Chapter 5 Construction

Constructing a building is very different from designing it. We no longer have discussions about the look and feel of the object, or what the planners might think of it. Upon the moment that construction starts, the concern is not so much what the object will look like in the end, but how we are going to build it. It is a battle against the laws of physics and the natural elements. As we shall see later in this chapter even the wind can pose a challenge to the final outcome of a project. In construction almost all issues are tangible; and depending on the size of the project it can be a long and laborious journey to materialise the design intent.

How to physically get buildings off the ground was a mystery to me. Sometimes I would walk past building sites and observe people on the tools, but I couldn't fathom how the different elements were coming together; or how some design features were accomplished. I would also be dazzled by some amazing structures and wonder how something so beautiful had been assembled. The Bell Tower in Perth was one of those buildings. Fast forward a few years and the process that got this building off the ground is less of a mystery.

Many developers are not interested in the construction process. Once the Development Application has been obtained, the contractors take care of the building. Knowing how to manage a contractor properly is the only skill a developer needs to master, especially if they have secured a cosmic price for the project. That's not to say that I haven't met developers who don't want to get their hands dirty. On the contrary, some developers understand the trades and the construction process and are able to transfer less risk to the builder and secure a better price from the contractor.

In the previous chapter we looked at the typical structure of a construction contract and the clauses that are most commonly negotiated before a contract can be awarded. Once the contract is signed, the parties' representatives manage the contractual relationship until the work is completed. The status of the relationship is often challenged throughout the life of the project. These challenges take the form of progress claims, requests for information, variations and extensions of time. In general, the quality of the documentation will play a role in the challenges that will arise along the way. Unfortunately, no matter how watertight the contract and how good the documentation is, there is still a risk that construction won't go according to plan. The purpose of this chapter is to highlight some of these issues.

In my experience, given that construction contracts can be worth many millions, even billions, on some projects - think of the Sydney Metro - no matter how good the documentation, disputes will arise as soon as one or more parties start losing money. For reasons we shall see, it is not always easy to ensure that construction is a win-win situation for all parties involved. At the same time, the nice and pleasant Mr Hyde I described in the previous chapter tends to turn into Dr Jekyll during the construction phase, although there are exceptions to the rule, or so I am told.

The construction process creates a web of contractual relationships that is very different from the management of consultancy contracts. Previously, the developer was more or less in contract with everyone involved in the project. This is no longer the case during construction. Most of the work is contracted and coordinated by the contractor. Information flows up and down the supply chain. Since commercial information between subcontractors and the contractor is treated as confidential in most jurisdictions, understanding what is actually happening on site can be a real challenge for most developers.

The majority of contractors I have dealt with have never actually built anything. The majority of the work is subcontracted, hence the name contractor. It is fair to say that a main contractor is only as good as his subcontractors. This is an important feature of the construction industry. I will discuss the relationship between a contractor and the subcontractor in more detail later in this chapter.

Almost every subcontractor has an area of expertise. Almost every subcontractor has a speciality. It could be roofing, concrete, carpentry and so on. The bigger the project, the more manpower we need. As a result, it's not uncommon for subcontractors to subcontract some of their work, if not the whole package, to another subcontractor.

Some of my projects have been very labour intensive. Remember the project I mentioned in the introduction where we had 500 workers on site? One of the headaches I had to go through was negotiating a contract variation with the subcontractor who was responsible for letting workers and visitors in and out of the site. In their quotation the job was priced with a maximum peak of 300 workers. The surplus, according to them, was a variation. I could accept a higher level of equipment depreciation, but I was struggling to understand how this could affect their scope of work. My position was that the number of people they had on site had remained the same, the only issue we had was more people going through the turnstiles. The subcontractor, of course, was of a different opinion.

Variations in the construction industry can have a significant impact on the financial outcome of a project. Extensions of Time (EOT) are also contentious issues, especially when accompanied by a claim for delay damages. We tend to argue a great deal about anything that puts pressure on the contract price, sometimes without understanding the factors and variables that created the claim in the first place.

To better explain the root problem of most variations and EOTs I have decided to narrate my life as a Contracts Administrator in one of my projects. I have compiled a handful of contract issues in one working day together with the dialogue I had with the subcontractors.

The project I was working on was in Chatswood and it was a big project. I was looking after 2 buildings within the precinct. One was a 20 luxury apartment low-rise block with a construction cost of about $20 million and close to practical completion. The other was a 150 apartment tower, aka the tower, with a construction cost of $70 million and one year to practical completion. My role as a Contracts Administrator consisted mainly in procuring, negotiating and managing subcontractors.

One day in the life of a Contracts Administrator

The sun was already above the horizon line and about to start damaging the most delicate skins while I was cycling to work. I arrived at the site at eight o’clock in the morning. The parking lot was packed with SUVs. It was fair to assume that the majority of my colleagues were already at their desks. We were about 30 people in total, including site managers, construction managers, supporting staff and Contracts Administrators. We also had a team of architects and engineers working with us, but they were not based on site.

My working day always started with several ‘Good mornings’ and several ‘G’days’ in return. I always had to sign in at the reception. A few more ‘good mornings’ and I was off to my private room. My office space was rather small and it was a running gag to call it the janitor’s room. I didn’t mind the office banter. I loved the privacy of my room.

Today, the running gag had reached an all time high. When I got to my office, I noticed that some funny soul had decided to chuck a bunch of mops and buckets in there and put a big sign on the door saying 'janitor's room'. I sighed and removed the mops and buckets. I left the sign on the door, since it didn't affect me at all, and I didn’t mind working in the janitor’s room. My decision was not generally well received, as my colleagues kept asking why I hadn't taken down the sign in the days that followed. A few weeks later, one of them in an act of madness, removed it himself, despite my efforts to keep it on the door.

But let’s go back to the beginning of my working day. I scanned my notes from the previous days and noticed two words in bold letters circled in red pen: cost report. It was that time again, once a month, when I had to update the previous cost report in line with the latest cost developments in the project. This could mean converting budget figures to actual costs. Moving the balance to the contingency, or vice versa. Overall, the main focus was to ensure that the Return on Investment (ROI) on the project would stay at 10%. Since none of my projects was experiencing major cost overruns, the cost report was a breeze to complete, but it was still a consuming task.

