It is a tricky issue, I have found many clients who from the first meeting said, clearly and directly, "we do not want any extra costs." Furthermore, a client sent a model contract in which it was intended that my employer, at that time the winning contractor of the award, declare that he "waived any request for extra costs or time extensions for any and all concept".
I have also been on the other side, representing the owner and seeing how the entire contractual system was prepared in order to avoid as much as possible the increase in the amount and the term of the contract. Moreover, on some occasion our legal advisor - partner of a well-known law firm -, since we were the owner and his agent, expressly told the contractor with whom we negotiated: “construction is classified in the same category as the games of chance”. No one told me that story, I was there, and it remained indelibly engraved on me. I never investigated if something like this could be true or was simply a negotiating position, but what struck me was the ease with which the lawyer blurted it out to the contractor. Having been a contractor for much of my career, the expression hit me. I really felt pain inside my chest.
I started my career in a technical department, designing and budgeting. It is a generally arduous task. If the project is fully designed, the important thing is to properly calculate the quantities and get good prices, in addition to properly estimating the labor and equipment. When the project is not well developed and the client wants the bidder to include the design and assume the risk of errors (all within the contest term), the issue gets really dangerous. These are the famous EPC (Engineering, Procurement and Construction) projects and, especially when the client asks for a Lump Sum, the idea is that the bidder's price and term include everything and there is no possibility of presenting extra costs.
Now, is it really possible to run a project that does not have any extra costs? I find myself in the need to state that it is not impossible, but it is really highly unlikely, and I will go on to explain the reason.
The only way that a project does not have extra costs (I include here the concept of time extensions) is if some conditions are met: (i) the design is complete and perfect, it does not have any flaws or deficiencies and it everything has been planned, (ii) the owner does not introduce any changes during the execution, (iii) the owner is capable of, and manages to, fulfill perfectly all his obligations, from the delivery of the site and information, to the acquittal of any query or procedure within the deadlines, as well as the provision, timely and on the spot, of any supply under its responsibility; and (iv) there are no unforeseen events or technical conditions, usually uncontrollable, on the ground, weather or with neighbors. There may be a few more, but these are the most important.
Note that none of the conditions mentioned are related to the executor. That has a simple explanation, no matter what difficulties or problems the executor has, they are part of his responsibility, which is why none of them will entitle him to an extra cost. I make this clarification because it has been a common denominator that clients respond to the contractor that they do not understand how claims and requests for extra costs or extensions of time never mention the problems of the contractor.
As is easy to see, hardly all conditions will be met, even in an EPC contract. There is more to discuss about EPC contracts, but that will be the subject of another article.
The bottom line here is to discuss whether the extra costs are positive or not. In fact, if the need for an extra cost arises, it is because said work was necessary and positive for the project. However, it is often the case that the owner is reluctant to spend more than he originally supposed and prefers to find some way for the contractor to carry that extra cost, in addition to considering that the additional cost requested by the contractor is greater than necessary.
In this scenario, especially when the work is essential to continue the execution of the work, the contractor seeks a quick approval because a delay will impact his general expenses
and generally presumes that the client, whatever the number presented, will accept only one fraction of it - if any at all - no matter how good and clear the support information is; which is why the contractor will feel compelled to submit a larger number than is strictly necessary.
We see here a "self-fulfilling prophecy", the client thinks that he will receive an excessive number or time and will be tempted not to recognize it or reduce it to the minimum possible; while the contractor, waiting for that reaction, will actually present overestimated values, time or both.
The roots of extra costs are generally in the failure of one or more of the four aforementioned hypotheses: (i) the designs are not complete or perfect, (ii) the owner makes changes, (iii) the owner has a problem with one or more than their responsibilities or (iv) something unforeseen appears on the ground (unexpected rock, for example), weather, etc.
None of this is necessarily "bad" or deserves a "culprit." Methodologies such as VDC (Virtual Design and Construction) improve designs, but perfection does not exist. It is also natural and often positive for the client to introduce changes that improve some aspect of the project and that, although they generate an increase in construction costs, will probably allow significant savings during the investment life cycle, seen as a whole.
The issue here, as in everything, is who pays the bill, who bears the cost of variations in construction. The reality is that, as in any field, the client pays everything, unless it is an error of the executor. The errors or delays of the executor or of any of its suppliers do not generate the right to request extra costs or time extensions.
If something was missing in the design, and that fault would have been timely corrected, the project would have had a higher cost from the beginning. The extra cost would have "arisen prior" to the selection of the contractor.
An error in the design is something more complex. If it is timely detected and does not generate rework on site, the cost of modifying the design can and should be borne by the designer and the change on site (no rework), if any, must be borne by the owner. Now, that change can even be a cost reduction. But if the error is not caught in time and causes rework in the field, the problem is that rarely would a designer have the capacity to bear those costs. There may be, and most likely will be, some type of penalty towards the designer, but the balance of cost, which will be the largest part, will end up being covered by the client, simply due to economic capacity.
The case of changes introduced by the owner is usually the clearest. The concept of the extra cost is hardly discussed, and it all comes down to negotiating the impacts value, considering the “self-fulfilling prophecy” of recognizing only a fraction because the claimed effect is presumed overvalued.
Finally, there are the site conditions, including ground, weather, neighbors, and the like. I have seen unnecessary discussions because rock appeared when excavating that was not detected in the soil study, but the contractor made a site visit before issuing the proposal and it is understood that there he became familiar, or should have done it, with the construction site.
For some years now, a new family of construction contracts has been introduced, which are managed under a concept of collaboration between the owner and the executor.
The general concept is that the work is performed with "open books", the client covers all costs and the executor earns a fee. The design is developed with the best available tools, including VDC, the early works are carried out with flexible systems allowing time to complete the design, and any additional costs are analyzed as a team. The client covers all costs, and there is a system of prizes and penalties towards the executor, but only against his fee. This means that the executor, in the extreme, may lose his fee, but all costs are covered, so he has no risk of loss. For their part, the owner sees the real costs and stops incurring the risk of overvalued costs for any change.
I am convinced that this is the way: the owner has a need and hires a specialist to solve it in a technical way and with the real costs shown, in exchange for a reasonable fee, but it is the owner who covers all costs. The parties divide the tasks and risks based on who is in the best position to afford them.In short, the problem is not and never has been the appearance of extra costs, the problem has traditionally been the antagonistic way of the relationship between owner and client;the secrecy in costs that forces one party to overload them and the other to cut them, both blind to what happens at the other side of the table; and the fear of both of the parties: the owner is afraid of exceeding his budget and the contractor is afraid of losing.
The extras costs are not angels nor demons, they just “are”. The secret is to migrate to a way of working that considers both parties as single team: the owner who knows what he wants, the “what”, and the executor who knows how to do it, the “how”.
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