March 31 loomed for months as the day when the U.S. Treasury would stop purchasing $1.25 trillion worth of mortgage-backed securities and effectively remove a major support to the fragile housing market.
But now that the program has ended, economists interviewed by BUILDER suggest that builders-and others involved in the housing market-don’t need to panic. “This has been so well advertised,” says Scott J. Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla. “Investors have had plenty of time to get used to it. The Fed has been gradually unwinding its liquidity programs. … This is just one more step toward getting back to equilibrium.”
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It’s hard to believe spring is already knocking on the door.
We don’t have a lot of work this spring, but we’re feeling quite fortunate to have what we do. It was almost a year ago to date when I wrote in our newsletter about how great it was to have good clients that were excited to get under construction last spring. Somehow we are in the same boat again this year – great clients and great projects (just not many of them).
We’ve bid several residential projects over the winter with a myriad of General Contractors, where the winning bid has been around 30% lower than the median average bid. For the majority of the projects we’ve observed, the low bidder has predominantly been awarded no matter what the average of the bids have been. When the winning bid is below the actual cost of the “sticks and bricks” of the project – undoubtedly it’s only a matter of time before there is a problem.
Welcome to “the Dirty Project”…
We saw a little bit of the fallout in 2009 with low bidder contractors front loading projects and then bankrupting the business. Every once in a while you’ll hear a story of “that guy” being spotted somewhere in Aruba cuddled up to a 6′ hookah and some young Jamaican woman he calls Mama.
I think ’09 was only the tip of the iceberg for construction claims and fallout. As both sub and general contractors have most likely burned through the majority of their reserves in ’09 – the amount of fallout in ’10 should be staggering. The first to go will obviously be the ‘below cost” and “30% under” bidders who are just trying to keep their crews busy or make the next payment for their jacked up Ford or diaper polished Audis. So where does this leave the dirty projects? They will either be tied up in lawsuit or in need of troubled project turnaround – most likely both if history repeats itself from the construction collapse of the 80’s. It’s simple, a business can only sustain for so long doing work at or below cost.
Aside from the overall cost cut – the next to go is quality of construction. Even in small towns like Bozeman and Big Sky, it doesn’t take a rocket scientist to see what kind of crap was being built in 80’s. The current market really isn’t all that different with the amount of construction companies just trying to survive while making quality cuts just to be in the running of a “competitive” bid. Pastels, big hair and poor construction defined the 80’s – what will define construction in 2010?
I think the face of construction will change in coming decades, as well as the standards for building a custom home. Of course there will always be the rat race on specs as well as pre-sold units, but the current trend for high end custom isn’t sustainable with the value we put on our dollar and the high regard we generally hold to the quality of our homes. The high dollar commercial sector got wise to this in the late 80′ and early 90’s and started pushing negotiated contract and construction management services in lieu of the competitive bid/change order game. Twenty years later and the private residential sector still hasn’t caught on yet. Why is that?
Don’t get me wrong, there are a number of savvy Owners out there that see the value of negotiated bid and quality work as well as a handful of contractors that won’t succumb to the change order game or make quality cuts just to be competitive with an underpriced contractor.
How will your home be viewed in 10 or 15 years? Will it be a tear down just like the homes built in the 80’s or will it be a testament to maximizing the dollar of the recession?
Regards,
Chad Rothacher
If you haven’t been to Big Sky in a while – not only has the skiing been great, the dining at Andiamos Restaurant is exceptional. If you’re looking for a unique dining atmosphere, check out this design/build project by RMR Group.
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Many milestones in a construction project are established or acknowledged through certification by a third party designated by the project owner. This individual, stipulated in the construction contract, is typically the project architect or engineer. It may be a different owner’s representative. But the operative word is owner’s representative.
The denial of certification or a delay in certification can be very costly for a contractor. The contractor, however, has very little influence over or leverage with the certifier. The certifier is the agent of the owner with a duty to protect the owner’s interests. The certifier has few obligations to the contractor, possibly just the obligation to avoid bad faith or fraud.
The nature of this relationship was illustrated in a couple of recent court opinions, one involving a project engineer and the other a construction manager. In both cases it was ruled that the owner’s representative could not be sued by a contractor for delay damages allegedly incurred as a result of project mismanagement. Any duty to the contractor would conflict with the rep’s obligation to protect the interests of the project owner. The contractor can sue the owner for breach of the construction contract. But the owner’s representative, as a disclosed agent operating with the authority of the owner, is virtually untouchable.
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Construction contracts are rife with requirements that the contractor provide the owner or owner’s representative with written notice of occurrences: delay, changed work, unforeseen site conditions, anything that can lead to a contractor’s claim for relief under the contract. The issue which arises time after time is whether the contractor’s failure to provide timely written notice deprives the contractor of a remedy.
Usually, if the project owner had actual knowledge of the occurrence and was not denied any legal or practical options, the owner cannot use lack of written notice against the contractor. Differing site conditions, however, are a challenge in this regard. Once a physical condition has been disturbed or work has continued, the owner’s ability to respond to the situation may have been compromised. Notice requirement are more strictly enforced in this context.
This was illustrated in a recent Kansas case. The contractor failed to provide timely written notice of ground water conditions, but contended the project owner was well aware of the situation from the outset. The court had to decide whether to strictly enforce the written notice requirement or to adopt the more lenient approach used in federal construction contracting. The court elected strict enforcement.
As always, I welcome your comments on these issues. Are written notice requirements a reasonable tool for protection of project owners’ legitimate interests? Or, are they simply a legalistic device for tripping up the unwary contractor? As a contractor, do you always – as a precautionary policy – give written notice of every “occurrence?” When you do provide written notice, what sort of a response do you receive from the owner or its representative?
From the Construction Advisor Today
