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Tayla Matthews

www.cmcconstruction.net

In a perfect world, a contract should include a clear set of instructions that conveys well-defined expectations to all parties concerned. In reality, it’s often a monster document packed full of legalese that can be difficult to understand. This episode of Autodesk’s Digital Builder podcast addresses the most common challenges with contracts and how simple adjustments can ensure you fully understand what you’re signing. And of course, we cover steps to make sure you’re getting paid on time.

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You can also listen to this episode on Apple Podcasts, Spotify, Stitcher, Google Podcasts, and anywhere else you get your podcasts.

On this podcast episode

Today’s guest, Karalynn Cromeens, Owner & Managing Partner at The Cromeens Law Firm, joins the show to share the steps everyone can take to make contracts more straightforward and less contentious.

We discuss:

• The current state of construction contracts
• The difference between secured and unsecured debts
• How to protect yourself when it comes to contracting and payment terms
• Best practices for handling change orders
• Construction technology and the future of contracting and payments

A contract should really be a tool to help everyone in the construction industry; it doesn’t have to be this monster document that you just hold your nose, sign, and hope for the best.” — Karalynn Cromeens

4 tips for navigating contracts and getting paid on time

1. Understand the state of contracts and payment terms in construction

The current state of contracts and payment terms in construction leaves a lot to be desired, says Karalynn.

For starters, construction contracts have become increasingly complex, making it hard for all parties to get on the same page.

“The contract is supposed to be a clear set of instructions just like plans and specs, but it becomes this monster document that nobody understands and it’s not conveying expectations clearly.”

—Karalynn Cromeens, The Cromeens Law Firm

Karalynn also brought up the tendency of the industry to pass liability down the chain when drawing up contracts. Owners pass on certain risks (contractually) to general contractors, who may do the same thing when hiring specialty contractors.

These things are common in the AEC industry, particularly since construction professionals want to protect themselves when possible. However, these practices can create rifts in relationships and result in contentious situations.

For this reason, construction professionals must find better ways to craft and negotiate agreements. This starts with using contracts that people can easily comprehend.

“Let’s have a contract and ensure that everybody knows what it says,” says Karalynn.

She recalls her experience speaking with a fellow attorney who had to go through a 129-page subcontract that could have been cut down to ten pages.

“It’s all repetitive, it’s all legalese and there’s no reason for it. The contract should be a tool to help everyone in the construction industry understand the project’s requirements, deadlines, and terms. It doesn’t have to be this monster document that you just have to hold your nose and sign, then hope for the best.”

Karalynn also emphasizes the importance of negotiating who takes on certain risks and liabilities. “I’m not saying that the subs don’t take any liability or the general contractor doesn’t take any liability from the owner; I’m saying let’s negotiate. Let’s meet in the middle. Which is what it’s supposed to be.”

Taking these steps, states Karalynn, helps parties negotiate more equitable contracts and forge better relationships—something that’s crucial, especially since construction is such a relationship-centric industry.

2. Make sense of your contracts

The shifting of risk and liabilities is a very common practice when drafting contracts. After all, everyone is trying to protect themselves. That said, contracting can be done fairly so that relationships aren’t taken advantage of, and risk isn’t pushed downstream.

As the host of “Quit Getting Screwed,” a podcast that focuses on helping contractors build better businesses, Karalynn is well-versed in construction contracts and she offers valuable advice to help contractors understand the agreements that they’re signing.

Know the different types of contracts

There are different types of contracts drawn up between owners, general contractors, and specialty contractors. According to Karalynn, contractors must understand these various documents and how they relate to each party.

First, there’s the prime contract, which is the agreement that sets the terms between the owner and GC. The GC then hires contractors, which is where the subcontractor agreement comes into play.

This subcontractor agreement often “relegates the terms of the prime contract,” says Karalynn.

“What has happened and what has been happening as long as I’ve been reading subcontracts is on the first page of the subcontract, there’s a line that incorporates the terms of the prime contract. So these subcontractors, specialty contractors, or trade contractors are going to be held responsible and liable to the terms of the prime contract.”

The issue, she says, is that subcontractors often don’t see the prime contract so they don’t know what the document says and they’re unable to negotiate its terms.

Karalynn says it’s important for subcontractors to get ahold of the prime contract so they can understand exactly what they’re agreeing to.

Another common type of agreement is the Guaranteed Maximum Price (GMP) contract.

“What this tries to do is shift the risk of material price increases to the general contractor, and then from the general to the subs.”

