Risks to fast-track construction in manufacturing can occur and delays can be expensive, below are strategies to mitigate contract risk.
By: Christopher M. Caputo and Albert L. Chollet III
The Risks of Fast-Track Construction in Manufacturing
Time is money in manufacturing, and construction delays are expensive and may jeopardize commercial objectives. Until the ribbon is cut and the production line is fully commissioned, the construction process presents risks without tangible reward. Thankfully, there are strategies to reduce expensive construction-related risks for manufacturers whose core business is almost always something other than construction.
Contract Risk Mitigating Strategies
The selection of the most appropriate project delivery method for the project is one of the earliest risk mitigation opportunities for the manufacturer. For advanced manufacturing, there are two principal project delivery methods. The first is the traditional design-bid-build method in which the manufacturer enters into two separate contracts, one with the architect who designs the project and the other with a contractor who constructs the facility. Traditionally, design and construction occur sequentially. Only once the design is completed will the manufacturer obtain bids and pricing for the construction.
The other popular method for manufacturing construction is the design-build method. In design-build, the manufacturer enters into one contract for performance of the design and construction of the project. Because the design-builder is responsible for design and construction, those activities may occur concurrently and reduce the overall duration.
Design-bid-build offers a manufacturer some cost predictability at the outset of construction. Theoretically, the sequential process of design-bid-build should result in a more fully developed scope of work and more accurate pricing at the time of the bid. However, it is frequently a lengthier process than design-build and cost escalations during performance remain a risk.
The cost predictability of design-bid-build does not mean that it is the most cost-effective approach for every project. Design-build integrates the contractor early in the design process, potentially maximizing constructability and schedule, identifying potential cost savings to be incorporated in the developing design, and procuring long-lead items. The design-builder bears the risk of the completeness of design, so the design-builder is incentivized to manage the design process in a way that a designer in a design-bid-build may not be.
In either scenario, many manufacturers pursue a “fast-track” process in which construction starts before the project design is complete. This is often accompanied by an accelerated procurement process, ordering critical materials or difficult-to-procure equipment early in the design process.
Fast-track construction may shorten project duration, but it also can result in unforeseen costs. Fast-track may increase the chances of contractor change order claims for additional costs or time because multiple related designs, such as process and building envelope, may be performed independently and concurrently. More often than not, the design will develop during construction which, in the design-build scenario, may lead to disputes over whether newly conceived work fell within the design-builder’s original scope.
Under either of the two prevailing project delivery methods, a manufacturer has numerous additional strategies available to it to enhance cost and schedule controls:
Start construction planning early. By starting construction planning early, even during the site selection process, the manufacturer can select the project delivery method that best suits needs and risk tolerance.Scrutinize contract language. Popular “form” contract documents often do not contain all necessary terms or proper allocation of risks. Insist on contract terms that reasonably allocate risk to the designer or design-builder for reasonably inferable work, avoiding unnecessary change order claims arising out of post-contract design development. Limit excessive contract exclusions or qualifications that leave unclear gaps in contract scope or responsibility.Coordinate designs and plans for equipment. Require early integration of the production line design in the design and schedule for construction of the shell of the facility, including equipment mechanical requirements, equipment staging, equipment layout, and procurement requirements in both the design and schedule. Require early disclosure of the manufacturing line to the project’s design professional.Convey special technical requirements early. Incorporate cleanroom and other requirements of the production line in bid packages, requests for proposals, and contract documents. Fully defining the design-builder’s scope is absolutely essential.Identify critical schedule milestones and impose meaningful schedule and completion requirements. Establish interim milestones for critical production needs and an appropriate definition of “substantial completion” within the contract. Insist on schedule controls in the contract to require appropriate schedule recovery in the event of delays and establish liquidated damages for delay that reasonably approximate damages that would actually be incurred.Retain consultants to assist in managing the project. Employ a team of owner’s representatives and consultants with expertise in design, construction administration, claim, and scheduling to assess change orders and to confirm that the manufacturer’s requirements for quality, scope, costs and timing are met. Engage early with risk management. Involve the insurance and risk-management team in initial contract discussions, ensuring that insurer requirements and other risk-shifting provisions are contained in bid documents.
There is no one-size-fits-all strategy to risk mitigation on a complex and technical project. However, if the tools available to manufacturers are employed strategically as part of a comprehensive plan for the greenfield development, certain costs and delays can be avoided.
Christopher M. Caputo is vice chair of Baker Donelson’s Construction Group and is located in the firm’s Nashville office. He can be reached at [email protected]
Albert L. Chollet III is a shareholder in Baker Donelson’s Nashville office and a member of the Construction Group. He can be reached at [email protected]