These Ten Steps May Help Power Companies Avoid Headaches, Delays, Higher Costs, and Legal Complications
Jacqueline Greenberg Vogt, Esq. and Robert C. Epstein, Esq.
The International Energy Agency projects the rapid growth of renewables, with solar at the center of this new constellation of electricity generation technologies. Hydropower remains the largest renewable source of electricity, but solar is the main driver of growth as it sets new records for deployment each year after 2022, followed by onshore and offshore wind.
Construction projects in the U.S. and throughout the world will be necessary as the pace of change in the electricity sector puts an additional premium on robust grids and other sources of flexibility. Storage plays an increasingly vital role in ensuring the flexible operation of power systems, with India becoming the largest market for utility-scale battery storage, and new construction projects are necessary to support that growth. Power companies beginning such projects should be aware of the potential for delays, overruns, conflicts, defects, and failures.
According to a February 2017 Cato Policy Report, one out of ten large construction projects is on budget, one out of ten is on schedule, and one out of ten delivers the promised benefits. A June 2016 study by McKinsey & Co. Inc. found that large construction projects typically take 20% longer to finish than scheduled and end up well over budget.
Achieving a successful energy construction project requires effective preplanning, oversight, and cooperation. Here are 10 suggestions for planning and managing power industry construction projects to ensure they finish on time, on budget, and built well.
1. Careful Contracting
Aside from the construction work itself, the contract is the most important part of the project. A well-written contract carefully and clearly defines the parties’ agreement, their expectations, and their respective risks and obligations.
Owner-drafted contracts frequently seek to protect the owner from all possible claims. These contracts contain exculpatory language, waivers, and limitations that are intended to bar nearly all claims by the contractor. The idea is to protect the owner from all foreseeable and unforeseeable risks by shifting responsibility to someone else.
However, one-sided contracts may generate as many claims as they prevent. When a one-sided contract forces a contractor to lose money on a project, claims can be inevitable no matter what the contract provides. In a worst-case scenario, severe losses may force a contractor out of business, resulting in a failure to complete the work and the attendant delays, disruptions, and increased costs.
To best avoid construction disputes, allocate project risks fairly. Risks should be allocated first to the party who has direct control over the portion of the construction that creates the risk. Where no party has direct control, the party that is best able to prevent an unexpected loss should bear the risk. Where no party is able to control an unexpected loss, the risk is allocated to the owner, who is the party that initiated the construction project and is the ultimate beneficiary of the results.
2. Independent Cost Estimates
To reduce budget overruns, spend a little extra to obtain independent cost estimates as the design process progresses. This involves checking and double checking the construction cost estimates with contractors who actually perform the work and suppliers who deliver the specified products or systems, rather than leaving all cost estimating up to only the design team.
3. Establish a Firm Budget
While every project has a budget, some budgets are firmer than others. Owners should establish a firm budget from the start and hold the designer to that budget. Also, the designers’ contracts should require them to revise the plans at no cost if the bids exceed the budget by a stated percentage. These provisions can be difficult to negotiate, but they provide an important safeguard for the owners.
4. Use ‘Add and Delete’ Alternatives
Under this approach, the design team preplans certain components of the work which the owner may delete if the bids come in too high and add if the bids are lower than expected. Cost estimates are prepared for each alternative to ensure selection of the best systems and components. Preplanned “add and delete” alternatives protect the owner from the delays, disruptions, and extra expense caused by redesigning the project after bids are received. They also shift the consideration of alternatives to the design phase, where the opportunity to control costs is the greatest.
5. Peer Review the Design
An incomplete, inaccurate, or poorly coordinated design can lead to a project with conflicts, unanticipated costs, delays, and claims. Conversely, an accurate and complete design diminishes the risk of conflict and protects the owner. Peer review involves an independent architect or engineer reviewing the plans to uncover errors, omissions, and inconsistencies. The modest costs may help avoid the delays, disruptions, and extra expenses inevitably involved when design errors are discovered in the field after construction is underway.
