Harness the connection between managing risk and increasing profitability, Part 2

In our previous post, we began discussing how you, the AE professional, can control the flow of information during the construction phase and, at the same time, create strategies to manage risk, increase your profitability, and ensure the success of your projects.

It’s always a good idea to discuss any concerns you may have about your liability or risk exposure with your professional liability advisor and project owner, but it’s also important that you develop your own procedures that will help you take control of the flow of information on a project.

In Part 1, we covered taking control of the submittals schedule and managing RFIs. Let’s move on to properly allocating substitutions and limiting change orders. Follow these steps to maintain control of the construction process, effectively manage costs and risk exposure, and ensure your projects are completed according to your expectations.

Specify and allocate substitutions

Substitution clauses are common, essential parts of every contract. Often, however, they are not enforced and owners and contractors may not adhere to the stipulations set forth in them.  Remember that substitutions can be dangerous for a variety of reasons, including: 
• The building’s overall performance could be altered or adversely affected
• Sustainability checklists, such as LEED, could be compromised
• Manufacturer guarantees of other materials could be nullified – substituted materials can affect the performance of other, specified materials used in conjunction with the substitution and can affect the manufacturer guarantees of those materials
• Owner expectations can be jeopardized – substituted materials may not perform the way the specified material would and the owner’s expectation is based on the specified material

Protect yourself and your design by specifying and allocating substitutions. First, when the construction documents are complete, meet with the owner and identify which materials are not substitutable, put this list in writing, and obtain sign-off from all parties. 

Next, insist on using the right forms and documentation. When you are asked to review a substitution, require that the contractor provide to you complete information about the substitution, written clearly and comprehensively on the substitution form. As with RFI forms, many substitution forms are inadequate for this purpose, so it is best if you create your own comprehensive substitution forms. These custom forms should indicate the format and depth of information required for you to make an appropriate assessment of all substitution requests.  See your professional liability advisor for guidance on drafting your own forms.

Regulate and limit change orders

As you know, change orders always increase the overall cost of a project. Typically, 8-10% of the total cost of a project will be due to change orders; this is why contingency funds are important. Change orders also affect the schedule, which, in turn affects cost. You can be sure that changes in schedule will always increase the overall cost of the project because it will take longer to complete.

There are, however, certain change orders should be treated as non-legitimate. These change orders relate to aspects of the project that the contractor originally agrees to perform for a certain price during the design phase. Non-legitimate change orders arise when, during construction, the contractor reneges on the quote and returns with a higher fee request in order to perform the same work.  Reject all non-legitimate change orders and involve the owner with any disputes as to what is a legitimate change order and what is not.

Next, you must make sure that you are compensated accordingly for the inevitable redesign services required by any change order. To accomplish this, you must:
• Fully address the change – enforce all change order provisions in the contract; all change orders must be signed by the AE, contractor, and owner in order to be legitimate
• Do not proceed with approval of change orders until the requirements of the provision are accepted by all parties
• When new change orders come in, create a new proposal for how much it will cost you to redesign the project, including any design fees to be likely incurred by subcontractors
• Do not perform the redesign until your client approves your fee for the change

If you create a clear set of procedures and carefully manage communication during construction, you can reduce your risk exposure, empower your firm to receive proper compensation for your services, and ensure a more successful project. Discuss these risk management strategies with your professional liability advisor and, together, design your own strategy for success. 

About the Author: Steve Whitehorn is the author of the upcoming book, “Ensuring Your Firm’s Legacy,” and Managing Principal of Whitehorn Financial Group, Inc.  The firm is the creator of The AE Empowerment Program^®, a three-step process that helps firms create a more significant legacy and empowers them to achieve greater impact on their projects, relationships, and communities.