information, change proposals, cost estimates, price quotes, change orders and contract amendments.
In order to fully measure the impact of changed work, it is necessary not only to grasp the direct and indirect costs of the changed work itself, but also to grasp the schedule and cost impact on downstream work activities. Among the obvious consequences of changes which add work or delay completion of critical activities is the potential compression of critical schedule activities. In other words, where critical activities are delayed, or where delay in non-critical activities makes them critical, the resulting need to complete more work in less time, or to re-sequence the remaining work in order to achieve timely completion, carries with it both cost and schedule impacts.
It is not uncommon that the impact to downstream activities cannot be fully measured or predicted at or near the time of the change which triggers them. Consequently, it is not unusual that negotiation of the contract terms for such changes is less than exact. Even where the physical impact of a change on downstream activities can be discerned at the time of a change, it may be nearly impossible to accurately predict the costs of such impacts until such time as the downstream work is performed.
1. Extending the Completion Date for Owner Caused Delay
Invariably, the contract requires the contractor to complete the work by the completion date. As a general rule, unless a contract provision grants an extension, the contractor is liable for failure to meet this burden. Thus, the contract should expressly define what, if any, events entitle the contractor to an extension of time. Typically, the construction contractor can obtain a time extension and a price increase for owner caused delay. Nevertheless, the owner may attempt to limit the contractor’s recovery to a time increase by including a no-damage-for-delay clause. For example, the clause might state:
The extension of time or the additional compensation provided pursuant to this Section 10.2 shall be the sole and exclusive remedy that [Contractor] shall have against [Owner] for delays, disruptions, or interferences caused by the acts or omissions of the [Owner] on the Project, and [Contractor] shall have no right or entitlement to additional compensation, whether direct or indirect, for such delays, disruptions, or interferences.
From the contractor’s perspective, no-damage-for-delay provisions are overreaching and dangerous. Contractors incur real monetary losses when the owner causes delay. For instance, the contractor may be paying rent on equipment that sits idle. Or the contractor may experience decreased productivity, thereby increasing labor costs. It is the owner’s fault that the contractor incurs these out-of-pocket expenses; nevertheless, the contractor cannot recover monetary damages. In this regard, a nodamage- for-delay provision is similar to an indemnification provision that shields the owner for its own negligence.
2. Extension of Time for Force Majeure
Sometimes delay is caused by events that are not the fault of either the contractor or the owner, such as adverse weather, floods, strike, war, and similar events These are known as force majeure events. In such a case, the contract often provides for a time extension although the contractor may or may not be able to obtain a price increase. As a practical matter, construction contracts grant time extensions for force majeure events so that the contractor does not have to include a contingency fund in its price for uncertain casualties. This rationale is very similar to that behind a differing site condition clause.
3. Notice Requirements for Time Extensions
Similar to changes and differing site conditions, construction contracts typically include specific notice requirements for a time extension granted for delay caused by either the owner or force majeure events. Once again, these notice provisions will likely be strictly enforced. As a result, both contractors and owners should pay particular attention to the notice requirements, especially the time limitations. Contractors should object to procedures with unreasonably short notice requirements. For instance, the provision could provide: “No allowance for any extension of time for any cause whatsoever shall be claimed by, or granted to, [Contractor] unless [Contractor] shall have made written request upon [Owner] for such extension within forty-eight (48) hours after the event giving rise to such request . . . ”
Requiring the contractor to request the time adjustment within 48 hours puts the contractor in a very difficult position. Often the delay caused by an event may not be apparent within 48 hours of its occurrence. Even if it is immediately apparent, the practical realities of administering a complex construction project may prevent providing timely notice. For instance, if the event happens at 12:00 am on a Friday night the contractor may not even learn of the problem until returning to the project on Monday morning, well after the 48-hour time limit has expired.
4. Contractor’s Liability for Delay
Failure to timely complete the work is a breach of the contract that entitles the owner to damages. However, it is often difficult, if not impossible, to quantify the damages caused by delay. Most construction contracts avoid this problem by providing a liquidated damages provision that charges the contractor a stated amount for each additional day after the completion date that is required to achieve substantial completion.
In order to be enforceable by courts, a liquidated damages clause cannot be a penalty.185 To avoid being classified as a penalty, the liquidated damages provision should be a reasonable estimate of the actual damages incurred by the owner. Contractors in particular should be aware of the amount charged per day for liquidated damages. They should avoid unreasonably high amounts and seek a cap on the total amount of liquidated damages that can be incurred. For example, an unsavory clause could state:
Both parties agree that for each Milestone Date in which [Contractor]
shall fail to meet the date as stated in the clause 47.1 that [Contractor]
shall be subject to Liquidated Damages at a rate of $3,000 per day from
day 1 through 7 and $10,000 per day for each day thereafter. It was also
agreed by the parties that at no time shall [Contractor] be responsible for
more than $25,000 per day for Liquidated Damages for a combination of
missed Milestones. Furthermore, it was agreed that Liquidated Damages
shall be limited to thirty percent (30%) of the Contract Price. Both parties
acknowledge that Liquidated Damages shall be the Owner’s sole remedy
for any schedule delay caused by [Contractor].
Notably, the contractor is liable for $10,000 per day if it is more than one week late. In addition, the contractor faces up to $25,000 per day. This provision potentially exposes the Contractor to remarkably high liability. Owners should be concerned that a court would conclude that this is an unenforceable penalty clause.