I prepared a mug of coffee and went through my emails. Minutes later, I called Ron from Glazing Solutions and asked him to drop by my office. I knew he was working somewhere on site and I needed to have a word with him about the splashbacks for the tower.

Unfortunately, his contract had already been awarded, but it didn’t include the installation of the splashbacks. The previous Contract Manager didn’t notice the omission at the time and the contract sum was reported to the upper management team. Adding the splashbacks as a variation would eat through the contingency of the project.

I started working on my cost report and expected Ron at any moment.

9.15AM

Ron popped into my office. He had that I-don’t-want-to-talk-to-you look on his face. It was either that, or he was trying to make me feel afraid of him.

'Ron, where are the splashbacks?' I asked.

‘Not included. I told you already.’ Ron replied.

'Ron, for how long have you been working with us? I just don’t buy it. Your rate for the tower is more or less the same as your previous job and splashbacks were included back then.’

‘They were excluded from the tower.’

‘Yes, I’ve gathered that, but I can’t understand how that is possible. It’s going to cost a lot more than what we paid for similar jobs.’

‘It’s the logistics.’

‘Logistics my ass. How many years have you glazed for us? If you want to increase your rates just say so. This is how it reads to me. The contract sum has already been reported. If you want us to change it, fine, but Rob won’t like it. I won’t like it either.’

Rob was my boss.

‘What do you want me to do?’

‘What I want you to do? Mate, just do what’s the right thing to do. If you want to increase your rates just say so. Be honest about it. You cannot say that the splashbacks were not included when you always priced the splashbacks for us. The least you could do was to inquire about it when you were pricing the job, which I don't think you ever did.’

Ron didn't answer. Instead, he walked out of my office. I wanted to resolve this contractual situation as quickly as possible, so I sent Ron the following email: 'Ron, following our meeting this morning, please review your scope for the tower. Please confirm the additional cost to include the splashbacks. Please note that we do not expect your rates to increase more than the current inflation.’

After sending the email, I went back to my cost reporting. The software that I was using reminded me of a time when computer screens had only sixteen colours, but it worked fine nevertheless.

9.36AM

Out of the blue, Paul, the plumber from Plumbing Solutions, walked into my office. People were always popping in and out of my office and I was used to unexpected visitors.

‘G’day,’ he said.

‘What do you want?’ I replied.

‘Can’t I just drop by to say hello?’

‘Yes you can, and you can tell me what you want afterwards.’

‘How is everything?’

‘Good, what do you want?’

‘Did you go through my variations?’

‘Not yet, but since you’re asking, we need to adjust your contract in line with the latest events,' I said.

'No worries. We have more variations to put through anyway.'

Paul was the funny guy type who has never left Australia. He knew that I was from overseas and he used to come around to my office to talk about Europe. I always felt he had a genuine sense of curiosity about how people lived in other countries, but at the same time, I always assumed he was building rapport in order to have his variations approved quickly.

He liked to brag about being the best plumber on site, until days earlier, when the plumbing commissioning was going on, and no one could make it work. Several inspections later, the site manager said to Paul, 'I bet you forgot to connect your pipes to the main.'

‘That’s impossible. What do you think we are? A bunch of wannabes?’ Paul replied.

We looked at the drawings. The sewer connection was right under the terrace of one of the ground floor apartments. We had to cut the concrete slab with specialised labour to reach the pipes. I was asked to be present during the concrete cutting. As the site manager suspected, after we lifted a square metre piece of concrete, we all looked down below and saw a pipe hanging loose and dripping. Paul could no longer say he was the best plumber on site after that. The site banter went on for a long time on that one. You are only as good as your previous job.

'Paul, if you are telling me that you are fishing for variations to recover your loss, please be my guest, but don't waste my time. I can charge you with more costs, did you know that? For affecting the Practical Completion of the project, for example.'

'Hey, I wouldn't do such a thing. Our variations are genuine, you know that. Am I still your favourite plumber, or am I not?'

‘Seriously? Paul, have a look at this first,' and I turned around and pointed to several marks I had scribbled on the wall next to me.

Paul looked at them curiously.

'What is it?'

'It's a performance scale mate. Best subbies at the top. The poor performing ones at the bottom. It is also a variation approvals checklist. I tend to prioritise the subbies at the top.'

'Who is at the top?'

'The sparkies, who else?'

'What about us?'

'You are right here,' and I pointed at a line I had scribbled above the skirting.

'How come?'

'If you can explain how you let us pour concrete when you weren’t finished with your work, I might move you up a few inches, but not before.’

Paul left my office unsure if my scales were real or not. They weren't. It was just my way to let subbies know, politely, if they were annoying me, or consuming too much of my time. I do admit that I always liked to talk to Paul. When I look back at this project, he is one of the individuals I remember with a smile, but I had to return to my cost report that day.

11.05AM

Greg, the site manager for the low rise block, popped in. With the date for the practical completion looming ahead I could sense he was worried, busy, and in need of care and attention.

'G’day mate, how are you?'

'Good, good.’

‘Who put this sign on your door?’ I could sense from the look on his face that he didn’t find it amusing.

‘Some funny guy that never left high school. No big deal. I quite like it. What's up anyway?'

'We have a problem. You need to come with me to see it.'

'Do I have to? Can't you just tell me what it is? I am doing my cost report.'

'Better for you to come with me. You can't be stuck all day in this office anyway. The cost report can wait. Get your PPE and follow me.'

I got my PPE and we walked across the site. It probably took us 30 minutes to walk 500 metres as Greg had to stop and greet anyone that walked past us. “G’day mate, did you watch the Aches last night?’ was the trending topic that day.

Eventually we got to our destination, which looked rather busy. We made our way to the roof.

'Look at this,' Greg pointed to small ponds on top of the air conditioning system. Greg was right. We couldn’t have water on the roof. A great deal of building defects are caused by water infiltrations. Water corrupts everything, even the most stubborn material.