6. Review the Plans for Constructability
“Constructability” describes the ease and efficiency with which structures can be built. The constructability of a structure depends largely on the quality of the designs—if the design documents contain errors or are difficult to interpret, the project will be more difficult to build. In a constructability review, a contractor identifies errors, omissions, ambiguities, and conflicts in the plans before work begins. One type of conflict could involve plans that call for two systems to occupy the same space when there is only room for one. Another might involve lack of coordination between related systems. A simple example would be when the length of a specified concrete anchor bolt exceeds the thickness depicted in the plans for the concrete element that the bolt will penetrate. Again, although this service involves an extra expense, it is well worth the cost.
7. Set a Reasonable Schedule for Construction
The timeline for a construction project should be driven by its scope and needs. Never start a project under undue time pressure—the work almost always suffers. Too much time pressure could motivate a contractor to cut corners, leading to poor workmanship, which in turn leads to construction defects. For example, if the weather is worse than anticipated, or market conditions affect lead times on materials, give the contractor adequate time to do the job correctly even if that requires a reasonable extension.
Also, when construction begins, contractors expect all necessary permits to be in place. They also expect to have access to the job site and the finished work of other contractors who came before them. They also expect to receive timely engineering and owner-supplied information. Shop drawings ought to be promptly reviewed and unexpected conditions or changes fairly compensated. Where these expectations are not met, delays may occur.
8. Submittals as Communication Between Contractor, Designer, and Owner
Shop drawings are completed before construction begins and contain all the details needed to build the project. They take the designer’s plans and show exactly where everything will be located. In addition, they are a step-by-step manual of the construction process and a bridge between the contract documents and the contractor.
The contractor reviews the shop drawings to coordinate the trades and verify that the project can be built. The designer reviews the shop drawings to ensure that the proposed construction scheme meets the design intent for the completed structure and the owner’s expectations.
The shop drawing submittal-and-review process should be a dialogue between the designer and contractor. It is the best opportunity for the owner, contractor, and designer to avoid claims for non-conforming or defective work.
9. Review Construction Activities
The prudent owner will keep a close eye on construction progress. Owners often leave project oversight to the construction manager and frequently have no knowledge of conflicts brewing in the field, whether involving unpaid invoices, progress delays, or defective work. Some conflicts eventually become claims. By the time owners learn about a claim, the dispute is often more disruptive and costly to remedy than it would have been had the issue been detected and properly managed earlier in the process.
By regularly reviewing construction activities, an owner improves the chances of uncovering conflicts, reducing unexpected change orders, detecting potential design errors, revealing poor construction practices, and avoiding claims. Periodically looking over project meeting minutes is one way the owner can review construction activities. Although the construction manager is responsible for overseeing construction activities, occasional independent review by the owner improves the chances of recognizing conflicts early, particularly where the construction manager’s own errors may have caused or contributed to a problem.
10. Periodic Audits of Contractor Billing
Audits of contractor billings are a useful and important monitoring tool. They can assess whether the project is on time, behind schedule, or ahead of schedule. Periodic project audits can detect fraud, including contractor overbilling, inappropriate cost-shifting, abusive change order practices, and other abnormalities. They also may ensure controls are in place, verify contractor compliance with government requirements (such as prevailing wage, disadvantaged business enterprise), and help avoid litigation.
It’s Worth It!
Following these preconstruction and construction planning suggestions can help achieve a successful project—one which finishes on time, on budget, without defects in design or construction, and with minimum conflict among the project parties. Failing to follow these suggestions may lead to setbacks, delays, cost overruns, and defects, all with adverse or even catastrophic consequences.
—Jacqueline Greenberg Vogt, Esq. is a shareholder at Greenberg Traurig LLP and a member of the national construction practice. Robert C. Epstein, Esq. is a shareholder at Greenberg Traurig LLP and co-chairs the firm’s national construction practice.