THE COST OF RISK
The construction industry, in Montreal, is buzzing with major infrastructure and industrial projects and is riding the wave of a red-hot residential construction market. Who would have thought that such a craze would have existed at the beginning of the pandemic!
This effervescence causes contractors to be insufficient to the task and we are observing a return of the pendulum that for the last 30 years, favored project owners / work providers. We observe, fewer and fewer bidders on projects. Where once there were several invited bidders, now only one or two accept, and this, even for major projects. Nowadays, project owners spend time validating availability, explaining, and discussing with the contractors prior to tender, to generate interest, but often it does not change the outcome.
In trying to understand this new reality, one is forced to look at the perspective of the contractor, who has always chosen projects based on profitability and risk. The current environment allows contractors to push back and refuse the risks that were attributed to them for too long. These risks can be of different nature depending on the job, but owner project management, financial risks, contractual risks, constructability risk and coordination risks cover most of them.
The typical contractual conditions “boiler plates” developed by the various owners over the last few decades have become unbalanced, favouring the latter and accentuating the above- mentioned risks. Contractors are no longer willing to accept these unbalanced risks and conditions, let alone have them imposed on them: consequential damages, unbalanced bonuses & amp; penalties, no cap, etc. In fact, currently there is enough work out there that they have the option of contracting, increasingly favorable terms.
The typical financial and contractual terms, developed in silos, and cumulative penalties, are from another time, a time when the cost of passing on these risks was cheaper. Because of these contractual tender documents, extraordinary construction project concepts, a complex and cutting-edge construction design and innovative environmental projects may be relegated to the dungeons.
This new reality can be mitigated with an experienced client management team that knows how to adapt to this new reality. But without this assurance, the contractor often errs on the side of caution on his bid and includes risk provisions, causing the project to go over budget. This new state of affairs combined with restrictive procurement processes, means that refusing to bid on contracts worth tens and even hundreds of millions of dollars is more common than one might think.
We have reached the point where construction contracts can not solely be led by lawyers and financiers. Transferring risk to contractors is far too costly and is becoming a major issue. To overcome this, we must return to project risk management as the key to success. By having access to all technical, commercial and construction levers, the manager with tools and experience is a way to manage the risk and get out of it at a reasonable cost.
For large-scale public projects, it would be appropriate to revisit, or take exception to, the Quebec “Cities and Towns Act”, which is not always appropriate for this new reality, a framework that is too rigid and limiting, especially for complex projects.