‘The insurance company will go bonkers. These rain protections should be in the shape of a pyramid. These boxes won’t work. Call HVAC Solutions. They have to come back here and fix this mess.’

‘They won't. They are still fighting to get their variations approved. I have also heard on the grapevine that they are going under.’

‘Someone has to fix this, even if we have to pay for it.’

‘We have some contingency left. I can escalate it to Rob and see what he says. Can I go now?’

‘Yes, you can.’

On my way back to the office Greg shouted from the roof.

‘Have you approved Levent’s variations?

‘Yes, why?’

‘He went on holiday. Left two men in charge to work on the tower. They won’t come here to patch the final works unless you approve his variations.’

Levent was the painter. One of the problems we were up against was the ducting for the air conditioning system. It was dripping due to poor workmanship. Drilling holes in the suspended ceiling to rectify it was almost an ongoing task. Once the job was done someone had to patch it. Levent was already finished with his work, so everything came as an extra. He liked this arrangement, but he wouldn’t do anything without ensuring his variations were approved first.

Back at my office I called Greg.

‘Get someone else to do painting,’ I said. ‘We can't afford to wait. I’ll deal with Levent when he is back. His men should have known better.'

Later I started to put an email together regarding the ponds on the roof. It was not my decision to make.

12.30PM

One of my colleagues dropped in. ‘Why are you keeping this sign on your door,’ he asked.

‘Doesn’t bother me, are we leaving?’ I asked.

‘Yes.’

We were four Contracts Administrators on site. We always went out for lunch together, but we never ate at the same place twice in the same week. Although today we had a different arrangement.

‘Where are we going?’ I asked.

‘Jack will pick us up. It’s a surprise.’

Jack, from Sprinkler Solutions, had invited the four of us out for lunch. He was the kind of guy that liked to build strong and lasting relationships with people in charge of his payments.

The restaurant that he took us to was one of the best in the city. Jack also liked his share of gossip and most of our conversation was related to Lewis, the site manager on a different project, albeit from the same company as the four of us.

This particular site manager managed to stock a lot of construction materials at his place, without paying for it. Suppliers would drop the goods in his backward and somehow invoice the project instead. One day a subcontractor was asked to crane some prefabricated concrete elements into his garden. When Lewis asked him to write his project address on the receipt, the driver told him to ‘f--- off’ and reported him to the company. He was now facing charges.

We were all uncertain about his fate. My colleagues couldn't stop talking about him. It was a recurring theme around the site. Personally, I never understood how someone could harass the subcontractors the way Lewis did without considering that he would eventually get caught. Somehow his brain didn't care or consider that possibility.

Back in the office, I prepared another mug of coffee and I finished the email I had started before lunch. There was still some contingency left, but it was unclear how much it was going to cost to rectify the work from HVAC Solutions. I pressed the send button and continued working on my cost report.

2.25PM

Charlotte, from Cleaning Solutions, popped into my office while I was well immersed in my cost reporting. Charlotte was from the UK and the owner of her cleaning company. She had a strong British accent and always referred to her employees as ‘the girls’, which I thought was quite funny in a heavily male dominated industry such as the construction industry.

‘You have to help me,’ she said, sounding unwell. ‘The Castle Hills job is killing me.’

‘What’s wrong?’

‘I don’t know what to do,’ she said and started crying.

Although I had to listen to all sorts of sad stories to get variations approved quickly, Charlotte sounded genuinely worried. I had never seen her in such a state. I found a tissue and gave it to her.

‘What’s going on?’

‘It’s that job in Castle Hills, it’s killing me, it’s killing me. It takes more than one hour to get there. We all travel in one car, the girls and I, but I’ve never allowed for so many site visits in our quotation as I have been asked to do here. I am already in the red. I don’t get paid enough.’

‘Why not?’

‘The contract was signed ages ago. They just can’t finish the job on time. The market rates have changed since then, my girls want more money, but that wanker of a Contracts Administrator doesn’t allow me to adjust my hourly rate. I think I am going under.’

She started crying again.

I knew the job in Castle Hills was a disaster for the company. Finding out that Lewis was defrauding the subcontractors didn’t help either. The Contracts Administrator working on that job was under a lot of pressure. The company was losing money on every trade. As a result variations were unlikely to be approved. The management team had only one mission; finish the job quickly and move on.

‘What do you need from me?’

She wiped her tears from her face. ‘You have to give me the contract for the tower. I’ve already spoken to Rob about it.’

‘What did he say?’

‘To speak to you.’

I tried not to laugh. I did understand and respect Charlotte’s problems, but I also knew that Rob couldn’t care less if he told her to speak to me about it.

‘I will talk to him,’ I replied.

‘You promise me?’

‘Yes, I do.’

Charlotte wiped another tear from her face and left my office. I returned to my cost reporting. I also had a meeting that day with Fred, from HVAC solutions, to discuss his contract variations.

2.55PM

Leigh, from Tillig Solutions called me. They had been working around the clock and Brett, the site manager for the tower, a real treat of a human being, never stopped asking for more men. Anything below eight men would infuriate him.

When Leigh’s name appeared on the screen of my mobile, I already knew what was coming.

‘Leigh, how are you?’ I asked.

‘Good, thanks. One question, why didn’t we get paid? We have been working around the clock, why haven’t we been paid?’

‘When did you put your progress claim forward?’

‘Last week.’

‘Sorry mate, but did you think I was going to pay you in one week? We pay concreters on 14 days, everyone else gets paid on 30 days.’

‘Why can’t I get paid?’

I sighed.

‘Listen Leigh, I am not going to teach you how to comply with your contract. Submit your claim before the end of the month, I will assess it and you will get paid in 30 days. It’s that simple.’

‘Can’t I get paid earlier?’

‘I don’t think so.’

‘Can I drop by your office?’

‘Anytime you like. My door is always open.’

3.01PM

Our receptionist called to let me know that Fred, from HVAC solutions, was waiting for me at reception. Greg was going to join us too. I got my notebook and walked towards the reception. I could sense the tension in the air when I shook Fred’s hand.