The GMP contract can cause challenges if it doesn’t allow contractors to increase what they’re charging when material costs rise. For this reason, contractors need to be careful with the GMP agreement and negotiate terms to protect themselves.

Be aware of the “pay when paid” clause

Karalynn recommends being mindful of the “pay when paid” clause, which essentially means subcontractors won’t get paid until the GC is paid by the owner.

“So if you’re a subcontractor and you do the best outstanding job in the whole world and the GC tells you what a great job you did… That by itself is not enough to get paid if you have a ‘pay when paid clause’. You are relying on something to happen that you have no control over.”

She continues, “the owners [have] to pay the general contractor before the general [contractors have] the obligation to pay you, the sub. So really, if you sign a subcontract with a ‘pay when paid’ clause and you don’t negotiate, you should really have enough cash on hand to float that whole contract amount just in case.”

In these instances, you should negotiate and try to split the risk, says Karalynn.

“You can say, ‘If the GC is not paid by the owner within 30 days and it’s not my fault, you’ll pay me 50% of the payout. At least I can pay for my guys and I can make it a little longer without getting paid.’”

—Karalynn Cromeens, The Cromeens Law Firm

3. Learn how credit works in construction

The construction industry runs on credit. Owners often take out loans to fund projects, and they are extended credit to be able to do that. A similar thing happens with subcontractors, especially those working with a “pay when paid” clause.

As Karalynn puts it, “subcontractors and material suppliers supply the labor, supply the material and wait to get paid. And that is credit. You are owed a debt. So, if you work and wait to get paid you have extended credit.”

To ensure that you get paid, you need to understand the difference between unsecured and secured credit. Unsecured credit means the debt is not tied to any collateral. You can collect on the debt by taking things to court, obtaining a judgment, and finding assets to collect the amount owed.

Secured credit, on the other hand, is backed by collateral. A home mortgage is a common example of secured debt. Mortgage companies let buyers obtain a loan to purchase a house, and they hold the property as collateral.

“A mechanic’s lien works the same way,” says Karalynn. “If you do it right in your state and you file it on a project, you are now a secured creditor. The amount that you’re owed for labor and materials is secured by the property that you supplied them to.”

She adds, “You still have your unsecured debt claim against the GC or whoever hired you, but now you have a security interest in the property to the extent that you’re owed money for labor and materials supplied.”

4. Ensure you’ll be paid on time

While laws vary from one state to the next, there are a number of universal tips that you can implement to negotiate contracts and ensure you get paid on time. Here are Karalynn’s top recommendations.

Don’t just sign a contract—make sure you understand it

Even if you don’t want to negotiate, Karalynn says it’s worth having an attorney or legal professional break down what the contract means. “That way, you know what you’re agreeing to and you know what’s expected.”

At the very least, you must “understand what you’re agreeing to, and then you can go from there,” says Karalynn.

She continues, “Please, don’t just sign the contract. From my experience, the subcontract that comes over is the first offer. It is like paying the sticker price for a car. No one does that. And I think part of why subcontracts are in the state that they are in now, is that attorneys draft things that are the best for their client thinking that there’s going to be a negotiation. But subs were so afraid of not getting the work that they just signed the contracts, and now there’s a standard out there that’s one-sided.”

Get your change order costs covered

Karalynn says subcontractors must understand the change order provision in their contract and then negotiate before signing.

“What I like to do in my contracts is, if we can’t agree on a price, we’ll do costs plus a percentage—e.g., 15%, 10%, or whatever is agreed upon. That way, we don’t have this long, drawn-out negotiation.”

—Karalynn Cromeens, The Cromeens Law Firm

“What I like to do in my contracts is, if we can’t agree on a price, we’ll do costs plus a percentage—e.g., 15%, 10%, or whatever is agreed upon. That way, we don’t have this long, drawn-out negotiation. We just build in, ‘Okay. I’m going to give you a price. If you don’t like it, here’s the alternative.’”

Another tip? Before doing the work, have the actual change order form drafted and ensure that the costs for the work are outlined clearly. You also need to assure that all parties have signed it before working on the changes.

“Where most people get into trouble is that they don’t get it signed or they submit it after they do the work. When that happens, you’re just in somebody’s good graces to sign it for you because you’re really not going to get paid for that extra work if it’s not on a written change order,” says Karalynn.

Account for market volatility

With material prices being so volatile right now, Karalynn says contractors and subcontractors need to account for increases in material and labor costs.

According to her, “you need to put on there that if the material prices escalate more than 2% or 3%, you’re going to be able to change your bid for that.”

