The development of many new construction projects in and around the New York City area has begun to return to pre-recession levels. Unfortunately, so have the problems with unwarranted cost overruns and delays that plague most projects using standard AIA or other form agreements and so-called “fast-track” projects that incorporate a “guaranteed maximum price.”
Too often, owners designing and constructing projects rely on contractors to set the price for these projects. But contractors are frequently an unreliable source for determining a project’s true cost. 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.” Paying an additional 10 percent or more in this fashion is no longer necessary.
Below, I’ve outlined four facts about cost overruns. In my next column, we’ll talk about five solutions that all owners can employ to ensure that their projects come in on time and on budget.
Fact No. 1: Every project that uses a “fast-track” methodology is guaranteed to incur delays to the completion date and cost overruns that will routinely add 20 to 30 percent or more to the contract price.
Fact No. 2: Standard form agreements do not serve an owner’s interests. Rather than prevent cost overruns, they foster delay claims and contribute to added costs associated with resolution of claims during and after a project.
Fact No. 3: Use of a guaranteed maximum price contract (GMP) all but ensures the owner will encounter change orders and delay claims that will boost the final price in the contract by 10 to 30 percent or more, an additional cost that severely impacts the bottom-line success of the project.
Fact No. 4: 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.
To properly manage costs and to properly protect their interests, owners must proactively address these serious issues. The construction industry has long deemed cost overruns to be the norm. Owners do not have to—nor should they—accept this fallacy.