Greg joined us straight after. Ten minutes later, when we were just warming up, Fred started shouting. ‘Why can’t you approve my variations? I have finished my work. Why can’t I get paid?’

‘Because your work is faulty,’ Greg said in my defence.

‘I am not going to rectify anything before I get paid.’

‘I can’t pay you, Fred, I wish I could, but I can’t. Your variations don’t make sense, but even if they did, and we were happy to entertain them, the supporting documentation is pretty bad. Either you redraw or substantiate further.’

Fred, who was a big guy, stood up and smashed a stack of papers onto the table.

‘Here it is, c--t.’

Greg, noticing that the meeting had become offensive, decided to put an end to it.

‘I’m sorry Fred, but you can’t talk like that. We’ll be in touch,’ he said and Fred was invited to leave the room. As I suspected, his documentation was the same as before and just as faulty. HVAC Solutions went under one week later.

Every so often I find myself thinking about this meeting. It was the first time I felt physically threatened. I started sensing the tension in the room, one inch away from my nose, as soon as we started talking about money. Word went around on site that I stood my ground, but it was Greg who had the good sense to cut the meeting short. He knew how to behave in similar situations. I grew as a professional that day.

As time went by, I also started thinking about what had put Fred in that position. Personally, I don’t remember seeing any merit in his contract variations, but I hadn’t been involved in the contract negotiations of his package. Whatever his struggles were prior to our meeting I took a very contractual position on the matter. Weeks later, when the liquidators knocked on our door, I had a better understanding of his finances. Financially, Fred’s misfortune had only a minor impact on our project, since we still had some contingency left. We used it to remedy the poor workmanship and some poor design solutions. However, similar situations can be a lot different if the subcontractor is not yet finished with most of their work and sits on the critical path. Because this is such an important topic, we will return to it later in this chapter; after we have reached the end of my working day. So not to deviate from the focus of this section.

3.25PM

Back at my office an email from the steel supplier came through. Steel prices were increasing 10% for the next quarter. I sighed and returned to my cost reporting.

3.42PM

My phone started ringing. It was Greg, ‘What’s up?’ I said. ‘Can you get Ian to work on Saturdays?’ He asked.

‘Ian who?’

‘The carpenter.’

‘What do you mean?’

‘He doesn’t want to work on Saturdays. He doesn’t want to employ chippies either.’

‘Can’t do much about it.’

‘He needs to work on Saturdays. Otherwise, we can’t make it on time.’

‘Mate, I can email him and attach an extract from his contract where it clearly says that he is obliged to work on Saturdays, but do you think he is going to care?’

‘Well, he should.’

‘And what are we going to do if he ignores my email? Taking him to court?’

Ian was a local carpenter that had been working for us since the beginning of the job. He was probably in his fifties and more keen to go fishing than to work on Saturdays. As he pointed out one day, ‘I have paid my mortgage. I have a boat, why should I work on Saturdays?’

‘Because your contract says so’, I thought, but contracts didn’t mean much to Ian. It was just a piece of paper that he probably didn’t remember signing. The only contract management he cared about was to come by my office, at the end of each month, to drop his progress claim on my desk with that don’t-forget-to-pay-me-or-else look on his face. His variations were sometimes hard to understand, but it was a lot harder to negotiate them.

Greg thought for a while. He said, ‘Okay, leave it up to me. I will find someone else to do some of his work.’

When I was about to hang up, Greg asked, ‘What about Concrete Solutions?’

‘What about them?’

‘Gary doesn’t want to do the concrete wash.’

‘Why not?’

‘They are too busy.’

‘Can’t we use someone else?’ I asked.

‘Can’t find concreters. Not these days. Besides, he was the concreter on this job anyway.’

‘Are you sure you can't persuade him to do the job? Can't you talk him into it?’

‘He doesn’t want to talk to me. He wants to talk to you.’

Gary, from Concrete Solutions, was a difficult person. He talked to everyone on site like he was the man in charge. Brett didn’t get along with him either. Their relationship was so sensitive that I was not allowed to call Gary without telling Brett about it. ‘I will deal with him, not you,’ Brett once told me.

Gary was the kind of subcontractor that would walk off site if things weren’t to his liking. Program wise his work was on the critical path. He could deliberately delay the job. Personally, I have never come across a subcontractor that could pull such a stand, but everyone knew, or suspected, that Gary would not hesitate doing it, and would deal with the contractual consequences later.

I called Gary that day because we needed someone to do the concrete wash and unfortunately I couldn’t think of anyone else to do it on such short notice.

‘Gary, how are you?’

‘What’s up?’

‘Concrete wash, why can’t you do it for us? Greg told me you wanted to talk to me. We need your help, man. We need you.’

‘I’m busy working on the tower.’

‘Mate, what difference is it going to make to send 2 guys in the morning to sort us out. How many men do you have on the Tower? 20 or 30? I’m sure you can spare 2 and help us out.’

‘It’s going to be expensive.’

‘Just do it. We need you.’

‘I’ll see what I can do.’

I always had to approach Gary as if he was doing us a favour. Eventually he did the concrete wash for us, for twice the market rate, but we got the job done.

3.57PM

Leigh popped into my office. He seemed worried, but he always seemed worried to me; and his questions always sounded the same.

‘I wasn’t expecting to see you here so quickly. What’s up?’

‘Why haven’t we been paid?’

‘Leigh, come over here please.’

Leigh leaned over my desk. I found a sample of our contract and explained to Leigh the payment procedures. Progress claims were to be submitted latest on the 28th of each month. I would then assess everything and process the payment. Four weeks was the normal turnaround for most subcontractors to get paid, which was also in accordance with the NSW legislation. In the end I looked at Leigh and said, ‘This is not a Mum and Dad contracting company; and you are not the only one putting your progress claims forward. You just have to stick to the process.’

Leigh looked at me and said, ‘But why can’t I get paid this week?’

I sighed.

‘Leigh, I am doing you a favour explaining how the contract works. If you don’t want to listen, fine, but don’t waste my time.’

