“The success of your business is a result of your choices. If you are dissatisfied with the outcomes, make different choices.”
Engineering News Record, August 24, 2021, Richard Korman
“Big design-build infrastructure projects often turn out to be money-losers for design-build contractors, preventing contractors from covering their overhead, much less earning a profit, according to a new study…
“Carried out by Travelers National Construction Services Surety team, the study looked at 224 highway, bridge, rail, transit and tunnel projects with different project delivery methods from 2004 to 2020. All projects had contract values between $250 million and $4 billion…
“On more than four out of 10 design-build projects, the study found, the design-build contractor failed to cover its costs… “If the contractor had design liability, in general the average profit margin fell by 77%,” says Stan Halliday, chief underwriting officer for Travelers contract surety…
“My understanding is that owners see design-build in such projects as almost completely a risk-transfer mechanism to the contractor and it hasn’t worked well,” says Halliday.
Why Do We Keep Doing This?
The results of this study are nothing new. Many experienced contractors have watched their ambitious competition take on a mega-project and lose their shirt and, in many cases, their entire firm. Here’s a recent example:
A construction team is in federal court with the Port Authority of New York & New Jersey over disputed costs on the $1.5-billion replacement Goethals Bridge between New Jersey and Staten Island, N.Y. Work was completed in 2018, and the team has an estimated $100-million claim tied to its costs on that project that the agency refuses to pay. (ENR)
$100 million!!!! The numbers have gotten so big they have almost lost all impact. Our industry seems to keep doing this repeatedly. We keep choosing to take on mega-projects, some larger than anything we have tackled before, and allow the owners to settle the mega-risk squarely on our shoulders.
Frankly, it is astounding that otherwise sophisticated and experienced professionals continue to fall for this tired old three card monte scheme that politicians slip under our noses. There is simply no other way to put it.
WHY? We asked
“Why,” we asked contractors, “does our industry continue to enter into design-build arrangements with government agencies to tackle enormous projects that require intricate partnerships many years to complete and historically often don’t cover overhead and sometime generate breathtaking loses?” Their answers are interesting but not surprising.
- Contractor #1 – “After 18 years building similar projects successfully, we thought it was time for us to step up into the big leagues. At this point, with our expert team in place, we can build anything. “
- Contractor #2 – “These big projects are a challenge. We’ve seen our competitors lose money and sometimes go out of business, but by watching them we know what they did wrong and are prepared to avoid those same pitfalls.”
- Contractor #3 – “This isn’t our first day in business. We recognized the risks involved but figured if we didn’t take a shot at this one another career changing opportunity like this might never come along.”
- Contractor #4 – “Our firm is the best in the business. We’ve built other big projects successfully. We are the right company for this job. The entire industry knows that.”
- Contractor #5 – “The potential profit from a project of this size is irresistible. This will bump our company up into the stratosphere.”
All reasonable answers. This is how some professionals talk themselves into signing a contract that assigns them unbearable financial risk.
Make Better Choices
Mega-projects are not going to go away, and there will always be firms eager to take them on. The question is, how can we make better choices about contract terms, owner expectations, and risk assumption?
“There are many reasons that complicated mega-projects go over-budget and exceed schedules,” notes Lisa Washington, chief executive of the Design-Build Institute of America…
“The Travelers study is another example that design-build is not a panacea,” says Washington, “and must be executed with the proper amount of collaboration and experienced leadership to fulfill its promise…A mind-shift is needed. It’s a mindset as well as a contract,” she adds. (ENR)
Until contracts become a collaboration in good faith where both owners and contractors cooperate to overcome obstacles as they arise, mega projects will continue to be mega risk. In other words, both parties must shoulder an equal burden of risk.
When it comes to mega-projects –
Making Better Choices – means – Making Better CONTRACTS.
For more information on Contracts, read more at: https://simplarfoundation.org/?s=contracts
For a broader view on Project Selection, read more here: https://simplarfoundation.org/?s=project+selection
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
