Construction Management and Other Natural Disasters — 10 Things about Working with CMs that Made Me Say, “Huh?”

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The big difference between my office right now and this very same office seven years ago involves fourteen feet of standing water. Our city had a flood. A big one. Our disaster made national news and was later deemed the result of unusually heavy rains, excessive groundwater and (as it turned out) short-sighted civil engineering and water management decisions made by those charged with such duties. The 40,000 stunned residents of our upper-Midwestern town had never been remotely exposed to such calamitous ruin. Today you can still see dirty, gray high-water marks imprinted 1 ½ stories up on the older masonry buildings in our downtown block.

It was a grim time for everyone. We know from history that the human condition is a remarkable force, and it proved no different with our community. Once the shock and grief turned manageable, we turned our collective attention to rebuilding. Needs were prioritized and a list of construction and/or rehabilitation candidates created. What a list: schools, government offices, fire stations, libraries, civic centers – even hotels, retail stores and countless homes . With oil money (see below) already in the city coffers and the promise of disaster funds on the way, some were even looking at it as a chance to re-invent our city. A hint of positivity was starting to infiltrate the general feeling of loss and grief brought on by the flood.

 

The Swarm

About this same time, Money Magazine® ran a piece labeling us the nation’s most “economically active” area. You see, I have not mentioned that we were already in the middle of an economic spike due to an improbable, yet historically bountiful natural gas and oil discovery in a shale deposit west of town. In mere months before the flood, wells and derricks were springing up like sunflowers (oil prices were high at this point) and developers were tying up our planning and zoning meetings with renderings of the next best hotel, apartment house or strip mall—all in a city where only a year prior building permits were pretty much “hit or miss.”

Construction Management (CM) firms descended like locusts. Our formerly unremarkable community was suddenly the belle of the national construction ball and everyone seemed to want a piece. Overnight, rented storefronts sprouted new facades – painted and plumed with bright new signage announcing the latest CM arrival. Some firms even had private jets with their company name painted on the tail. Council and school board members were wooed (and liked it); meals and drinks were charged to corporate expense accounts and promises exchanged. Without fail, every firm “understood how we felt.”

Yippee Ki-Yay …?

CM proposals flooded the inboxes of the local solicitors  and the mountains of oil money mixed with disaster-relief funding to form the perfect storm of (let’s call it) Yahoo-Economics. “How much” was swapped with “how fast can we spend it” and at times you could almost hear the bucking horse and six-shooters. Sure enough, the CMs soon reaped the rewards they’d so richly coveted. CM #1 was awarded three public schools, a civic auditorium and a sports center. Firm #2 walked away with seven government buildings (including the new city hall), and Firms #3 through #8 split an array of civil, architectural, structural, mechanical and electrical packages. CEOs all over the nation sat behind walnut desks calculating their bonuses, smugly pleased with the “risk” they had taken. All that was left was to build the projects and “how hard could that be?” Well, hold that thought.

Here’s what happened instead:

Nobody in the area wanted to work with the CMs.  Nobody!

The few sub and supplier proposals that were scraped together by the CMs were grossly over budget.

This situation was not right, and it was also when (how can I put this?) “things started getting a little weird.” Here, let me set this up: as it happens, we’re an established general contractor (GC) in the town in our story. Personally, I’ve been an estimator/project manager for over 25 years. We enjoy a solid reputation, plentiful work portfolio and, besides performing common GC duties like acting as a prime contractor and overseeing sub-contractors & suppliers, we also perform some work trades in-house (with our own employees) including concrete, carpentry, metal framing, and drywall. This internal ability allows us to remain competitive and comfortably in demand. It’s also the reason we began receiving the calls.

Hey Buddy, Ol’ Pal!

