Business

Managing Once-in-a-Generation Construction Problems – Part II

Part II of this series explores the possibility that higher prices and steady consumer demand could lead to an increase in unscrupulous contractor practices—and how owners can mitigate that risk.
By Jeffrey S. Wertman
March 28, 2023
Topics
Business

Part I of this series discussed the benefits of construction participants using alternative project delivery methods and properly addressing change order issues, rising costs and payment structure issues to manage construction during these uncertain times. Part II below explores the possibility that higher prices and steady consumer demand could lead to an increase in unscrupulous contractor practices—and how owners can mitigate that risk, managing the challenges posed by the unforeseen labor shortage and turnover in the industry and evolving your construction team for short-term and long-term success.

Higher Prices and Steady Demand

With the demand for construction projects relatively stable, contractors remaining in high demand and a surge in prices for construction materials and components, owners are under great pressure to accept less favorable construction terms. This has presented unscrupulous contractors with perceived leverage over owners and new opportunities to engage in questionable business practices and fraud. Although some contractors may seek to stretch the boundaries of a construction contract, other contractors are more deliberate. Falsifying payment applications and invoices to inflate labor or materials costs, billing for work not yet performed or materials not yet delivered to the project site and manipulating change orders are examples of illicit and fraudulent practices by contractors.

Owners can reduce the risk of questionable or fraudulent contractor practices on a construction project by implementing certain practices. For example, owners and their management teams should carefully oversee all key aspects of the project, including establishing stringent project controls, truly understanding the scope of work, carefully reviewing payment applications and assessing whether there are irregularities in invoices for items like undelivered or substandard materials or incomplete work.

Labor Shortage and High TurnoveR

Construction participants are keenly aware of the current labor shortage and high turnover facing the industry. Regardless of company size, construction companies are struggling to attract and retain quality workers. The labor shortage hampers productivity in project development and delivery and reduces output quality and customer satisfaction. Unabated, the labor shortage issue will lead to an increase in delay claims, including liquidated damages, and claims for construction defects.

Although there are no quick fixes, construction companies can address worker-shortage issues in a variety of ways. Before work begins, companies can seek to improve productivity by simplifying the scope of the project, including control of project scope, design simplification and utilizing offsite and modular construction in which major assemblies or subassemblies are produced in a factory and then shipped to the construction site.

To attract and retain new talent, construction companies can offer competitive wages, a broader range of benefits, learning and development opportunities and training, and place more emphasis on worker autonomy, flexibility and support. Mentoring and leadership-development programs can play a role in preparing new employees for future management roles. And, companies should actively recruit from underrepresented groups, such as Millennials, Generation Z and women. Encouraging a dynamic and positive company culture can also attract prospective employees, including those workers from other industries.

Finally, given the difficulty in securing commitments from trades due to current market demand, companies should secure early subcontractor and supplier commitments by expediting contracting negotiations with owners, which, in turn, will increase the security in pricing and viability of the construction schedule.

Evolving Your Team and Processes

Construction businesses must evolve to achieve short-term and long-term growth because of the challenges posed by the scarcity of skilled labor, persistent cost pressure and ever-increasing demands of customers and owners. First, companies will need to handle the persistent supply-chain issues. This starts with a company reviewing its supply chain for weaknesses and then designing a plan to address any shortcomings. Companies should consider increasing their inventory of essential materials and components, identifying backup distribution channels and recruiting direct labor to replace subcontractors and other trades.

Also, companies should try to obtain early owner commitments to projects, so materials can be located and secured before the start of construction to help minimize delays and cost premiums. Better collaboration between the construction and procurement teams, beginning in the design phase of the project, can lead to long-term success. For example, if a construction team member concludes that a certain design choice will have a costly domino effect as the project progresses, a procurement manager could suggest new ways to minimize costs. Finally, creating a strict process for change-order management and an efficient process for claims management could minimize time lost on construction disputes and avoid potentially costly litigation.

Adapting Now to Prepare for Tomorrow’s Challenges

The construction industry, which has been traditionally resistant to change, is navigating a time of historic uncertainty. Today’s once-in-a generation construction problems will eventually give way to tomorrow’s new challenges. Success will depend largely on the ability and willingness of construction participants and businesses to have an adaptive mindset and support and embrace transformative change, whenever it occurs.

by Jeffrey S. Wertman

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