As the population in Boston continues to rise, construction owners have seen a gradual increase in renovations and rehab projects to keep up with the growing demand of people who want to live in and around the city. Values recorded by the Census Bureau indicate that construction in Massachusetts and the rest of the country is growing. In 2015 alone, cumulative U.S. construction project spends reached $1 trillion, the highest recorded amount since 2008. However, taking on renovation projects brings upon increased risk for project owners. That’s why Boston area construction owners must take the following actions to avoid overpayments, disputes and potential litigation.
Spell Out All The Details
The biggest risk when renovating a property lies within the contract itself. Too often construction owners execute contracts that contain confusing and unclear language. If a contract’s intent is not clearly stated, the property owner might assume the project is cost-reimbursable while a contractor assumes the contract is lump sum. Multiple interpretations of contract language can lead to disagreements and potentially expensive lawsuits. One way to avoid an unnecessary problem is to write clauses and provisions so that even someone unfamiliar with the project, such as an arbitrator or judge, can easily understand the reimbursable project costs.
Review Each Budget Line
For all contracts, it is essential to ensure that the original project budget is not artificially inflated. On cost-reimbursable contracts, construction owners need to carefully review budget line items to confirm that budget amounts comply with the provisions of the contract agreement. By removing unnecessary or overstated budget line items, owners can save a significant amount of money before construction even begins.
Mark McCarthy
Be Ready To React To Change
Most renovation projects come with surprises that can increase the scope of work. Even if your organization has drafted clear contract language and complete architectural drawings, there is still the possibility that additional work outside of the original scope of work will be required. Avoid a contract dispute by carefully reviewing the pricing of all change orders. It’s important to be fair to both the contractor and the project owner. For example, a change order might include duplicative cost, incorrect markup percentages, or labor rates in excess of industry averages.
Set Your Labor Rates
Renovation projects tend to include a significant amount of change orders, which makes reviewing the subcontractor labor rates especially important. Subcontractors selected through a competitive bidding process will likely present low, lump sum contract amounts in order to win the work. However, change order work is often not competitively bid, which can result in inflated pricing when subcontractors overstate their labor rates. Review your subcontractor labor rates before breaking ground to guarantee you are receiving the best possible price. This strategy saved one company nearly $600,000 because they determined upfront their subcontractor labor rates were too high when compared with industry averages and local union collective bargaining agreements.Find The Right Insurance
Beware of insurance plans with unnecessary costs. Did you know that contractors can inflate their insurance costs by billing for coverages not required by the contract agreement? Ensure you are only paying for insurance coverage and limits you have specified in your contract. Carefully review your insurance coverage and costs to guarantee adequate coverage while also mitigating the risk of over-billings.
Understanding the major risk areas you face prior to beginning a renovation project will help you manage risk from inception to completion. At a minimum, you need to execute clear contracts considering project budgets, changes in work, labor rates and insurance costs to help you stay within budget.
Mark McCarthy is senior manager of CBIZ Risk & Advisory Services in Boston.