‘How do you want me to explain to my men that they have to wait 6 weeks to get paid?’

‘Leigh, this is how the construction industry works in this state. I thought you knew it by heart.’ I was being sarcastic.

‘I have been in the construction industry for decades and never experienced anything like this.’

I sighed.

‘Leigh, do you mind letting me work on my cost report?’

‘I’m going to talk to Brett about this. He can’t push us this hard for no pay.’

‘Please do. If you can convince him to pay you this week, I will cut the cheque for you myself.’

Leigh left my office with a smile on his face. Somehow he believed that Brett was going to approve the earlier payment. But he had felt the same way the month before, and the previous, and so forth.

I returned to my cost reporting.

4.25PM

Brett came to see me. The two of us never got along. I never felt he respected my work.

‘Gary told me you called him.’

‘Gary from Concrete Solutions?’

‘Yes, who else.’

‘I had to. We needed someone to do the concrete wash.’

Brett started to steam like a locomotive. I already knew what was coming. Seconds later he started shouting, ‘Didn’t I tell you not to speak to him unless you talked to me first? Didn’t I?’

‘Take it easy, man. We only need two men.’

‘Two men for f------g what? Can’t you get someone else to do it? Gary can’t be distracted. The tower is more important than that shitty job you’re doing.’

It was pointless to remind Brett that we were working together on the tower.

‘It’s too late to get someone else to do it. Besides, his contract is already in the system. It’s easy to process extra work.’

‘Can’t you f------g get someone else to do it?’

The shouting was just ridiculous.

‘What for? What difference does it make?’

‘It makes a hell of a difference. I don’t want him to say he is helping us with another job. The Tower is his ONLY f------g job.’

‘Brett, that’s fine. I’ll see what I can do.’

‘Don’t you f------g talk to him again,’ he said and left my office abruptly. I didn’t think much of our exchange of emotions. I always looked at Brett as a person that liked to mark his territory, but didn’t have the brain prowess to enforce it. Concrete Solutions did the job in the next few days and he had already forgotten all about it.

The end of my working day.

At around 5 pm I finished my cost report and emailed it to the management team. When I was about to start cycling towards my home, two site managers started to have a go at each other and the end result was that Bruce punched Nick in the face. In line with company policy Bruce was dismissed straight away. What the argument might have been between those two, generated a fair amount of gossip the next day, but all was forgotten days later.

As one contractor once told me, looking after subcontractors requires expertise in caretaking, mental support, mateship, lots of patience, empathy and so forth. As the illustration of my working day as a Contracts Administrator attempted to show, I fully agree with his observation.

Subcontractors

Almost all, if not all, of the most amazing buildings I have had the opportunity to visit were built by individuals. In recent years, I have begun to realise that we may be entering the next stage of evolution in the construction industry, led by robotics, but until now, and in most cases, the heartbeat of the construction industry has been kept beating by people on tools.

The size of the project and the time for completion, will dictate how much manpower is needed. Big jobs require loads of people. Managing people is not an easy task, and in that sense the construction industry has a layer of complexity that tends to increase with the size of the job. Some site managers, like Brett, seem to believe that shouting at people helps to get the job done, but it depends a great deal on whether the individual that is being harassed can absorb that kind of treatment. Otherwise it can backfire.

Some site managers can be very attentive, but relationships are often tested when the project starts losing money. I took the liberty of describing one day in the life of a Contracts Administrator to better illustrate what happens on site after the tender phase. However, had the job been under financial pressure, most likely my illustration was going to have a different flavour.

As I argued earlier in this chapter a contractor is only as good as its subcontractors, but in case you disagree with me, let me expand on this argument. In my professional experience buildings are erected by subcontractors. In most instances, the contractor is mainly responsible for coordination. Although I have seen situations where the contractor could deliver a great portion of the work, in countries like Sweden or Latvia, in Australia, in my experience, the majority of the work is contracted. No matter how much contractors try to regard their subcontractors as replaceable, subcontracting is the backbone of any project; and since almost any subcontractor needs a construction contract to perform works on site, it can also be argued that managing contractual relationships are therefore essential to deliver a successful project.

Unfortunately, most subcontractors win work in the same fashion as contractors do. The contractor will tender the works and award the contract to the cheapest tender, majority of the time. This normally means that subcontractors need a concise scope and to be able to work without interruptions. Somehow, most subcontractors have a tendency to believe that the contractor will coordinate the job on site well, which is surprising, since in my opinion jobs that go according to plan are an oddity in the construction industry. What we need to register here is that most subcontractors will price their work assuming everything on site will turn out fine, at least the cheapest tenderer. Which is all well and good, if it wasn’t for the fact that this assumption, and a few others, in their cost estimate are outside their control.

Most of the time, when the construction market is buoyant, prices will go exponentially high, but when the conditions are tough, the common practice is to underprice the job. In these situations, speedy completions are essential to keep the company financially sound. If a job can be done in 12 weeks rather than 13, then the profit margin will be much higher. However, most of the time, the reality is that 12 is better than 13 weeks because beyond 13 weeks the subcontractor will make a loss on the job.

On top of all variables at play, payments are also an important issue. Most subcontractors will price their jobs assuming they will be paid on time, but the reality is that many jobs run on a negative cashflow. Meaning that some subcontractors will have to sell a portion of their revenue to the financial markets, further dilapidating their profit margins and putting more pressure on their liquidity. This is assuming the financial markets will rescue them for a fee, otherwise subcontractors will struggle to pay their bills, and start trading on the brink of bankruptcy.

If there was something that my day in the life of a Contracts Administrator tried to illustrate, was the on-going discussion about being paid. Lord Denning once said, ‘cash flow is the lifeblood of the building industry’, and although this will ring true to most industries, as we have seen in my illustration, it is of paramount importance in the construction industry that payments flow down the supply chain and reach the people on the tools, who are at the end of the day, the people erecting the building.

