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Guest Post | Wise Counsel - before it's to late....

OWoN: Neo has provided a thought provoking article relating to Project Management. Post Settlements, it will be a useful document to contemplate as many of you will be considering projects and properties etc. 

Each are minefields of risks, overruns and bottomless black holes to drain your money if not controlled. Consider the depth of issues he raises, before committing to contracts. Also DO check the capability and suitability of the proposed Project Coordinator. We have experienced them all. Don't buy a Pig in a Poke, give the Pig the Poke from day one. Step with care, it's all a Villain's lair.




Wise Counsel - before it's to late....


Neo's Corner
By Neo
3 December 2014


Infrastructure building programs - boom or bust?

Many people believe they are positioned to initiate major building projects as part of either a Private Placement program or some kind of public exchange of foreign currency. There are indeed a lot of great ideas floating around various sources, but most of the people involved have never worked with an architect, selected a contractor or ever been involved in the decision making required with such efforts. This lack of experience all but guarantees difficulties on multiple levels.

To begin with, keep in mind that whatever you build you have to maintain, staff and pay all the operational bills including utility costs. That means that you have to 'endow' its operations or be saddled with fund raising efforts forever. As much as 75% of your money needs to be set aside for investments that yield 5-10% safely. You need to have a handle on this before you ever attempt to build anything. Otherwise you find yourself in bankruptcy even if you successfully run the design / construction gauntlet. You have to develop your endowment plans as you design your infrastructure project. Otherwise it simply will not work.

You will also have to decide on which organizational structure best serves your intended use. Is it a private cooperation, LLC, 501C3 or other structure? Keep in mind that each kind of organization carries with it IRS tax requirements. Not for Profit Organizations have a lot of restrictions you need to carefully weigh. Within the 501C3 category only one form of not for profit can process the proceeds of an endowment without tax liabilities. This fact may bear heavily on which organizational structure you may use.

You will need a lawyer who has real experience with the design / construction business.Many lawyers try and bluff their way through the process only to leave owners in the dark struggling through years of litigation that only the lawyers truly win.

Find a CPA who specializes in setting up the kind of organization you choose to use. You have to start out on the right foot with the right team. Rogues are your worst enemy. People with control issues need to be sent packing as they can create more trouble than they are worth.




Unless you have personal experience with large scale interfaces with a design professionals, you're about to find yourself in a world unto itself. Hiring an architect is a very challenging process. Often times it’s based on personalities or politics. Many people make multimillion dollar decisions based on a hour long interview. They have no idea what kind of questions to ask, have little insight to see through the glitter of a high tech presentation nor have any idea who will manage their work beyond the 'hand shakers' of a 'partner in charge'. Partners often have nothing more to do with your program other than offer a smiling reassuring face most of the time. Managing partners are generally the front for the golf game, the nice dinner, or trip to Hawaii to 'negotiate' a contract. In most cases lower level personnel perform the work.

Architectural firms are like any other business. They are given a profit loose analysis based on a fee structure so that they know how much time to spend on any one task. Bonuses are generally geared toward those who work fast and meet internal dead lines. Having been sold on the idea unaware owners sign percentage contracts with designers. This inevitably leads to a lack of objective decision making as the more they sell you, the more they make. Why keep your program under budget when it cost them money?

Standard American Institute of Architects contracts leave you as owner at full risk for cost overruns, counseled conditions and change orders. In some cases you will actually pay the Architect for cleaning up their own mistakes. It is highly likely that without experience in making decisions as a project owner, you will inevitably end up in either litigation or arbitration with your design team over some issue. As important as the Architect is, the various sub disciplines involved in everything from the Civil Engineering to the Plumbing design. Just as there is a KYC with a bank, you had better know the backgrounds of every decision maker on your team. They all have to be experienced, licensed and insured.

Selecting a contractor is often based solely on cost. In many cases the contractor is forced to work with people who have little knowledge or experience to arrive at the 'lowest bid'. Opening up your construction program to this kind of project delivery is a disaster waiting to happen. Never, ever, ever sign a cost plus contract without a guaranteed maximum construction cost. Bond the entire program no matter what anyone says. Pre-approve all bonding agencies to make sure they have the financial backing to finish your program should anyone involved default. Keep in mind that at anytime during the process, you as the owner, change your mind or delay the contractor in any way, will be generally liable for the increase in the contractors extended overhead.

Building anything in the US is very complex. There are sometimes city, county and state building officials that can either help or simply make your life miserable. Model building codes like the International Building Code (IBC) will be enforced. Sometimes different agencies are enforcing different editions of the same code. Add to this the complexity of civil rights issues associated with the Americans with Disabilities Act and you have the recipe for disaster. Hire the wrong professionals and your in trouble before you get started.

