Why Risk It?: Building a Better Project

The key to successful construction projects is to retain well-qualified contractors who do not cut corners

• By John P. Bachner
• May 01, 2005

But it doesn't have to be that way. In fact, construction is not inherently risky at all, and construction problems, rather than being inevitable, can easily become rare. Why, then, do so many projects go bad? Because all too many owners blithely proceed with the utterly bankrupt notion that there is such a thing as free lunch; that they can compromise quality with abandon but nonetheless get results that work just fine.

An association of construction owners has begun developing its own set of standard contracts because, it has said, the standard contract sets developed by The American Institute of Architects (AIA) and the Engineers' Joint Contract Documents Committee (EJCDC) are too one-sided. The organization claims that the parties in the best position to affect a given outcome, e.g., via design or construction, should bear the most risk if the desired outcome does not materialize. I concur wholeheartedly, which is why the group's new contracts are not needed: The owner always has and always will be in the best position to control project outcomes.

A Best Case Scenario
Consider the following scenario: The Director of the Department of Public Works (DPW) of Pardonme, Miss. -- Sandra Clay, P.E. -- decides to test some of the time-honored dictums offered by the great Victorian intellectual John Ruskin:

• There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man's lawful prey.
• Quality is never an accident; it is always the result of intelligent effort.
• The bitterness of poor quality lingers long after the sweetness of low price is forgotten.
• It's unwise to pay too much, but it's unwise to pay too little too. When you pay too much, you lose a little money ... that is all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot ... it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better.

"Ruskin," she says to herself, "I'm going to try you out." And with that, she decides to go "quality all the way" for the location, design, and construction of a new wastewater treatment system, to see what type of impact quality held foremost will have on overall cost and performance.

She starts with geotechnical engineering. She asks several well-known, locally experienced firms to submit their statements of qualifications. She also examines DPW records of past dealings with the firms, to see which ones seem to have performed most effectively. She rank-orders the firms in terms of preference and meets with representatives of the first, insisting that one of those representatives be the project manager who likely would be in charge were the firm selected. She asks probing questions to learn more about the firm and the people who comprise it, how it would go about organizing the project team, communicating and cooperating with other project principals, and so on. The firm notes that it wants to have representatives on site during earthwork, to apply the observational method developed by the founders of geotechnical engineering, Terzaghi and Peck. "We are as committed to quality as you," the firm's senior representative says. "We're certain we can contribute to the success of the project."

Ms. Clay likes what she hears and decides that she wants to deal with the firm. She and the firm's representatives discuss the pros and cons of various services, how those services affect and are affected by risk, and related issues. Once they agree on what the scope should be, they discuss fee. Ms. Clay is thoroughly experienced and knows what is reasonable and what is not. They agree on a fee and move on to terms and conditions. The geotechnical engineers are somewhat surprised by the DPW director's response to their comment that the indemnity that the city attorney usually insists on is counterproductive. "It clouds the issue of insurance coverage," they say, "and even if it didn't, it's unfair. Why should we be required to provide free insurance?" She responds with, "I know. I was always taught that you rely on your attorney to give you advice on matters of law. A contract is a legal document that works to solidify a business arrangement. You want it to work right legally so you get a lawyer to review it. But you don't want the lawyer telling you how to do business, and that's what an indemnity does; it's a business issue, not a legal issue. Do I, as the owner's representative, want to have you provide me with free insurance? That's a business issue. Asking a lawyer to tell you how to get your business done is like asking a translator what to say. An indemnity epitomizes the free lunch syndrome and we're not gong to do it. We want good engineering from our engineers, not free insurance. Besides, when engineers are so worried about what could go wrong if they have to be an insurance policy, they're likely to rely on conservative design, and that's the last thing we want. It's too expensive."

With the geotechnical firm on board, the next step is retaining the civil engineering firm, and Ms. Clay uses the identical procurement method, choosing the firm based on its track record, the interest it shows in her project, the approaches it wants to use, the quality of the people it will assign, and so on. She insists that the firm not take shortcuts. "If I wanted the contractor to design elements of the project, I would have gone design/build," she says. She insists that all structural connections be designed by a structural engineer employed or retained by the civil engineer; that all wire gages be specified by an electrical engineer employed or retained by the civil engineer; and so on.

Peer review of reports, plans, and specifications is an element of the scopes both firms agree to perform. Both concur with Ms. Clay that peer review helps catch errors and omissions that could otherwise sneak through. Peer review can also result in the consideration of approaches and ideas that might otherwise have gone overlooked.

The geotechnical firm submits its final report at a meeting attended by Ms. Clay, two of her deputies, and representatives of the civil engineering firm. The geotechnical project manager explains significant findings and how they can affect civil engineering design. Later, when the civil engineering firm submits its preliminary design, the geotechnical engineer reviews it to see how geotechnical issues have been considered. (In this case, they have been considered well, because the civil engineers actually took the time to read the report!)

