While all construction projects involve risk, building a high-rise comes with a specific set of challenges. Due to the extended schedules and critical path nature of high rise projects, small issues can exponentially increase in significance as the project rises higher. After working on hundreds of high-rise projects over the course of my career, I can anticipate and help mitigate many of these risks for lenders and investors before they close on their commitments to the project. Most of the pitfalls of high-rise construction fall into 13 main categories. I’ve listed these below, along with mitigation strategies for each.
- Zoning and Building Approvals: The construction permitting process varies by municipality. Understanding the process and related timeframes is critical to keeping your project on track. As a lender or investor, you should verify that the sometimes complex zoning requirements have been met and the proper permitting has been completed. In cities such as New York City, a review by independent zoning counsel may be needed. The project will not be allowed to commence until the appropriate permits are in place; therefore, a delay in permitting will result in a delay in the schedule. As the project commences and continues, watch the expiration dates of building permits and calendar renewal applications in advance to avoid project shutdowns.
- Design, Project Changes, and Scope Creep: Construction documents, including interior design, should be completed and approved by the developer prior to project kickoff. To the extent that is not possible, it is important to fully understand the status of the construction documents (i.e. schematic design, design development, 100% complete construction documents, permit set, etc.) and agree on a set of milestones and dates to complete the documents prior to closing the commitment. Third-party review of construction documents, including review by specialists such as accessibility, roofing, MEP, or building envelope experts, can be useful in identifying inconsistencies or design deficiencies before construction begins. Identifying deficiencies early can help with avoiding project changes later on or scope creep due to overlooked requirements. Many cities, such as New York, require structural peer reviews prior to the issuance of the building permit. Verify what has been done to mitigate these risks.
- Project Team: A project team–including developer, design team, and contractor—with relevant experience in high-rise construction is critical to a successful project. A team with prior experience working together is a great advantage, as team chemistry can also contribute to project success. It is also important to dive into the experience of the individual team members. Complete a review of the developer’s financial standing and the experience of their in-house construction team. They should have their own staff of professionals to manage the design and construction team on behalf of the developer. Obtain their organizational table and resumes of their key team members to verify they have the appropriate experience. When it comes to the design team, obtain their qualification statement, which can be in the form of AIA Document B305 Architect’s Qualification Statement, and which will provide detail on their qualifications for the specific project. The design team must have high-rise experience to account for risks such as the impact of natural catastrophes, wind, and loads of a high-rise building. Similarly, the contractor must provide their qualifications. AIA Document A305 Contractor’s Qualification Statement provides general information on the contractor, as well as their project-specific experience and financial condition. The contractor will need specific experience in site logistics to protect pedestrians, traffic and neighboring buildings as well as in high-rise worker/material transportation and crane operations. As a team, the designers and contractor need to have the experience in selecting materials and systems that can hold up to the rigors of high-rise longevity and the risks during construction, such as costs and availability, so as to not increase costs or delay the schedule.
- Construction Agreement: The developer and contractor should negotiate a comprehensive and balanced construction agreement, to be executed by both parties prior to project commencement. While there are several agreement approaches that could be taken, most lenders and investors favor a Guaranteed Maximum Price (GMP) approach. Using a GMP approach can mitigate the risk of cost overruns to the developer for in-scope related extras and give some early comfort to the lender or investor that the project should be completed within budget. The GMP should be thoroughly reviewed by the developer and the lender/investor to confirm that the project documents that it is based on are sufficiently complete, that there is a reasonable amount of allowances and that the GMP qualifications do not alter the intent of the project documents or transfer additional risk to the developer that would have to be accounted for. A GMP based upon substantial subcontractor buy-out (in excess of 80%) also helps mitigate future financial risk to the contractor under that arrangement. The GMP should also include a detailed construction schedule with clear milestones to be met.
- General Contractor Failure: The contractor must demonstrate that it has the financial ability to complete its obligations under the construction agreement. If there is a question regarding their ability to do so, performance and payment bonds should be obtained, or another contractor considered.
