There are certain risks related to construction in real estate that have a tendency to increase as the economy looks to make its recovery. Let’s take a look at five common risks related to the industry.
Risk No. 1: Onsite stored material requested on payment applications are increasing, due to the recent rise in transportation costs. A great example to illustrate is when a general contractor receives discounted pricing for ordering 100% of their required material, having it delivered in one shipment, and subsequently requesting full payment for the material once it is onsite. This often results in the payment application reflecting work that appears to be further along than what is physically constructed and in place. A Clear understanding and agreement to this type of approach is suggested. It is critical that site observations are made to ensure proper storage and handling of the material is being performed, and to determine the amount of material that is actually installed and in place, reduces the risk of overpayment.
Risk No. 2: The quality of construction appears to be declining in part due to the lack of construction administration traditionally performed by qualified architects. Construction administration, by the architect, assures the general contractor is building in accordance to plans and specifications. Who better to manage this risk than the architect? We have seen an increase to this risk when the developer and contractor are related parties, where oftentimes no clear definition of responsibilities occurs. Therefore, to reduce risk, consideration should be made to require the architect to perform typical construction administration services, or to retain a qualified third party for such services.
Risk No. 3: Due to volatile fluctuation in material prices, general contractors increasingly utilize a strategy of locking in prices much earlier in the life cycle of the project than was formerly common practice; resulting in requests for payment on deposits or materials and equipment that remain to be fabricated. This process inherently excludes any form of surety to ownership and other stake holders. While not recommending payment for such expenses may be a conservative approach to protecting the stakeholder’s interest, as these practices become more common, failure to reasonably expedite the process may ultimately create a greater risk to the clients’ project by slowing progress and overrunning costs. To reduce these risks, surety type documents should be required and closely reviewed to manage the process, in the construction and financial agreements.
Risk No. 4: Workforce projections indicate a shrinking construction workforce in coming years, particularly with respect to skilled trades. In addition, current Congressional debate concerning border security and immigration policy may create sudden and drastic reductions in certain components of the construction workforce. Meanwhile, development projections indicate an increasing demand for more workers. While we cannot change certain fundamental realities of the marketplace, evaluating both cost and schedule realities to workforce dynamics early in the process, assists in reducing surprises during the construction phase. Further, this mindset should be followed throughout the construction process so that well educated decisions are made along the away.
Risk No. 5: The lack of standard construction information/documentation (schedules, contracts, change orders, change order requests, pending/potential change order logs, lien waivers, submittal logs, request for information logs, and insurance certificates) provided by either ownership or the construction team to proactively manage the project can lead to unnecessary issues. Consideration of this type of documentation contributes to a proactive approach for all stakeholders and assists in reducing surprises.
