How to Recognize Red Flags

The risk-to-reward ratio in construction is among the most unbalanced of any mature industry. The disproportionate downside, risks associated with an extremely bad project, far outweigh the upside gained from even the most successful projects. At their worst, truly disastrous projects can cost firms and owner/agencies millions of dollars, push their best people to the breaking point and cause long-term damage to reputations and key relationships that are important to future work.

When examining which projects most significantly impact a firm’s bottom line, professional management and consulting firm FMI often finds that a small handful of the worst-performing projects in a firm can wipe out the total profits gained from all of the top-performing projects combined.

Over-optimism, underestimates of project complexity and skilled labor shortages are the primary causes of project distress industrywide. While it is very true that these causes are all typical drivers, they are diagnosed with the benefit of hindsight; typically, after the design is finished, the contract is signed and construction is well underway or even complete. Because no contractor enters a project expecting it to go poorly, they often fail to recognize the signs until it is too late. Generally, both contractors and owners implicitly understand that the rising tide lifts all boats and that a construction project is rarely a zero-sum game. Put simply, it is uncommon for some parties to incur significant losses, while others experience a windfall. All parties involved in a construction project are highly interdependent.

However, the litigious nature of the construction industry can force project stakeholders into a reactive and protective mindset, in which the focus shifts to assigning as much blame as possible. Predictably, parties quickly stop thinking in the best interest of the project, and instead focus on how to protect their individual firms.

Symptoms of Project Distress

A historical study of distressed projects conducted by FMI found that there are four main causal factors leading to project distress.

While much could be written about these areas, this article focuses on the effects of unresolved change order disputes and poorly performing submittal processes.

Unresolved Change Order Disputes

Poor or incomplete design can lead to a number of constructive changes. Generally, these types of changes arise from errors, omissions or poor design coordination, and only allow the project to function as initially intended. Once the construction process has begun, there is a significant premium attached to the work that must be performed, and at little or no additional value added to the project.

Most contracts are written in a way that allows the upstream party to direct contractors to proceed with the work in the absence of an agreed-upon change order. This is typically referred to as a construction change directive (CCD).

Most contract language is written so that there is no limit to the number of CCDs that can be issued, and downstream contractors can become extremely over-extended as they attempt to effectively fund the additional, completed work.

Because of this, contractors attempt to limit the number of CCDs that can be issued at given time. For example, if the aggregate value of a proposed change order work exceeds a certain percentage of the contract value (typically 2 to 5 percent), no further CCDs can be issued until the previously submitted change orders have been resolved.

Poor Performing Submittal Processes

In the early procurement stages of a project, when submittal activity should be at its peak, contractors should closely monitor any trends that emerge concerning the percentage of submittals approved in the first review cycle. They should also monitor the number of review cycles required to obtain final approval.

It is worth noting that project schedules rarely, if ever, assume multiple submittal review cycles for key procurement items. Because contractors can be woefully optimistic regarding future progress, they fail to recognize and communicate the real impact that multiple review cycles will have on the project’s schedule.

Highly successful projects should expect to see 75 percent or more of submittals approved in the first review cycle. For the most distressed projects that were analyzed, less than 50 percent of submittals were approved in the first review cycle, and sometimes required as many as five iterations before final approval was granted.

The Road to Recovery

Because the specific causes of project distress are varied and innumerable, there is no one-size-fits-all approach to recovery. However, there are a few universal best practices that FMI has developed and refined over the years to help project teams get back on track.

1. Facing the Facts

There comes a point in the life of a bad project in which its leaders have no choice but to face the facts that early project objectives can’t be met. In many cases, this admittance comes after most members of the project team have long given up hope that it stood any chance of achieving these objectives.

Because contractors loathe to admit that the project cannot finish on time or within budget, they attempt to prolong the inevitable with overly optimistic projections of schedule recovery and cost savings. Setting unrealistic goals based on assumptions that have already proven false sets the table for new, more severe project distress. Like a cancerous tumor, waiting too long to admit there is a problem and only then beginning treatment is much more harmful than going to the doctor for a diagnosis.

This point in time represents a delicate and critical juncture for project executives. If the message is delivered poorly, communication within the project may take on a very litigious tone. Downstream, executives must be able to communicate new goals for the project that the project team actually believes are achievable. Upstream, they must tell their own superiors what the best, worst and most likely case scenarios are. In a public works project in which cost and schedule commitments must be published to the community at large, this process can become exponentially more difficult and complex.

2. Redefining Success

The entire project team must agree that the new objectives are both achievable and worthy of their commitment. If the project team continues to operate in damage-control mode, the reactive behaviors that inevitably follow will cause the project to revert to its previous dysfunction. If the expectations and objectives set forth at the beginning of the project were inherently flawed, they must be re-baselined in order for the project team to have realistic goals. Keeping the morale of the project team intact is critical during this time period.

If downstream communication leading up to this point has been that “failure is not an option,” the tacit message becomes that schedule slippage and cost overruns are allowed. In this case, getting people to fully commit to the new objectives becomes a much tougher mountain to climb.

3. Removing Prior Disputes

The individuals most directly responsible for driving progress must be willing and able to focus their efforts exclusively on getting the project completed, and not on contractual posturing. This is not to suggest that the terms of the contract should be relaxed or ignored, but, rather, the unresolved issues and disputes of the past must be taken out of the stakeholders’ purview so that all team members are able to work together cooperatively and collaboratively. Project participants must think and act in the best interest of the project, rather than focusing on their individual organizations. For this to occur, stakeholders at the executive level must bear the burden of bringing disputes surrounding cost and schedule to timely resolution. Because individuals at the project manager level usually have the most intimate and pertinent knowledge surrounding these issues, this process requires greater time commitment from project executives.

4. Looking Ahead

Avoiding project disasters requires a disciplined strategic approach from owners, architects, engineers and contractors/design-builders before new project initiation. However, many things can derail a construction project. The operative questions become:

• How soon did project executives first realize that the project was stressed?
• How did they take measures to right the ship?
• How much time was left in the schedule to get back on course once the issue was corrected?

It takes a focused effort by executives of all key parties to set the path forward to project completion. While the outcome may not be what everyone set out to achieve from the beginning of the project onward, the process of getting there can be greatly enhanced and will leave everyone feeling better about what he/she accomplished.