Once you start down the road to construct anything you can’t stop. If you stop the construction program for any reason you are potentially liable for the consequences. If you cancel a contractors contract you can still be liable for his overhead and profit. If you're funding source changes or someone puts a hold on your funds for whatever reason, you are liable. Hold-back of 5 to10% during construction is a must. State laws govern the escrow account. Know how this works before you get started.

Contractors have an entire industry geared toward change orders. They, in some cases, attend seminars on how to leverage the construction cost by finding holes in the specifications and drawings. It's all about the blame game from day one with a lowest bid award process.

If you're not trembling at the thought of all this, you should be. Funding release is the 'minor' part of your battle. The real challenge begins once you try and do something with it. I suspect the failure rate of unprepared owners, having bit off more then they have experience to handle, initially maybe as high at 80%. There will be wreckage all across the world as 'lottery winner's' dream big and loose it all.




The only hope for success - 'Team Build'

The team build approach is by far your only hope of success. First you hire someone who is on a fixed fee to be your objective counselor. This firm is responsible to take your thoughts and put them to paper on a 'schematic' level. Once you have signed off (in blood!) that you have what you want to build, they develop a full set of specifications and design criteria for the various systems in the building. If your goal is LEED certification, this is where that component comes into play.

Once the drawings, specifications and certifications are signed off, then these preliminary drawings are given to three teams of designers  /contractors who work as a team to complete and develop a cost-plus contract with a guaranteed maximum construction cost with split savings. Each team should be paid for this process. If the contractor comes in under budget then benefits from savings will be earned along the way. This approach is a win-win for both of you. Your owner’s representative will help you in pre-qualifying each team and evaluating their proposal. They will also sign-off on compliance certifications to the original documents. Interview each team before pricing and afterword. Feel free to negotiate if it is appropriate.

The team build process, guarantees no change orders, on time delivery, and full responsibility of the construction team for concealed or hidden conditions. You know from the onset the maximum cost of your program. If it cost more than you can afford, cut back before the construction begins. During construction your representative is present on site, during construction meeting, updates to the CPM schedule and approves each monthly draw based on their independent observations. Periodic audits occur of the pricing process to assure that each purchase with the contractor is occurring competitively. Incentives can be built into the contract for local labor and local material purchases. If the contractor fails to perform, the bonding company finishes the job on your behalf. Extended warranties of up to five years can be included in the specifications. Performance criteria can be bonded for the utility costs of the various components of the building. If the systems fail to meet expectations they are replaced at no cost to you as owner.

You need to have a very healthy respect for the process you are about to be involved with. You cannot only loose your money for the project, but find yourself liable with everything you own. It's great to dream, but there is a cold shower awaiting many people who try to do things they are ill equipped to handle. The money for the infrastructure is a once in a life time occurrence. Squander this resource and it’s gone forever.

If your ego can’t take a knee to common sense and restraint, better for you to invest in something other than a building program. Be sober of mind to evaluate the cost and have realistic expectations of yourself, also the time you are prepared to devote to your program. If you are confused with all this - good! Know what you're about to become involved with before you get started. Otherwise you’re potentially heading for a massive disaster.

The above article was posted with permission and edited by OWoN. Emphasis and images were added as well as some minor changes. The authors original intent and meaning has not been altered. To view original article follow link below.

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8 comments :

  1. Neo
    This is the best advice ever read...it's on point and awesome.

    Thank you.

    ReplyDelete
  2. For sure useful info - of someone who has touch with biz ....

    Thanks Neo

    ReplyDelete
  3. Thank you for this article. Have had to drop one small property that was reasonably priced and much liked due to a neighboring bully that had been continually encroaching on the land and terrorizing the elderly owner. Legal costs would soon have exceeded purchase price. Will try to help some how though, good people.

    Have a good and vetted list of contractors and tradespeople and have done the research on much needed, but like what Neo suggested will set most aside to create my own endowment fund. Have seen those change orders create absolute chaos and what a bad architect can cost long after his/her design has been built. A good onsite project manager is a must. Agree, bonding is must.

    Thank you Neo and Canauzzie and OWoN team, this is great advice.

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  4. I am sure we each carry an important piece of the puzzle. Dialogue will be important as events unfold. Am sure we can all help each other when the time comes.

    Cheers!

    ReplyDelete
    Replies
    1. I will definitely reach out to you as our company proceed through this quagmire...I am grateful for your advice and view this as incredible advice...I have been through this and I can vouch for the process.

      Thank you again...I have you in my rolodex!

      Delete
  5. Great advice. I did get a taste of this, although on a small scale, I learned things I would not do again. So thanks for taking the time to write and share this.

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  6. Excellent advice, Neo, which is helpful to me even though I'm not American. Thank you.

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  7. when the time comes, happy to help you all avoid the pot holes. i don't have all the answers but i do have a few. have a great day.

    ReplyDelete

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