Ms. Clay's next step is really a surprise: She issues a notice to the area's five top water treatment system contractors, saying she will select three to perform a buildability review of the engineers' instruments of professional service. She notes that each firm will be paid for its service, and the one that performs most effectively will be selected to build the project, assuming it can negotiate acceptable terms with Ms. Clay. Negotiate?!

In fact, one of contractors calls a city council member, James Denndie. Mr. Denndie calls Ms. Clay. "Sandy," he says somewhat patronizingly, "just what's going on over there? One of my constituents called to tell me you're letting a pretty major project without bidding. What's all that about?"

"Will, Jim," she begins, "it's like this. In the past 50 years we've let about 500 major projects to bid. Do you know that we have not in even one case paid the winning contractor the amount it bid? In every case we had to pay more, because of unanticipated conditions, or changes, or because we forgot this or forgot that. Frankly, some of these contractors are a lot better at bidding than they are at building, and for all we know one of the contractors that bid too high may have included work that the low bidder left out. What's the point of using a bidding system to select a contractor when the number that's used to pick the winner is a number that's never paid? It just makes no sense. The only thing that really counts is quality. If we can get it at what we know to be a reasonable price, clearly that's the best deal for the public."

"Well, you've got a point there."

"Besides, Jim, when we select a contractor on a negotiated basis, we give the firm an incentive to perform well, because next time, if we can stick to a quality-oriented procurement system, it will be that much ahead of the game."

"Well, I hope for your sake it turns out well."

"I don't know why it wouldn't, Jim. We're selecting the best firms to perform the work, we're encouraging them to use comprehensive scopes, we're agreeing to fair terms and conditions, we're providing a high level of observation, we're commissioning the product, and we're overseeing operation and maintenance. That's the right way to do it. You can't get that kind of high quality for a low price, and you know full well that high quality is the least expensive in the long term."

Ms. Clay selects the contractor that she believes is best qualified. They have an excellent reputation and performed a thorough analysis of the geotechnical and civil engineers' recommendations. They pointed out alternative approaches that could be taken in some areas to improve efficiencies, and the designers agreed, incorporating the suggestions into the final construction documents. "I want no accidents on this project," Ms. Clay tells the contractor's CEO. He assigns a well-qualified safety officer and develops a safety plan. While no plan can be fail-safe, this one looks pretty good and, in practice, it works almost perfectly.

Both the geotechnical engineers and the civil engineer assign personnel to provide full-time construction observation. They are available to evaluate conditions as they are exposed by excavation, and to work with the contractor in making any necessary changes. In some cases, the conditions are better than anticipated and the contractor, working in a spirit of cooperation, has no problem with the fee deductions proposed.

Once the construction is complete, the new system is put into service. The engineers and contractors have personnel present to look for even the smallest problems. The civil engineer, as part of its agreement, prepares an operation and maintenance (O&M) manual, trains the O&M staff, and then monitors their performance for the first year. Finally, at the end of the first year, the project is complete.

"We intend to do more his way," Ms. Clay testifies before the city council. "The shortcuts we've taken in the past have been the cause of just about every problem we've experienced. The cost of resolving those problems -- in terms of cash outlays and the value of the time we've had to expend -- far exceed the money the shortcuts were designed to save. We now have an excellent new wastewater treatment system with no latent problems ready to surprise us."

Quality Wins Out
True story? Not yet, although I'm confident there are some "out there" that I'm not aware of. But think about it: If you actually did approach a project as our Ms. Clay is portrayed to have done, what would you do to risk? You'd reduce it significantly. "But you'd have to pay so much more," some might argue. To which the response must be, "More than what? You certainly wouldn't pay more than the price required to do it right in the first place. It's when you try to get a high-quality result by paying less that you pay more. Maybe you get away with it on some projects, but sooner rather than later, you'll have a problem, and by the time you add to the cost the expenses you have to bear because you decided to do it wrong, you lose."

Some owners think that they can insulate themselves from the financial consequences of problems by requiring designers and contractors to agree to harsh contract terms. But harsh contract terms will almost always be contested, usually by an insurance company. As a consequence, assuming an owner "wins" anything at all, the price paid to obtain the winnings can be substantial, including amounts paid to attorneys and the value of the time spent.

One of the best sources of information on this topic is Derailed by Dispute, a book published as CD ROM by ASFE/The Best People on Earth. (It's available at ASFE's on-line bookstore: www.asfe.org). It comprises 76 case histories of good projects that went bad. With few exceptions, the problems were caused by the owner's desire to do something not as well as it could be done, but rather as cheaply or as quickly. We know how to do it right. It's thinking that we can get the same result by doing it some other way that makes construction such a risky affair. And until we change our approach to how we build things, we will continue to make problems inevitable. It's not construction. It's us.

This article originally appeared in the 05/01/2005 issue of Environmental Protection.