In my illustration contractors were paid on time, and yet, subcontractors not being paid on time is one of the most common, recurring themes in Australia, despite being in most instances unlawful to do so. In Australia, thanks to a myriad of security of payment acts, it is mandatory to pay subcontractors when the payment is due, unfortunately there is also a great body of research that shows how frequent late payments are.

If we reconsider the initial argument that contractors are only as good as their subcontractors, it is sometimes mesmerising how much they need to endure to get the job done. There is a great deal of professional management that only cares about getting the subcontractor to sign a construction contract, without doing their homework. So when issues between the subcontractor and the contractor arise, the contractor can always point at the clause in the contract that saves them; but getting a signature on a piece of paper is a lot easier than trying to enforce it, as more often than not, subcontractors don’t know what they are signing up to.

I was once working on a project where we couldn’t find a concreter to carry out the works for the price we had on the budget. Until Hussein from Concrete Solutions came along. His price was so cosmic that we gave him another 2 jobs very quickly. The scope was quite straightforward, but a few weeks later Hussein emailed me a long list of Variations. The majority of the variations had no merit, but entering into an argument with a trade sitting on the critical path was a risky move. We could negotiate with him, but we had to be cautious.

In our opinion the negotiations were going to be easy when most of the concrete work had been completed, but Hussein knew that too, so he kept pushing for a meeting to settle our differences. We tried to delay it as much as we could, but eventually I had to run through his variation list. There was no merit in his variations. Even if I could find some, the pricing was just ridiculous.

But Hussein didn’t care. We had to approve and pay for his variations, or else he would take his men from the site. In most cases, contractually, a subcontractor, or even a contractor, is not allowed to stop working on site if there is a dispute going on. This tends to be the case in most jurisdictions. I tried to explain to him that despite the absence of a dispute resolution the work on site couldn’t be stopped; but Hussein didn’t care. ‘Pay or face the consequences’, he argued. He was so adamant that I considered the possibility that maybe Hussein was on the brink of bankruptcy. So I asked him a simple question, ‘I don’t get it, Hussein, are you losing money on this job?’

His reply was disturbing.

‘I don’t know,’ he replied, ‘how can I know? When we get to the end I will see how much is left in the bank account.’

My hopes of having a proper conversation with Hussein vanished at that moment, because I don’t think it is possible to have a constructive conversation when one of the parties doesn’t know where it stands. Hussein's understanding of contractual matters and simple accounting was rather poor. His advantage was that his works were on the critical path and he could use it to bargain for extra money, rather than focus on the work at hand, which I am guessing we would, if he had the means to know how financially sound the job was.

I used to think that any subcontractor signing a contract should know what they were doing, but Hussein made me rethink my assumptions. The reality is that understanding the scope and risk profile of a construction contract can be a difficult exercise. It can be argued that most subcontractors don't have the profit margins to employ the right skills to negotiate and manage a construction contract when we consider that in most cases the cheapest tender wins..

My argument here, albeit without the academic research to back me up, is that we ought to help subcontractors as much as possible by reducing their administration burden. Needless to say, they also need to be paid on time.

With this argument in mind, we can deduce that the most important issues to discuss when awarding a contract to a subcontractor is to ensure that the scope is well understood and defined, the delivery schedule is realistic and the payment terms are agreed. These are fundamental issues that need to be discussed and clarified. Quality is also important, but that is a discussion for another book. Misunderstandings can lead to delays that eventually affect the work of other subcontractors, and suddenly the job becomes a real headache for everyone involved. Headaches can escalate into real dramas; and a real drama can put a real pressure on all the cosmic prices that were secured for the project. From the developer all the way down the supply chain.

Which brings me to the topic of insolvencies, and the question ‘How come Fred from HVAC Solutions found himself in such a dire financial situation?’ Personally, I don’t know the details of his liquidation, but I think we should be able to second guess it at this point.

The Australian Taxation Office (ATO) publishes regular reports on the number of insolvencies in the construction industry. The numbers are alarming. The ATO also provides a list of the main reasons for insolvency, which makes it easier to guess what might have happened to Fred. Underpricing and mismanagement are the leading causes of insolvency in Australia.

The root of the problem is often underpricing or underestimating the complexity of the job, but underpricing is only half the story, because I don't think it's that easy to predict at the tender stage how all the project variables are going to play out. There are a number of variables that are out of the subcontractor's control, and even if the contractor gets everything right, the subcontractor is still at the mercy of another subcontractor that might have grossly underpriced the job and put the whole project under pressure.

HVAC Solutions may have underestimated the cost of our job. It could also be that our contract was fine, they just happened to mis-price another job and were unable to recoup the loss. Or Fred got bored and started spending the company's reserves on fast cars. We don't know. What I do know is that his company went under a few weeks after we handed over our project. We were lucky in that respect. Their bankruptcy didn't affect the profitability of our project, but if HVAC Solutions had become insolvent before completing the work, the financial outcome of our project would probably have been different.

Contractual variations

In my experience, no one likes to pay for extras; yet not one project goes by where I don't see someone, either a consultant or a contractor, trying to bend a contract clause and ask for more money. Contracts can't be watertight; no matter how much we try to account for all the unknowns. Sometimes we can be proud of a job well done during the design and tender phases, with a great start on site, but there is always the passage of time, which tends to bring a surprise with every turn of the wheel.

Some projects can suddenly take a very long time or be put on hold, but no one wants to adjust them for inflation when they come back on track. Incremental weather can turn a work schedule upside down, but no one wants to pay for the delay. There are also the random situations; e.g. someone finding an artefact buried in the ground and the archaeologists have to be called in.

Once, I was travelling on the underground in Berlin when my journey came to a halt. Later, I was told that a contractor working on a construction site had miscalculated the excavation work, resulting in the collapse of a wall that was part of the underground line. Berliners weren't happy to see the line disrupted for many years, but for those involved in the project the issue was mostly about the extra costs associated with the accident. Someone had to fork the bill.

In general terms contractual Variations are extra works that are necessary for the completion of a project. Because these extras were not included in the initial construct often need to be assessed and priced. Since not everything is straightforward in the construction industry, negotiating Variations is not an unusual occurrence in most construction projects.

