Covid or Supply-Chain Costs and Delays
Most of us will be aware of the problems builders are having in getting materials onto sites at reasonable times and costs. This will have a consequential risk for design practices: your Risk Management should be looking beyond the short term and thinking about the effect that these problems will have in the future.
If you had any doubt about the seriousness of these issues, take a look here: https://www.eboss.co.nz/supply-chain-report-2021/background
These issues will impact on client/designer/builder/funder relationships. The material cost changes of 5% to 25% in the past year or so are the harbinger of more upward movement. Labour costs are being driven up by tight labour resources and contractors well booked into the future. The supply chain problems are disrupting site progress, leading to project delays and pressure on contractors’ margins.
The problems are not ours alone: America and Europe are also troubled by shortages of materials and labour, slow and expensive shipping and varying lockdown measures. Covid is driving up inflation generally, and the size of our economy (and construction industry) means we have ineffective leverage on material supplies.
Clients with projects at design stage may be unable to accommodate these costs and delays within their budgets. Others will continue but with resentment adding stress to the project. Still others will be looking to continue but with cost cuts which may compromise the design and add to design costs. Procurement strategies may favour early contractor design involvement, movement away from lump sum contracts to an arrangement which redistributes the risk of delays and cost increases, staged consenting and contracting, and design-stage identification and ordering of items requiring long lead times.
Projects under construction will come under stress if builders cannot complete within the time and cost parameters understood when the project was priced. If increased costs cannot be recovered, performance on site is at risk or perhaps may be abandoned. Where costs can be recovered, they will not be welcomed by clients. Arguments from delays beyond those directly related to Covid lockdowns will be unpleasant. All of those circumstances represent increased risk to you: both additional (and perhaps unrecoverable) attendances, and the potential for dispute and negligence claims. In order to manage those risks, please take the time to assess how these issues will affect all the projects you have underway, in particular where reliance has been placed on pre-Covid cost/time estimates, and to communicate appropriately with each client.
Project Cost Management – Not Snakes and Ladders
Project Cost Management – Not Snakes and Ladders
Recent claim notifications relating to the architect’s alleged failure to manage their client’s reasonable expectations as to project cost estimates include those which have been dealt with as an NZRAB complaint. NZRAB’s Code of Ethics identifies professional negligence as an ethical infringement: their decisions relating to project construction cost estimation, and the cost awards attached to them, provide some precedents.
The background relates specifically to residential projects, and those that proceeded in reliance on a client-appointed QS for budget estimation purposes; or on the architect’s notional square meterage rate; or on a builder’s cost estimate.
Part way through in some cases, or nearing the end of project documentation in others, the client’s QS or builder’s estimate identified a likely construction cost which significantly exceeded the client’s expectation as to project cost by 50 – 80%.
In Snakes and Ladders, we sometimes encounter “go back to start”, but this is not always possible in architectural services. The client may have already paid for some design fees, various consultants and a Resource Consent application. The architect may also have outstanding documentation invoices to recover from a disgruntled client.
A standard PI insurance policy does not respond to fee recovery claims. The architect may be contractually entitled to their early design-stage fees, but in the event of cost over-run, there may be a conflict over their entitlement to the construction documentation fee. The client will naturally plead that had they known the true construction cost in a timely manner, they would not have proceeded with the project and accordingly have saved themselves that expense. In effect, the architect proceeded without the client’s fully informed consent.
Not only will the architect face difficulties in collecting fees, there may be a potential claim against them for recovery of documentation fees and alleged negligence in project cost estimation. Whilst the PI cover may respond to some or all of this, it will also trigger the need for payment of the excess on that policy.
If there is doubt about reliance on cost estimations, it may be prudent for the architect to obtain (and meet the cost of) a cost opinion from a QS, whether or not it is disclosed to the client. This legitimate business expense would be preferable to the potential adverse alternative.
If it was only so easy.
Architects have a duty to keep their client informed about the nature and quantum of project cost estimates for contractual and ethical reasons, but equally for their own commercial protection. In such circumstances, a little ink is better than a good memory.