Ending Business as Usual: How Project Owners Can Free Themselves from Unwarranted Construction Cost Overruns

Huge cost overruns and missed deadlines have long been the accepted norm for construction project operations. But as construction starts to pick up after a long hiatus, construction expert Barry LePatner stresses the importance of putting new rules in place to make construction cost containment the way of the future for the construction industry.

New York, NY (April 2013)—As the economy has picked up so has construction in New York City. In fact, development on many new construction projects in and around the New York City area has begun to return to pre-recession levels. Certainly, that’s good news for an industry that was hard hit by the recession. The bad news is that the construction industry continues to be plagued by the same problems it experienced prior to the recession-induced slow down. That’s why, says Barry LePatner, project owners who want to ensure their complex capital projects aren’t held hostage by delays and cost overruns need to know five important facts.

          “There were several prevalent problems in the construction industry before the recession,” says LePatner, author of Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry (University of Chicago Press, 2007, ISBN: 978-0-2264726-7-6, $25.00, www.BarryLePatner.com) and Too Big to Fall: America’s Failing Infrastructure and the Way Forward (www.TooBigToFall.com).

          “Unwarranted cost overruns and project delays resulting from change orders, projects contracted using standard AIA or other form agreements, and so-called ‘fast-track’ projects that incorporate a ‘guaranteed maximum price.’ Little to nothing has been done to curb these problems. In the best of times, the construction industry was allowed to waste upwards of $120 billion each year, and it appears that contractors are perfectly happy making that the industry standard once again.”

          How do construction costs get so out of hand? LePatner explains.

          “Too often, owners designing and constructing projects rely on contractors to set the price for these projects,” he says. “But contractors are frequently a highly unreliable source for determining the true cost of a project. As one major developer recently confided to me, ‘I paid $1 billion for [my latest] building but I am sure with all our experience that it could have been brought out for 10 percent less, but we just don’t know how to get there.’ Project owners need to know that paying an additional 10 percent or more in this fashion is no longer necessary.”

          Read on for five facts LePatner says owners must know before designing and constructing large construction projects:

Fact #1—Every project that uses a “fast-track” methodology is guaranteed to experience delays and as a result missed deadlines. “Fast track” projects will also experience cost overruns, routinely adding 20-30 percent or more to the contract price.

Fact #2—Standard form agreements do not serve the interests of owners. They do little to prevent cost overruns, they foster delay claims, and they contribute to added costs associated with the resolution of claims during and after a project.

Fact #3—The use of a guaranteed maximum price (GMP) contract all but ensures that the owner will encounter change orders and delay claims that will boost the final price in the contract by 10-30 percent or more, an additional cost that severely impacts the bottom-line success of the project.

Fact #4—Today, owners can learn the accurate price of a project while the design is in process. They no longer have to wait until the construction team submits its proposals, which can occur a year or more after design has begun.

Fact #5—Insurance brokers are an unreliable source for ensuring placement of the all-important builder’s risk, general liability, and professional liability coverages that must be correlated with the indemnity provisions of each team member’s contract.

          “To properly manage costs and to properly protect their interests, owners must act proactively to address these serious issues,” advises LePatner. “For the past 40 years, the construction industry has deemed cost overruns to be the norm. As such, owners seeking to avoid cost overruns but who choose to retain project advisors from the construction world will not be well represented.”

          Cost overruns can and should be avoided. Here’s how:

          1. Insist on complete and coordinated drawings. The design team contracts should clearly require that the architect and engineers produce complete and coordinated drawings. A “fast-track” model that starts construction before the design documents are complete practically guarantees there will be unwarranted cost overruns, adding 15-30 percent or more to the owner’s budget.

          2. Conduct “constructability reviews.” During the design phase, a short list of construction managers should be invited in to do a “constructability review.” This review will assist the design team in creating drawings that are buildable and include cost-saving features that are best secured from contractors. On one recent project led by LePatner, ideas generated during the review saved six weeks from the schedule.

          3. Secure a detailed cost estimate before going out to bid. The owner must secure a detailed independent cost estimate of the designs before going out to bid. In this fashion, the owner will know the true cost of the work and no longer be totally reliant upon the self-serving “bids” by construction managers who dictate the individual line items from amongst their subcontractors and vendors.