Negotiating extra work when the job is ongoing may lead to intense fights. Someone needs to be paid for the work that was or shall be carried out, and someone needs to assess if the claim is legit or not. The party cutting the check often has the upper hand, since the work is normally paid in the end. But the party doing the work also has some cards to play. Despite how ridiculous the claim might be, no one wants to contest it in court, risking further delays on the project.

I have been at both ends of the table. Either evaluating Variations on behalf of the client, or trying to get paid for the extra work performed. With so much money at stake, unfortunately, during the construction phase, the nice and pleasant Doctor Hyde we met during the tender phase is now fully converted into a Mr Jekyll. In my experience most contractors suffer from the doctor jekyll and mr hyde syndrome, but they are of course exceptions to the rule, or so I have been told.

As I mentioned earlier, we often argue about changes, sometimes without understanding what caused the extra work in the first place, or the root of the problem. I have written about managing relationships with subcontractors because this is often where most problems start, but experience also tells me that even on a project with good attention to detail, things can get out of hand.

I once worked on a project that had over 300 Variations. The project documentation was concise and well put together, but halfway through the process someone made a political decision to change the scope of the project. The end result was that preparing, submitting and arguing variations was literally all I did during the day for almost 2 years. When I finally moved on to another project, the person who took over my job continued to work on the variations for a few more years.

Switched on subcontractors like to claim variations. Sometimes some of these variations are also a variation to the client. In fact, with construction sites being as hectic as they are and managers always falling behind, most contractors rely on subcontractors to pick up on the variations that are outside their contract. If a subcontractor finds a gap in the documentation, this will likely lead to a variation to the Employer too.

Some variations, such as omissions in the documentation, are usually easy to price, but not always. The contractor notices the missing information in the documentation. After much moaning, the client agrees to pay the extra cost because it's difficult to ask a contractor to do work that is not in the contract. However, as the mistake was caused by the designers who produced the documentation, the extra cost paid to the contractor may be chargeable to them.

So far so good, but the biggest challenge in assessing a contra-chargeable claim is calculating the amount that can be recovered by the client. Let's consider the following scenario: the hydraulic consultant forgot to document a trench drain in the drawings. By the time the missing drain is identified, the concrete slab has already been poured. As the drain is quite important, the client instructs the contractor to install the drain and submit a variation for the extra work. When the variation comes in, it is approved fairly quickly. The client doesn't challenge the cost that much. Why bother? As I mentioned, since the documentation is faulty, the extra cost can be contra-charged to the consultant who prepared the documentation.

The contractor carries out the work. The existing concrete slab needs to be broken to make room for the drain. Once the drain is installed it needs to be connected. When everything is in working order, it is time to backfill, concrete the trench and make it look good. Was all this an additional cost to the project?

Not necessarily, all things being equal, the reality was that the tender price was wrong from the start. The installation of the drain should have been included in the original documentation. Meaning that the Employer ended up awarding a construction contract for a little less than the correct value of the work. In other words, the consultant's liability to the extra cost is the difference between what should have been the cost during the tender phase and the contractor’s variation. However, what could be a simple mathematical exercise can often turn into a lengthy discussion. More often than not, clients like to throw another variable into the mix, arguing that the costs were more competitive at the tender stage, which adds a layer of complexity to the assessment of the counter-charges.

Variations like the one described above are at least clear from the onset. Assessing variations can become a real headache when the project documentation is unclear. Or, when a client decides to change the scope of the object halfway through construction. I once worked on an industrial project that started out as a freezing warehouse and became a logistics centre for postal services during construction.

We should not award a contract for a warehouse and halfway through the process ask the contractor to build a boat instead. Contractually and hypothetically, a client can do it through a variation, but for obvious reasons, this is something I would not recommend. But what about changing the scope of an object from a freezing facility to a logistics centre? Since the know-how and skill-set is more or less the same, the contractor I was working for agreed to do it, and priced the extra work at roughly 1 million.

The client, who was in a big hurry, said ‘sounds lovely! Let’s go for it. We can assess the cost of the variation as we do the work as we have no time to wait.’

The construction work did go against the clock, but the client, who was an experienced developer, also knew how to deal with the extra cost. So instead of approving it, they appointed a quantity surveyor who did a great job of challenging as many rates and quantities as possible. With so much money at stake, negotiating this variation led to endless meetings. A lot of time was spent arguing the finer points of the claim. In the end, I realised that it was better to break the variation into smaller ones, so that some could be approved more quickly and provide cash flow to the contractor. That way we could focus on the contentious issues without breaking the bank. In this particular case, the final difference was settled in court. I found out later that the contractor was experienced in solving disputes in this fashion.

There is a lot of academic research, and common law cases, that define how to measure and price most variations, which probably helps a lot when disputes end up in court; which might be the most normal course of action when jobs are run by lawyers, but rarely a solution to consider when we are trying to complete a project on time.

In my long experience of evaluating variations, I have reduced my work to a 2-step evaluation process. The first step is to determine whether the claim has merit. As mentioned in the paragraphs above, this can be a straightforward task, such as missing information on the documentation, a so so task, such as changing the scope of a facility, or a challenging task such as the following:

I was once involved in the construction of a large tower in Sydney. When we started building this tower, Sydney had not built a skyscraper in a long time. So let's just say that everyone went about building the tower like we normally do, brick by brick. We put together the project documentation in the usual way and started awarding packages. The project documentation was a good piece of work, but one particular natural element was underestimated: wind.

On most construction sites wind is normally not a problem, but when we are building towers, this is not an element to toy with. It can create a lot of downtime. Downtime is a construction risk, but construction programmes can allow for it; and agree who takes the risk for it. But in my story it was a different scenario. The subcontractor installing the structural steel starts the job well. The structure is well on schedule and is being erected with the crane at ground level. Eventually the floor slabs catch up with the crane and the crane jumps up. The crane is now several storeys up and we realise that the wind is causing a problem.

