Recently, an article in the South Florida Business Journal suggested that South Florida is starting to see an explosion of new construction. The article stated:
South Florida contracts for future construction increased in May, with total building skyrocketing 131 percent, according to the research and analytics unit of McGraw-Hill Construction.
With projects such as Resorts World Miami, Brickell House and the Regalia – Sunny Isles, new construction and development projects in Miami have started to reappear. And in light of the increased construction in South Florida, owners and developers should be mindful of certain certain issues that ought to consider before beginning a project and signing a construction contract with a general contractor.
Tip #1: Change Orders
Perhaps one of the biggest challenges that owners face today is change orders. The concept of change orders, or simply “CO’s,” is the formal method by which construction contracts are modified with regards to time and money. As a result of CO’s, an owner’s project is rarely delivered on time for the agreed-upon price.
In its simplest form, an owner must protect himself/herself and maximize his/her level of success by having a contract in place that minimizes a contractor’s incentive and ability to request a CO, thereby preventing a contractor from holding an owner’s project (and bank account) hostage.
However, in attempting to reduce CO’s, an owner may face significant resistance from a contractor. From an owner’s perspective, completion of a project does not necessarily constitute success. Success for an owner turns on time and money. On the other hand, for a contractor, success is measured by contract price and profits. Often times, a contractor will agree to a low contract price because of the low-bid process. One way for a contractor to improve its profitability is through CO’s, which in most cases increase a contractor’s profits.
When To Address Change Orders
It is imperative to note that the time to address CO’s is at the beginning of the construction project—at the contract drafting stage. While CO’s can never really be eliminated, an owner can do several things to reduce the number of CO’s, preventing delays which drain an owner’s time and money.
While an exhaustive analysis regarding CO’s is beyond the scope of this blog, the following basic ideas should be considered by any owner embarking on a construction project:
- Obtaining contract stipulations regarding CO’s,
- Defining circumstances where CO’s will be accepted,
- Defining “Force Majeure” events,
- Defining how the contract sum will be affected by CO’s up front,
- Getting the architect involved to determine appropriate CO’s in the event of a dispute between the owner and contractor,
- Ensuring that all CO’s are in writing, and
- Specifically excluding all claims for extra work not in a written CO.
Moreover, since many owners simply rely on a form without giving their project the necessary thought, it is important to note that such a form contract will not take into account the complexities of an owner’s specific project. In almost all cases, an owner should obtain legal advice before agreeing to terms with a contractor.
Conclusion
Owners must understand that construction projects and CO’s are risky business. A single CO can mean the difference between a project being completed timely or late and within or outside an owner’s budget. Since time is the most critical issue for the overall success of a construction project, every day that a project is delayed could conceivably cost an owner considerable money in lost revenue, carrying costs, interest, fees, and damages. A well written contract is one of the best ways that an owner can control CO’s and prevent the delay and costs associated with same before the first shovel is ever put into the ground.