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The construction industry costs the US economy $120 billion per year in waste, according to Barry LePatner, one of the nation’s leading construction lawyers and author of “Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry,”–The University of Chicago Press, 2007. Even as other industries have become more efficient and streamlined with technological advances, the construction business has changed little since the first steel-framed skyscrapers were erected in the early 1900s. Lawyers can be part of the solution to improving both the cost efficiency and timeliness of office construction projects. Founder of New York City-based LePatner & Associates, LePatner discusses with GlobeSt.com how to reform the system one contract at a time.

GlobeSt.com: In your book, you state that lawyers can be part of the process of making construction jobs more efficient. What role do lawyers play?

LePatner: Lawyers should approach this as much as the owner’s business adviser as legal adviser. We pay close attention at the outset of every project to a client’s business objects, and we tailor the approach to structuring contracts based on those objectives. We don’t use form agreements. We do not accept the construction and design industry’s statements that this is the way business has always been done and always will be.

Clients often come to us who in the past have experienced terrible problems with cost overruns. And we help them change that experience and make sure their new projects do not have cost overruns.

GlobeSt.com: How did you arrive at this new approach to structuring construction contracts?

LePatner: I did an industry-wide analysis of the construction industry as a whole and compared it to other industries in America. The construction industry operates in a fashion different from every other industry in America. There are 7.7 million construction workers in America in 883,000 construction firms. And 92% of those construction companies employ 20 workers or less. It’s truly a mom-and-pop-shop industry. Therefore, these companies function like mom-and-pop shops: They live from paycheck to paycheck. They don’t have deep pockets, and as a result, they can’t take on risk. And most importantly, they spend next to nothing on IT research and development and technology to improve efficiency.

What this all translates into is that when we go to hire contractors, it is all done on a low-bid basis. To get a job, a contractor has to bid at or below cost. That means that when a contractor signs contract to do a $1 million sheetrock job, he knows that the only way he can make a real profit is through change orders and to hope the team will find ways to make money, because he won’t make money on the base contract. And it means the owner has to gird itself for cost overruns.

Most of the workers on construction jobs are independent subcontractors. Every subcontractor wants to get in and out, and when there are problems, the subs say, “I’ve got to get a change order, or I’m going to walk off the job.”

GlobeSt.com: And you have found particular problems with so-called “fast track” projects?

LePatner: The term “fast track” is a disaster of the first magnitude. The concept of starting a project before architectural and engineering drawings are 100% complete is absurd. If you give contractors 70% complete drawings for them to make their bids then it opens everything up to cost overruns.

Suppose a contractor tells an owner than he can fast track the project by starting it four months early before the plans are complete–starting the demolition and the foundation and giving contracts of to various subcontractors for steel, electrical, framing, etc. Four months later when the new set of drawings comes out, everyone on the job will raise their bids. Everyone uses supplemental drawings as a way to go back and reconfigure their prices. If the owner balks, everyone starts finger-pointing. It’s a free for all.

GlobeSt.com: So a project should never begin until all the drawings are complete?

LePatner: To get a true fixed-price contract, all the drawings must be complete and all the risks must be negotiated out. Then contractors know that they’re not going to get one penny extra for the work, so they have to be efficient. And the owner doesn’t get any surprises–unless the owner decides that he wants to add something and that he is willing to pay for that.

GlobeSt.com: What about the inevitable change in the price of materials? How do owners and subcontractors factor in that?

LePatner:Contractors can lock in their prices on materials. Let’s say an owner wants to build a 10-story building, and the architects and engineers have it fully designed. If the contractors come in and bid $20 million and $4 million of it is steel, then the owner should say, “I will pay for that right now. Order the steel.” It may be come in five months before the project starts. But the contractor can put it on the lot and put a fence around it. The owner has locked in costs on the steel and paid the price.

What happens when jobs are fast-tracked is that a contractor puts in a preliminary order for two-thirds of the steel at one price. And six months later, when they bid for the balance of the steel, the price has gone up. An owner or a government agency doesn’t want those kinds of surprises.

GlobeSt.com: How do the contracts you create differ from standard form agreements?

LePatner: Standard form agreements are anathema. They have been prepared over decades in conjunction with the contractors, and they perpetuate bad business practices.

My agreements are different because, first and foremost, we spend time meeting with the architects and engineers beforehand and tell them we are going to give them extra time to give us complete drawings. We even tell them that if they need to add on extra people to check the drawings, that the owner is willing to pay for that. And we tell the contractors that we are creating a true fixed-price contract based on 100% complete drawings. We ask contractors to waive the right to claim that the drawings aren’t complete. We have them sit down with the engineers and architects and acknowledge in the contract that they have had sufficient opportunity to review the drawing and specifications with the design team and that they are complete.

In addition, profits are all built into the initial price. In the old construction-pricing system, everyone is at odds. I’m making it a more collaborative system.

GlobeSt.com: How do you account for the possibility that things may go wrong during construction?

LePatner: We create a whole list of “risk allocations.” We sit down with all the parties and go through the risks and put a price next to them. So if we run into those risks, we have prenegotiated what they will cost. If it’s a $100 million project, we may have negotiated $4 million in risks that may occur. Even if all the risks occur, our client knows what the maximum price will be.

GlobeSt.com: Clearly owners would favor these types of contracts, but what about the other parties involved?

LePatner: Contractors love it. They get tired of dealing with change orders and claims and fights with subcontractors. Architects love it because they get more time to coordinate with the engineers and more chance to interface with the contractors who sometimes have good ideas. And they don’t have claims against them.

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