Historically, placing the owner and contractor on opposite sides of the table fostered a climate in which bid-rigging became prevalent. All too often, the night before bids were to be delivered to a potential client, the executives of the several large GCs would get together and decide amongst themselves who would be the low bidder and thus merit the contract; the notion was to spread the work around so that each GC would have enough work to be profitable, and not at the expense of one another. In big American cities such as New York, this had been an unofficial arrangement. In Japan, it was close to being an official arrangement. Japan’s top industrial firms apportioned all of their work according to a schedule and formula set up by the general contractors themselves.
Design and bidding are pre-construction phases. During the actual construction, additional problems inevitably crop up, and under the GC system, their solutions invariably add costs to the GC’s operation that the GC must then renegotiate with the owner. Let’s be realistic: over the length of time needed to build a project, it is quite natural that proposed changes in the design will develop. When this happens under the GC system, the owner or architect must enter into new negotiations with the GC to define the scope and cost of the desired changes, and to determine who will pay the extra cost associated with the changes.
What now becomes apparent, if it had not already been so, is that the owner has started the building process at a disadvantage because he is using the general contracting approach. The disadvantages are accelerating as the inevitable design changes crop up. During the before-bid design phase, if the owner had less than adequate construction expertise onboard, he had no good way of evaluating the architect’s design in terms of construction costs. From a construction point of view, the designs may have been impractical, but the owner will have been unaware of this because of the dearth of expertise on his side of the table during that phase, and the ramifications of his being inadequately advised will ramp up as the time comes for design changes during actual construction. Then, too, he will be unaware that far less expensive techniques might be available for use than the ones recommended by the architect. Nor will his general contractor have told him that GC’s generally do not suggest alternatives to architects’ designs. The owner’s lack of construction expertise in the design phase can and often does more than lead to extra costs it can cause real problems.
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The major problem is that costs can do far more than go up a few percent they can spiral out of control. Since while using a GC the owner has little or no direct control of subcontractors, he cannot control this major contributor to spiraling costs. On a typical construction project, 80 percent or more of the work is subcontracted to specialty trade contractors. Frequently, the owner is surprised when such subcontractors submit claims, through the GC, that the owner deems excessive, and usually his first response to such a claim is to withhold payment. But this drastic action is often neither contractually permitted nor in the project’s best interests. Stopping payment to one subcontractor can result in immediate delays that will further adversely impact the overall cost. The first sub stops work, and its stoppage prevents others from working but the others continue to pile up hours that need to be paid for. And so on and on.
Another problem for owners comes when GC’s submit claims for “extras.” It is not uncommon for information about alternative construction procedures or materials to become known after the bid phase. But by this point in the building cycle, changes that earlier would have been simple to accommodate now represent opportunities for new claims by contractors and subs claims that go by the name of “extras.” Unfortunately, in such situations, the owner is usually faced with the GC and subcontractors who, to protect or enhance their profits, offer less in terms of “credits” and charge him excessively more for these changes. Without sufficient expertise on board, the owner is unlikely to find a factual basis for rejecting such claims.
In the 1950s and 1960s, I was able to see and understand the problems that arose between owners and GCs perhaps more acutely than other developers or contractors were able to, because as an owner/builder doing construction for our family’s portfolio, I was able to avoid many common pitfalls. For example, Tishman Realty & Construction did not as often run into the problem of shifting designs in the midst of the construction phase or, on the construction side, of employing a GC that needed to cut corners in order to make a profit.