          4. Require fixed-price contracts. Contractors working from complete and coordinated design documents should sign contracts requiring that they provide a true fixed price for all items specified on the design documents. Since they will have already reviewed the designs with the architect and engineers, they should certify that they perform this work without recourse to unwarranted claims for errors and omissions in the design.

          5. Say no to guessing games. Contractors should agree that once they have been provided with complete and coordinated design documents, there are no more guessing games as to the scope of the work, and they should be able to assure completing the project on schedule.

          “Once this practice starts to take root, far-reaching effects will take place in the marketplace,” says LePatner. “Owners will begin to have equal bargaining power with the construct
ion industry when negotiating the cost of their projects, large and small. By adopting the above proven methodologies, owners will know the price of the work before they secure bids from contractors. Finally, they will be able to gain the confidence of a secure budget for their projects free and clear of the omnipresent cost overruns that seem to strangle all projects under construction in our nation today.”

About Barry B. LePatner:
Barry B. LePatner is founder of the New York City-based law firm LePatner & Associates LLP. He is author of Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry (University of Chicago Press, 2007, ISBN: 978-0-2264726-7-6, $25.00, www.BarryLePatner.com) and Too Big to Fall: America’s Failing Infrastructure and the Way Forward (University Press of New England, 2010, ISBN: 978-0-9844978-0-5, $27.95, www.TooBigToFall.com).

He recently launched www.SaveOurBridges.com, a site educating the public on the perilous state of the nation’s infrastructure. The site includes an interactive map pinpointing the most dangerous bridges in the U.S.

For three decades, he has been prominent as an advisor on business and legal issues affecting the real estate, design, and construction industries. He is recognized as one of the nation’s leading advisors to corporate and institutional clients, real estate owners, and design professionals. Mr. LePatner has also been awarded the distinction of Super Lawyer by Super Lawyers magazine. In 2009, he was rated as one of the top ten real estate attorneys in New York City by the New York Observer.

A November 2007 Governing magazine article stated, “If there’s a guru of construction industry reform, it’s LePatner.” In November 2008, an article in New York magazine referred to Mr. LePatner as “a Cassandra of infrastructure.”

Mr. LePatner is recognized as a thought leader in the construction industry. As the coauthor of Structural and Foundation Failures (McGraw-Hill, 1982) and with 35 years of experience as a construction lawyer, he brings a special understanding of the engineering, business, and legal issues attendant to the design and construction processes—knowledge he put to good use in his latest book, Too Big to Fall. His second book, Broken Buildings, Busted Budgets, was very well received inside and outside the construction industry and helped create a national debate among owners, designers, and other key stakeholders.

Mr. LePatner has been featured in the Wall Street Journal, BusinessWeek, the Boston Globe, the New York Times, Forbes.com, the Chicago Tribune, Infrastructurist.com, and other prestigious publications. His articles and speeches on the perilous state of our nation’s infrastructure have garnered widespread attention, including his serving as a commentator on the multi-billion-dollar stimulus plan of the Obama administration. He has appeared on many television and radio broadcasts, including interviews on CNBC, Fox Business Network, and several National Public Radio segments.

A nationally recognized speaker, Mr. LePatner has addressed audiences on topics central to the real estate and construction industries, including events sponsored by the International Economic Forum of the Americas, Syracuse University, and several construction industry associations with audiences including contractors, architects, engineers, construction technology experts, economic experts, and other construction industry thought leaders.

In 2002, Mr. LePatner was honored by the American Institute of Architects with its highest award to a non-architect when he was given an honorary AIA membership. He is also currently on the Board of Trustees of the Design Industries Foundation Fighting AIDS (DIFFA). He has also served on numerous advisory committees including: the Advisory Board, Society for Marketing Professional Services; the Board of the New York Building Congress; Board of Advisors, Legal Briefs for the Construction Industry; American Institute of Architects Advisory Committee; and the National Academy of Sciences.

About the Books:
Too Big to Fall: America’s Failing Infrastructure and the Way Forward (University Press of New England, 2010, ISBN: 978-0-9844978-0-5, $27.95, www.TooBigToFall.com) and Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry (University of Chicago Press, 2007, ISBN: 978-0-2264726-7-6, $25.00, www.BarryLePatner.com) are available at bookstores nationwide and all major online booksellers.

For more information, please visit www.BarryLePatner.com and www.TooBigToFall.com.