June  23, 2000



Bulletin # 37: On the Fast Track

The management of ZZZ Sheet Metal often longed for the good old days. In those days, a bid request would arrive by regular mail with a relatively complete set of plans and specifications enclosed. ZZZ personnel would flip through the plans at a leisurely pace, and compile a bid from manufacturers’ price lists and other printed reference materials in the subcontractor’s office. When it was ready to go, the bid would be mailed back to the general contractor and ZZZ management would hope for a phone call a week later indicating that it had gotten the bid.

More than anything else, the pace of communications indicated how dramatically the world had changed since those days. U.S. Mail had been replaced by Federal Express deliveries, which had themselves been supplanted by facsimile transmissions. Time lines had compressed from days to hours. With the spread of e-mail communications, those hours had become minutes. Bidding information was no longer in 3-ring binders in the subcontractor’s office. Instead, the subcontractor’s personnel went on-line to multiple vendors with product specifications and delivery requirements. Bids were assembled on the fly to meet what seemed to be impossible deadlines. Any response that was not delivered almost immediately was considered late.

The communications revolution posed only part of the challenge faced by ZZZ. The emergence of design-build projects placed ever more responsibility and risk on the subcontractor. If it was in a direct bid position, ZZZ could find itself having to pull together an entire system for heating, ventilating and air conditioning, while also ensuring that the system would function with the other building components and the available utility and other services. Coordination of the work of outside and inside engineers had become an essential part of the subcontractor’s job. Without design-build capability, ZZZ realized that it could no longer compete. On the other hand, the risks inherent in design-build projects were far beyond what it would ever have considered acceptable in the past.

Somehow ZZZ had risen to the challenge of remaining competitive. Its people (even management) had become computer literate. Its bidding team developed a high level of internal coordination and strong relationships with several very competent engineering firms. Working on design-build projects had involved a steep learning curve (and numerous early mistakes), but management at the subcontracting firm felt that it now had the process under control. That is, it thought so until the firm accepted work on the new sports stadium.

The city in which ZZZ was headquartered had struggled with the development of a sports stadium for many years. Public opposition was strong, but the backers of the stadium were very well-connected. When the decision was finally made to build the stadium, time was already running short. The public authorities had assumed responsibility for building the stadium and upon its completion, it would be turned over to the sports teams. The contracts with the sports teams provided for severe penalties payable by the public authorities if the stadium did not open by a particular deadline. Due to the shortened construction period, a decision was made to proceed before a detailed design and plans and specifications had been completed and approved. The public authorities appointed a stadium commission to handle the construction. In fact, final plans and specifications for the new project were not even on the horizon. The handling of many major components of the project was still under discussion with the sports teams. On the other hand, the stadium promoters did not want to take the risk that the project might be cancelled while the final design decisions were being made and the plans finalized. For political (as well as scheduling) reasons, work had to start immediately. The commission agreed to proceed on a “fast track” basis. The project would be designed as it was built. The stadium commission recognized that this approach involved major risks from a cost standpoint and the construction manager was instructed to get guaranteed maximum price bids from each of the prime contractors. ZZZ received a bid package for a design-build system with some general airhandling specifications, but with significant details missing. The ZZZ project manager immediately contacted the construction manager and indicated the impossibility of providing a guaranteed maximum price without having some clear indication of the work to be performed. The ZZZ project manager was told that the subcontractor would have to “play ball” to be part of the fast track project and that it should fix its guaranteed maximum price high enough to deal with potential contingencies. The guaranteed maximum price was an absolute requirement if the subcontractor wished to participate in the project. After some deliberation, ZZZ put together a design-build proposal and fixed the guaranteed maximum price, with a 15% contingency. That certainly seemed ample, given the subcontractor’s prior experiences.

ZZZ got the bid, signed its contract, and immediately found itself in the midst of the construction equivalent of total chaos. As footings were being poured, the walls and other structural components were being redesigned. Corridors were constantly being moved. Luxury boxes were being added by the day and were also being expanded and relocated. Mechanical rooms were being displaced by concession stands. Areas that had originally been open were now to be enclosed and provided with HVAC service. The structural components for a future retractable roof were added and ZZZ was told to design its system so that it could be supplemented in the future to service a fully enclosed structure. It was the ultimate “moving target.” Change orders flew back and forth between the construction manager and the subcontractors. From day-to-day, it was never totally clear what was included within the bid work and what was a change. The subcontractor’s costs were escalating at an astronomical rate as it removed previously installed work and relocated system components. As the representatives of the various subcontractors talked, it was agreed that the cost of the project could easily exceed twice what had been originally contemplated. Fortunately, the public had “deep pockets.”

As close-out on the project approached (six months late), nervousness began to spread among the subcontractors. The construction manager had been overheard referring to the guaranteed maximum prices on the various components of the work and the fact that the project overruns would be limited by enforcing those pricing clauses. ZZZ’s work had gone far beyond the guaranteed maximum price and the subcontractor was seeking 80% above its bid price based upon the constant changes to the project. The construction manager and the subcontractors never got anywhere near an agreement on the overruns and the dispute ended up in arbitration. The resulting arbitration proceedings between the stadium commission and the subcontractors took several years and, in the end, ZZZ’s 15% contingency proved to have been low by a factor of 5. While the arbitrators had some sympathy for the position of the subcontractors (and were somewhat pro-contractor in their findings as to change orders), they generally upheld the guaranteed maximum price provisions of the contracts. The subcontractors were left to pick up the pieces from a disastrous project.

As technology advances, it is inevitable that the pace of bidding, contracting, and construction will also accelerate. The complexity of individual projects can also be expected to increase. The prime subcontractor’s assumption of design responsibility is also an inevitable trend. The successful subcontractor must acknowledge these trends and develop an operation that meets the challenges that they pose. The subcontractor must also recognize that the more a project resembles the “fast track” sports stadium described above, the harder it will be to accurately project the cost and time that will be involved. Where the work is not well-defined or appears likely to change in material ways, the subcontractor would be well advised to maintain flexibility as to its price and schedule and to carefully document changes to the work (and the additional amount that the subcontractor expects to be paid with regard to those changes).

 

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