Above a certain height, the wind moves much faster. This wouldn't be a problem if we didn't have to operate cranes. If the wind blows above a certain speed, the cranes can't be used for safety reasons. The operator has to get out of the cab, go down the stairs, which can take up to 30 minutes depending on the height of the crane, and wait for better conditions. It can take several hours before operations can restart, and an extra 30 minutes to go up the staircase again. So we are talking about a lot of downtime.

In our project the cranes were often moving like metronomes. The situation was new to us, and therefore not covered by the construction contract. It had never been discussed during the tender negotiations. The client felt that the contractor should have known better, but the contractor didn't share the same argument. They had never worked on a tower before. In fact, we were all speechless. Although we were good professionals, wind was a new beast to us.

Suddenly the project was 3 months behind schedule. Cladding Solutions was about to catch up with the structure. This means that they would have to stop their work to allow the structural team to finish a few floors. No subcontractor likes to have men at the table watching youtube films outside lunch hours, so a delay claim is put through the system. They based their claim on the argument that their price structure was based on continuous work. As the management team, we already knew that this was going to be the start of a chain of delay claims, as all the other trades would eventually suffer the same problem. We also knew we couldn't stop the wind. We all came to the conclusion that the programme was wrong. Years later, when I discussed this claim with colleagues, the reaction was often the same: 'But surely the management team should have known about it.’

Well; we know now.

However, back then, the question was not so much how to move forward, but who was going to pay for the delay? The subcontractor thought it was us and sent us a claim for 15 million. We looked at the claim and decided to retaliate with a claim for delay damages of 17 million. Soon, both parties were poring over the project documents for details that could strengthen their case. But the most important point, the merits of both claims, was up for grabs. There was not a single reference to wind in the contract or in any of the meeting minutes.

As it is often the case, discussing claims of this magnitude at the negotiating table is like watching a bunch of artists argue about who has created the most beautiful work. No matter how much we discuss it, most of the time both parties will stand their ground. We could try adjudication or arbitration to get out of this stalemate. In fact, we were very close to pursuing one of these avenues when something else happened.

Two directors had a long dinner and settled the claim over a handshake. The developer promised to drop the claim as long as the contractor did the same, and in return the contractor would get a contract for 'another' project plus 1 million. The office gossip described the deal as a win-win situation. It worked for this developer because they had other projects, but that is not usually the case.

However, as the gossip was circulating, I was the first to realise that while the deal had solved one problem, it had also created another. I was the cost manager in letting the structural package for the 'other' project, which was worth more than 45 million. A few weeks later, when I received their latest price update, their rates had suddenly increased significantly and I had a large budget overrun. I had to spend several weeks travelling between Sydney and their factory to understand the cost drivers behind the sudden price increase and how to minimise it.

The above examples illustrate the complexity of agreeing the merit of each variation. Once the merit has been established, which doesn't have to be 100% as sometimes it's easier to agree on a shared fault, then the price has to be agreed.

Agreeing on the price is another challenge. Sometimes the price is so ridiculous that it takes a lot of energy to put up with the most pathetic arguments to justify it. There are two documents that play an important role when it comes to contract negotiations. These are normally discussed during contract negotiations, and if the tender phase was done properly, these documents should be part of the contract documentation.

One document is the schedule of rates, which sets out the costs to be paid for labour hours, equipment and other key activities. The other document is the Bill of Quantities. We talked about this in the previous chapter. Bills of Quantities often contain a lot of data that can be used to price variations, but because the work we are looking at is often extra, it is rarely itemised in the BQ.

In the absence of both, there are official reports that can help to price a variation, but these are not always as up to date as the speed at which the construction industry moves. In boom times, prices rise; in times of shortage, the opposite is true. As construction books are only published once a year, it can take a while for these reports to reflect current market trends.

In the past, when I was struggling to agree on a variation, I would approach subcontractors directly and ask them to price the extra work for me. This can work, but the reality is that when a contractor prices a variation, they are under no obligation to offer a competitive price. There is no competition in that sense. The case law is complex. While the contractor has taken on risk during the tender phase, they are not necessarily under the obligation to take the same risk during the pricing of variations, and assessing the risk margin of a variation is a complex exercise.

Time-barred variations.

In most common law jurisdictions, variations can't be time-barred. This is based on the concept that no one should benefit financially from something they haven't paid for. I think the principle is logical, but it can become a real headache to agree on the merits of a variation that's several months old, especially if it's poorly documented.

I think the biggest problem is perception. Few people will remember what actually was agreed, if anything was agreed at all. At the same time, my experience also tells me that the brain has a tendency to embellish or exaggerate past events. Something that was a minor accident can suddenly be presented as a major event, and vice versa.

When a variation is discussed, but there is no written evidence of the agreed price and what actually happened, site diaries are one of the most important documents to rely on. Contractors sometimes don't take note-taking seriously, without acknowledging how crucial these notes will be when we can’t agree on the merit of a variation. These days there is no real excuse for not doing so, as any site manager with a mobile phone can write site diaries on the move.

The lack of proper documentation can trigger quantum meruit forms of dispute resolution. This means that if the dispute ends up in court, a third party will most likely be asked to quantify and price the work. This may be more or less than the original figure asked for, plus legal fees. Simply put, in most cases, going to court will only add extra costs to the dispute and reduce the compensation that one of the parties is seeking. Contractors or subcontractors who provide proper documentation to support their claims can often be dealt with rather harshly. On the other hand, everything is looked at in a different light if protocol has been followed.

Overall, whether we are dealing with a time-barred variation or not, my recommendation is quite simple: deal with it as soon as you know about it. As annoying as it may be to agree on the merits of a variation, or even the price, doing nothing for a long time will only exacerbate the annoyance and turn it into a possible long headache.

Finally, it goes without saying that if we take the time to cover all the details of the project during the contract negotiations, then most of the issues that arise during construction can be easily dealt with. Experience tells me that there will always be variations, but none of them should affect the project financially. In this industry it is very difficult, if not impossible, to predict everything that can go wrong in a development project, but it is rather easy to be prepared for the most annoying eventualities.

An experienced developer will build a contingency into the construction budget. We will cover contingencies in more detail in the final chapter, when we look at the business case.

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