- Subcontractor Failure: The failure of a single subcontractor or vendor can have a cascading effect on the project’s schedule and budget. The contractor should have a clear strategy to mitigate risks related to a subcontractor failure. The contactor could require the subcontractors to provide individual performance and payment bonds covering their obligations or utilize a Subcontractor Default Insurance (SDI) program. Individual bonds provide guarantees from the subcontractors’ sureties that the work of the respective subcontractors will be completed, while SDI provides security to the contractor, the policy owner, if a subcontractor breaches its contract and is terminated. SDI puts the contractor into a position to proactively manage subcontractor issues without limiting coverage in the ultimate event of a default. The contractor who uses best practices around subcontractor prequalification, subcontractor management, quality programs, and subcontractor default loss control, stands to benefit from the implementation of an SDI program.
- Workforce Sufficiency and Labor Harmony: The construction agreement typically requires the contractor to provide an appropriate management team and workforce to maintain the quality of work and meet the project schedule. The contractor’s strategy for meeting the project’s labor needs should be reviewed at the start. On large projects in areas where union labor is prevalent, the use of a Project Labor Agreement (PLA) may be useful. A PLA can help to ensure labor harmony throughout the term of the project, as it can provide protection against strikes, work stoppages, sympathy actions, picketing, slowdowns or any other disruptions associated with labor union activity.
- Construction Quality: The construction documents should contain detailed quality control and controlled testing requirements to be met by the contractor and its subcontractors. It should identify the specialty consultants retained by the developer for such systems as the exterior wall, structural, life safety, etc. Additionally, the designers should perform traditional construction administration services as part of their scopes, which will enhance the quality control for the project and protect ownership against poor quality work. The contractor should manage the overall quality control program and provide a monthly non-conformance report to the developer and lender/investor of all testing that did not meet specifications and the status of the remedial efforts.
- Major Construction Accidents: While no project is immune to accidents, having a contractor with significant experience with high-rise construction, an impeccable safety record, and a robust health and safety plan for the project will go a long way towards avoiding major accidents. Cities such as New York, where high rises are common, will have stringent safety requirements as well. Be sure the project budget contains adequate funds for safety and protection measures during the construction period.
- Adverse Weather Conditions: Depending on the size and timing of the project, weather can seriously impact the project schedule. Designers and contractors must adopt measures to minimize weather delays. The GMP schedule should be prepared to account for normal weather delays. Of importance, many schedules and budgets are prepared based on a specific start dates. If the project start has been delayed materially, confirm that weather-dependent activities have not been impacted due to seasonal shifts to the extent they result in extra costs or delays to the project.
- Contractor’s Lack of Urgency to Meet Schedule: The construction agreement should include milestone completion dates for events such as foundation start, tower structure completion, envelope completion, first Temporary Certificate of Occupancy, final Temporary Certificate of Occupancy, building opening, and project completion. The contractor should be required to provide regular construction schedule updates, look-ahead schedules and recovery schedules if the project has fallen behind. The construction agreement could also include financial incentives to the contractor for meeting or beating the milestones and liquidated damages of an agreed-upon sum per day if the substantial completion date is not met.
- Inability of Developer to Make Decisions and Settle Claims: Late decisions or unsettled claims can impact the schedule and budget of a high-rise project. The developer should have a team and procedures in place to review open issues and make major decisions so as to not slow the project down due to the lack of developer direction or settlement of outstanding cost issues.
- Budget Risk: Given the longer construction period durations and interconnected activities of high-rise projects, the risk for large cost overruns increases. The construction agreement should include requirements for the contractor to monitor, review and present cost exposures to the developer on at least a monthly basis in the form of a pending change order log and anticipated final cost report. The construction agreement should also have specific language regarding the contractor’s responsibility to review all claims presented by the subcontractors for appropriateness, and when and how the cost exposures are to be presented to the developer to be considered a valid cost. A contingency budget sufficient to absorb the unavoidable extra costs for those risks that could not be mitigated should be included in the budget.
Generally, the risks of high-rise construction are the same as for any large, complex construction project, but they increase with the height of the project. Before funds are committed, savvy lenders and investors will have a robust risk management plan in place, including a qualified construction consultant. A construction risk management consultant with high-rise experience will be well aware of the potential pitfalls described above and can help a lender or investor assess risks and employ strategies in their documents to avoid them, from document and budget review to project close.