Congratulations! It’s no longer 2020! Yet 2021 begins as déjà vu for the present time. We should anticipate a slow vaccine rollout, ongoing COVID-19 disruptions and possible shutdowns, the need to keep projects under strict best practices, and scheduling and labor challenges for existing and new projects. To increase success in 2021, owners and contractors would be wise to review the following three tips.
Tip no. 1: Agree to reasonable contract terms
- Existing projects – One must live with what was negotiated, but stay diligent and perform obligations, and meticulously verify where each project stands while moving toward completion. Communication is key. Document appropriately to address potential or actual disputes promptly. Finishing a good project strong, or minimizing problems on a less-than-fantastic project, is far better for all parties than entering litigation on a stopped project. Delays or disputes rarely improve with avoidance, denial or time. Disputes are very expensive. A cost-benefit analysis must be considered when evaluating dispute outcome alternatives.
- New projects – Realistically negotiate for sufficiently certain terms and timing for project performance. Legitimate give-and-take will allow successful performance and completion of a project. A one-sided, heavy-handed approach by either owner or contractor will most often devolve into defaults, bankruptcies and expensive litigation. Project success is driven by reasonable terms, and not trying to be the “800-pound gorilla.” As much as possible, avoid being the stereotypical “outdated financials owner” or the “change-order-Charlie contractor.” Those strategies can drive a project to litigation, or bankruptcy, in uncertain economic times.
Tip no. 2: Evaluate insurance and consider bonds
- Existing projects – Verify ongoing compliance with insurance requirements in the contract, secure endorsements and required documentation, update any change in terms/parties during the project, and verify that the policies have not lapsed if a project schedule continues longer than anticipated. Consider whether labor needs or material/equipment scope has changed. In some markets, due to trade or labor shortages, there may be a necessary increase in self-performed work – something not covered by standard contractor insurance. If instability or uncertainty in contractor performance arises, consider whether a performance bond may be necessary, if available, to try to ensure work completion.
- New projects – The insurance evaluation is increasingly more complex, and usually includes a fully developed, multipage exhibit, or at least several pages in the body of the contract. Don’t presume “any” insurance provides coverage simply because the title of the policy is familiar. Verify that all reasonable scenarios for project risk are addressed. Ensuring project completion through a performance and payment bond may be higher on the consideration list in light of the continuing uncertain times for the industry. Also, consider whether less common insurance products might mitigate some risks, such as those caused by project location and the possibility of “protests” near the project site. In complex energy or manufacturing projects, special insurance for commissioning is required to address the risks of extended start-up and testing prior to operational functioning.
Tip no. 3: Diligently address project events
- Existing projects – Engage your team to stay on top of the project deadlines, requirements and “looks ahead,” and determine what can or cannot be managed before a “project schedule slip.” For example, consider where there may be a gap in staffing due to COVID-19 or other labor shortages (ongoing or unexpected) and the need for readily available alternatives for “supplementation.” Question whether there are increased long-lead-time needs under current conditions, or whether there are new needs for alternatives for project requirements. The old adage “the squeaky wheel gets the grease” does bear out in handling potential or actual problems before or when they arise.
- New projects – If 2020 taught us anything, it’s that the normalcy bias can cause us to avoid evaluating all the risks the parties are undertaking because “it’s never been a problem before.” We no longer have that luxury. For instance, “boilerplate terms” must be negotiated. While there is no such thing as a “perfect” contract, negotiating for a proper risk allocation between the parties, or avoiding being saddled with risk a party is unprepared to manage, is less costly than project disputes or project failure.
As uncertainty persists in 2021, both owners and contractors would be well-served to invest time in realistically evaluating the challenges to existing and new projects.
Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on January 14, 2021.