Owners Should Make Early Decisions on Major Construction

Successful construction projects often have one common trait - developers make a lot of good choices at a very early stage. Here are core legal and management tips that can get large construction assignments started on the right track.

By Philip R. White

Taking on a major construction project can be daunting for owners, even ones that have managed smaller projects in the past. But there are basic project management steps that every owner can take to ensure a successful result. As a seasoned construction litigator who has spent 20 years working on the back end of troubled projects, I know that these steps are a smart way to avoid problems in a development venture.

1. Hire good construction professionals, not just the cheapest. On projects with a budget above $100 million, and even some smaller ones, using a strong program management firm and design team early on will save money in the end by providing continuity and allowing integration of design and construction expertise. And make sure the team reflects your business style and philosophy. If your organization is hard-edged, get a hard-edged group; if you favor a cooperative management style, hire a team with a similar attitude.

2. Recognize that contractors and designers are in business to make a profit, not to accept every risk. These firms have varying tolerances for risk and want it to be fairly allocated and compensated. The tendency of owners to try to achieve cost certainty by expressly allocating every risk to the contractor in a lengthy contract is usually a recipe for future project change orders and litigation. The most successful owners recognize that risk should be allocated to the party best able to control it - even if that means taking on some of it themselves.

3. Set reasonable time and cost goals. As projects get larger, the pressure to move faster and squeeze margins becomes greater. While there are cost benefits from fast-track design and construction schedules, these require more intense planning and supervision, which could offset the savings from having a shorter project schedule. On the cost side, too low a budget will attract only claim-oriented contractors to bid.

4. Draft a clear contract that addresses not only the normal construction issues but also ones that are unique to your project. A power plant where many trades must work in the same space at the same time presents different coordination challenges than a linear project like a highway. A tunnel project that runs through more than one jurisdiction has different permitting risks than a stadium located in a single city. There is not a one-size-fits-all contract.

5. Pick a project delivery system that matches your desire for control of the design and construction details. At one end of the spectrum is the standard bid-and-build, where the owner hires a team to design and construct the project, but can be as involved as it wishes and even make changes during construction. At the other end of the spectrum is design-build contracting, in which the owner gives performance specifications to the project team and then steps out of the process. There are many variations to these basic systems.

6. Hire lawyers and consultants with construction expertise. Much of the success of a project depends on identifying risk and striking a balance between competing approaches. The relative cost of hiring experts is small in comparison to the cost of dispute resolution, especially on large, complex projects.

7. Accept that projects constantly change, especially the more complex ones. Heavy infrastructure projects, which increasingly are the collaborative work of government and private companies, offer the best examples. Since these projects serve so many constituencies and are massive in scale, changes in the political climate, fluctuations in the price of raw materials, or financing constraints could arise during design, procurement, and construction phases. The financial, management, and legal structure of the project must be sufficiently flexible to handle the uncertainties.

Philip White is chair of the construction law practice group of Sills Cummis Epstein & Gross, which has offices in Newark, N.J., and New York.