“I also have guys that are putting shorter timelines on their bid—like 30 or 60 days—and if it’s not accepted by then, the bid is withdrawn. That’s just because the market is so volatile right now.”

Do an itemized bid

Always do an itemized bid, advises Karalynn. “You don’t want to just bid the whole scope and miss something and then you’re on the hook to do it. Because once you put a bid out there into the world, it is an offer that can be accepted. And once it’s accepted, you’re held liable to those terms.”

Another thing to keep in mind is that your bid can be different from the actual scope of the project. You need to remember that you’re not hired to do your bid, you’re hired to do the scope.

As Karalynn points out, “your bid no longer describes the work you were hired to do. The scope attached to the contract does. If those two things are different, you’re still held to the scope. So one of the things I tell my contractors is to read the scope as if it were a new project and make sure you get the same price.”

Utilize technology to save on attorney fees

Karalynn is all for using technology to help contractors put together contracts and make sure they get paid.

“There are so many great platforms out there that allow you to do everything electronically. A lot of times, you don’t get paid on time because not everything is in there or it’s not submitted correctly so that pushes you back another month. Technology helps eliminate all that. It has everything all in one place.”

Karalynn adds that technology not only helps attorneys do their jobs more efficiently, it could even lower your legal bills.

“I appreciate it so much as a lawyer that I don’t have to go through banker boxes looking for all the paper documents that go with a particular job. If I’m looking for something, I can search by keyword. It saves you so much in attorneys fees too, because I don’t have to spend time searching.”

Final words on contracts and timely payments

Navigating the realm of construction contracts, costs, and risks can be tricky, but understanding these things is key to getting paid on time. Before entering into an agreement, be sure to read and fully understand the terms of the contract, so you can negotiate accordingly.

Doing that is no easy task, which is why Karalynn says it’s extremely helpful to have “an attorney that’s a phone call away.”

“I don’t think people realize how much legal crosses over into the construction world. And often, you need somebody that’s going to answer the phone right away. You can’t wait two days, you can’t wait a week to get an answer. I think an attorney on call that is familiar with construction is a priceless tool in your toolbox.”

New podcast episode every two weeks

Autodesk’s Digital Builder podcast is hosted by me, Eric Thomas. New episodes go live every two weeks.

If you need to learn additional contracting and negotiation tactics, catch the full podcast episode of Digital Builder to hear more from Karalynn.

Listen to the Digital Builder Podcast on:

• Apple Podcasts
• Spotify
• Stitcher
• Google Podcasts
• or wherever you listen to podcasts

The post Digital Builder Podcast Ep 22: How Specialty Contractors Can Navigate Contracts & Get Paid On Time appeared first on Digital Builder.

Tayla Matthews

www.cmcconstruction.net

Cost management is key to ensuring construction projects stay on budget and on schedule. Yet many projects, as many as 33% come in over budget, as reported in the Construction Cost Management Report by Dodge Data & Analytics (Dodge). Surveyed contractors note that even among their best-performing projects, one out of five does not meet the budget requirements. 

Efficiently tracking construction costs and monitoring risks make a big difference in maintaining budgets. Tracking costs and monitoring risks, however, requires a strong cost management discipline. Insights into current cost management practices can help fine-tune practices to build discipline. In this article, we’ll review highlights from the report and key takeaways to drive your cost management discipline. 

Key takeaways

• Owners and general contractors alike prefer a single primary tool for cost management, complimented by a limited number of third-party tools.
• Forecasting costs with real-time field data is the top future need for cost management.
• Alignment between owners and general contractors is critical to building an integrated cost management discipline, and revealed as an opportunity for both project teams and solution providers.
• Project-focused staff shows higher capability of being involved in cost management on a more holistic level. One reason is due to the ease in which technology allows this to happen.

Owners and contractors prefer a single cost management tool, yet most use more than one

Overall, owners, general contractors, and specialty contractors use more than one tool for cost management. Forty-four percent leverage more than one tool but lean on one as their primary. Thirty-three percent use two to five tools with none as their primary. Only 21% use one tool alone, while 5% use more than five tools with none as their primary. 

For respondents in project-related roles, there is a strong preference for using a primary technology tool for cost-management-related challenges such as establishing a system of cost accounts, status reporting during a project, and identifying areas of the project that require more attention in real-time. 

For best results from a primary cost management tool, prioritize ease of access and use.

We can see a consistent preference for having a primary cost management tool, yet just over a fourth of owners and contractors actually use one tool alone. The leading approach to construction cost management relies on a primary tool with supporting tools. For that reason, it’s important to choose a primary tool that allows you to connect your project data to cost activities and schedules. Integrations factor in here too to connect the field and office teams while avoiding data silos. 