In addition to liquidated damages, some construction contracts enable the owner to seek traditional breach of contract remedies, including consequential damages. According to the common law of damages, only harm that the contractor could foresee occurring from the delay is recoverable. The harm must be foreseeable when the owner and the contactor executed the contract, not when the delay occurred. This general rule of law limits the contractor’s potential liability. Contractors should be wary of a provision that could expand this liability:
Damages for Delay: Contractor shall be liable to [Owner] for all damages,
including any liquidated damages payable to Owner for delays caused in
whole or in part by Contractor or Contractor’s employees, agents,
Subcontractors, material suppliers, or any other person or entity for whose
acts Contractor may be liable. In the event damages incurred by [Owner]
are caused by both Contractor and another entity for whose acts Contractor
is not liable, [Owner] shall have the right to reasonably apportion said
damages among reasonable parties, and such apportionment shall be
binding on the Contractor.
This provision potentially exposes the contractor to unlimited delay damages. As a practical matter, contractors should try to negotiate a provision that limits the owner’s recovery to liquidated damages, but even if unsuccessful, contractors should never agree to unlimited damages.
4. Project Recordkeeping
Keeping records during the construction phase of a project is important for a number of reasons. First, documents maintained during construction serves as a way to keep all parties informed about progress, problems and any modifications that might be needed.186 Second, the records can be referenced in subsequent projects, providing helpful information with regards to the estimation, planning and management of various jobs.187 Third, the records provide a reference once the project is completed to ensure that the operation and servicing of various systems can occur with minimal problems.188 Last, records can serve as evidence against claims that are later filed.189 There are five key categories of project documents that should be maintained in any construction project.190 The first is the Project Manager’s Site Visit Report which should be completed on a monthly basis.191 This report includes areas that should be checked by the Project Manager upon inspection and reflects the progress and any changes that need to occur. It would be most efficient if, while the Project Manager is inspecting the project, the job supervisor is present so that notations can be made as to any corrections that need to be made. This helps in terms of the overall efficiency of the completion of the project. The following is an example of a Site Visit Checklist:
Secondly, a Daily Job Log should be maintained by the job supervisor and retained after the completion of construction.192 Within this log should be reflected a daily recording of what transpired during the day on site, including any conditions (such as weather or a failure of a supply delivery) that may result in a delay. The immediacy and consistency of what happened at the jobsite daily will serve useful as evidence should claims be filed at a later date. In addition to any problem areas, noted progress should also be recorded to serve as a reference for future projects. The project manager should review this on a daily basis to keep abreast of the occurrences on site and to address any problems that have arisen.
Third, each project ought to have a “Field-Authorized Change Order Form.”193 These forms serve as documentation for any changes performed once the construction is underway, including those changes ordered by an owner, contractor or design professional. This serves as important documentation when questions are raised with respect to the completion time or cost of a particular project. These forms should be approved by the project manager prior to any change being implemented. Fourth, each project should have documentation with respect to the equipment installed.194 This would include any written material with respect to the installation, testing and operation of each piece of equipment. Again, such reports would be able to be referenced in later projects or if problems should arise after the construction phase is completed. Included in this area of record-keeping are the submittal sheets, shop drawings, operation and maintenance manuals, test reports, air and water balance reports, as-built drawings, start-up notices, warranty letters, and maintenance contract proposals.
Finally, any communication should be documented during and maintained after the completion of a given project.195 During construction, while numerous conversations may be had, it is better to document any communication in written form. This documentation provides clarity should it need to be referred to after the project has been completed or during litigation. The records of the correspondence should include the date, who the correspondence was to, who the correspondence was from, some way to identify the job, possibly a number or identifier assigned to the actual communication (a way to show that all of the communication is present), the text of the communication, any requested date of response, and the names of the individuals who were sent copies of the correspondence.
159 Frederick E. Gould, 2002, Managing the Construction Process (2nd ed.), at 96-97.
160 Id. at 97.
162 MCAA Project Manager’s Manual, Section 9 at 109 (2006).
163 Edward R. Fisk and Wayne D. Reynolds, 2006, Construction Project Administration
(8th ed.), at 97.
164 Id., at 98.
165 MCAA Project Manager’s Manual, supra, note 162, Section 11 at 117-118.
166 Id. at 119.
167 Id. at 120.
169 Id. at 122-123.
171 Gould, supra, note 254 at 346.
172 Id. at 354.
173 Id. at 346.
174 Id. at 349.
176 Id. at 351.
178 Id. at 371.
183 Gustav Thieszen Irrigation Co. v. Meinberg, 276 N.W.2d 664 (Neb. 1979).
184 Charles M. Sink & Mark D. Peterson, The A201 Deskbook: Understanding the
Revised General Conditions , 87(1998).
185 See, e.g., Browning Ferris Indus. v. Eating Establishment-90th & Fort, Inc., 575
N.W.2d 885 (Neb. Ct. App. 1998).
186 MCAA Project Manager’s Manual, supra, note 162, Section 8 at 97.
189 Id.; Fisk, supra, note 163 at 78-79..
190 MCAA Project Manager’s Manual, supra, note 162 at 99.
192 Id. at 100.
193 Id. at 102.
194 Id. at 103.
195 Id. at 103-104.