For best results from a primary cost management tool, prioritize ease of access and use. These solutions should connect to schedule and cost activities over the lifecycle of the project. 

The Dodge report also indicates a preference for third-party tools among respondents. About 47% use third-party tools, with around 60% leaning on desktop applications and 40% using cloud-accessible ones. Thirty-two percent of owners and contractors use internally developed tools, and 16% use spreadsheets. 

We’ll likely see the number of people using internally developed tools and spreadsheets decrease in the future due to the customization capabilities of third-party tools and the maintenance costs of homegrown solutions. Organizations can generate better cost-related outcomes for all involved partners by focusing on using fewer, more comprehensive tools that engage all stakeholders in a shared approach to cost management. 

Success criteria for cost management solutions: what owners and general contractors expect

When measuring cost management success, respondents indicated that they use the following three metrics most frequently:

1. Turnaround time on processing change orders/variations
2. Achieving expected profit margin
3. Final cost compared to budgeted cost

Owners and contractors are split evenly on the subject of spending levels on cost management. Thirty-nine percent believe they are spending more than they should have to, 32% think they are spending the right amount, and 29% say they’re spending less than they should. In the subgroups, variation exists with owners more likely to believe they’re spending too much, especially those in public entities (55%). Contractors, on the other hand, especially those in trades, are the least likely to believe they are overspending (31%). 

There is also a significant amount of variation between how owners and general contractors measure the success of cost management solutions. Owners cite the following metrics most frequently:

• Final cost compared to budgeted cost (30%)
• Generating useful data to benchmark for future projects (26%)

In comparison, contractors pinpoint minimal unplanned changes as their top success criteria. These preferences align with the responsibilities of each role but also indicate a lack of synergy on what successful cost management means. 

Forecasting costs with real-time field data in top future need for cost management

Respondents selected the most critical future need from 14 cost management practices. Thirty percent selected forecasting critical costs with real-time field data as the most important to improve over the next three to five years. This practice ranked number one across all four regions studied, with the United Kingdom selecting it most frequently (32%) and Canada choosing it least frequently (26%). 

Other top future needs were dynamically tracking each dollar in budgets (29% overall) and managing collaborative workflows (26% overall). As with other areas surveyed, we can see variance between the subgroups. Owners are most interested in dynamically tracking budgets and using field data for forecasting. These are two cost management practices that are also beneficial to contractors. 

Three times as many contractors (compared to owners) want to improve their future estimates. Twice as many want to benchmark cost performance. Again, these two practices are beneficial to owners yet appear to be more pressing needs for contractors. 

Project teams could be more involved in cost management

One area of opportunity for construction firms is the greater involvement of project teams in cost management. The report emphasizes the ability of these teams to participate in an integrated approach to cost management. Dodge’s findings “indicate that project-focused staff are ready and able to participate in a more holistic and integrated approach instead of the traditional office-based function with just discrete, periodic inputs from the field.” This was made evident by project-based staff reporting:

• Higher levels of cost management capabilities
• Lower levels of difficulty with their most challenging cost management activities
• Greater satisfaction using technology to address them

These responses indicate a significant opportunity to improve cost management practices by involving capable, skilled staff in the process. Doing so will help to integrate the practice into a firm-wide discipline. 

Owners and contractors have opportunity to align more

In the Dodge report, there are notable differences in priorities for owners and general contractors. For example, contractors note improving cash flow as a top need. Yet owners are more focused on improving their ability to forecast critical costs with real-time data from the field. Both of these areas require involvement from owners and general contractors. For example, cost flow contributes to the owner’s overall project health, and forecasting critical costs requires contractor participation. 

Variations like the one mentioned above represent a need for greater owner and general contractor alignment. Getting on the same page about cost management success, tools, and priorities will power leaner construction and smoother workflows throughout all phases of a project. 

From cost management insight to action 

To move cost management forward, owners, contractors, and project staff need a comprehensive tool they can rely on to centralize and improve the visibility of related cost activities and risks. This tool should be equipped with capabilities to support the future top need of forecasting costs in the field with real-time data.

We understand how important an integrated, collaborative cost management discipline is to the health and success of your projects. If you’d like to see Autodesk Construction Cloud’s cost management offering, please contact us for a demo. We’d love to show you around.

The post Key Takeaways from Construction Cost Management Report by Dodge appeared first on Digital Builder.

Tayla Matthews

www.cmcconstruction.net