Once it dawned on them that the local sub-contracting  firms wanted nothing to do them, the growingly anxious CMs began sheepishly calling us generals. Now bear in mind three things:

  1. This was not their original plan.
  2. We local GCs weren’t real thrilled with these CMs being in town in the first place. Collectively, we felt the doling out of such prime construction work to these “carpet-baggers” was a slap in the face to us locals. Remember too, that our phones were already ringing off the hook due to the smaller ($100k to $5M) jobs made available from the flood and oil money. We already had more than we could handle.
  3. Many CM/client contracts forbade the CM from using in-house work themselves . This meant they were compelled to form their construction teams entirely from third-party, outside entities (mostly area sub-contracting and supply firms). But if our situation here wasn’t already unique enough, now add to the equation that our region is cut off 40 miles to the north by Canada. We’re also a sparse state where large cities are very few and far between – meaning there were no larger metropolitan areas close by from which to draw resources should the need arise. And here’s the reason this is important: we GCs knew this.

It gets worse. Remember the wooed city councilmen and school board members – and those promises exchanged over gin and tonics? Well, one of the promises – a big one as it turns out – was that the CM would use local talent in their projects. This is quite common in CM negotiations and can even be a deal-breaker if too little local participation is realized. We GCs knew this too. So, let’s recap:

  • We (local GCs) didn’t like the CMs.
  • We (local GCs) didn’t need the CMs. We had plenty of work.
  • These CMs were on line #1 begging us to help salvage their deals.
  • This was going to be fun.

Hey, A Fella’s Got to Eat!

The reader should know that, in the end, we did, indeed, work with the CMs; and overall it was a positive experience. But unfortunately, mostly for the clients I’d say, a big factor in why the experience was positive simply had to do with the fact that we ended up being paid very well to take part in these projects. Not excessive, mind you, there was still civic obligation and local benevolence that held us in check; but suffice it to say we had little reason to be competitive with our pricing. Liken it to paying retail at Sears®. But before you go wagging fingers, remember it was the CM contract delivery vehicle that created this bloated environment. We were minor sprockets in a wheel that had long spun out of control. In the months and years of construction that followed, as we worked side by side with these CM firms, I came to observe and chronicle some events that would eventually form the premise for what I now entitle:

The 10 Things About Working with CMs that Made Me Say, ‘Huh?’

  1. My first observation concerns the CM master plan itself—as in, there didn’t seem to be one– at least, that is, after the sale was complete. Circus-level energy, effort, and expense were devoted to getting the job; but then not so much, once contract was in hand. Before the contractual ink was even dry, the bigwigs were back in Metropolis; the jets returned to their rental agencies; and the CM superintendents – recently hired off Monster® –were standing dazed and alone onsite with a set of plans, a leased trailer, and a packet of field authorizations.
  2. This next one may be due to the disaster-relief status (which I understand), but the manner in which some of the CM awards were made just seemed to be a bit… strange. While some were made only through open, transparent and competitive-bid processes, others seemed to materialize from the ether. Suddenly a CM firm simply HAD the job. No fanfare, no process, just poof! And virtually every one of these awards involved some percentage of state/federal funds. Now I’m sure a legal scholar could explain to me how this is all above-board and justifiable, but I can tell you that – as a citizen outside looking in – it did not look right.
  3. Then there were the bid lettings. The lettings in question were those that awarded the separate prime contracts (created by the CMs) to lower-tier sub-contractors and suppliers for their particular project. These contracts were broken down by trade category (flooring, carpentry, masonry, etc.) and could stretch to 25–30 different awards within any particular letting. Before this time, in 25 years of attending bid-lettings, I’d never seen one of these work categories not be bid. But now (keeping with the general lack of enthusiasm theme by local subcontractors), I was watching a quarter to half of the bid categories go entirely unaddressed. No bids. Of course, this left the CM (and, in turn, the client) in a tremendous quandary. What next? Re-advertise and re-bid the project (expensive and schedule-killing)? Or scramble with what you have and negotiate post-bid any deal possible (even if it’s not particularly competitive or beneficial) to simply make the package “whole” and move forward? Most scrambled.

 

  1. Admittedly, and sour grapes aside, many of the projects awarded to the CMs were too big and/or too complex for us local, smaller GCs/sub-contractors. We get that. But noticeable by its absence was any attempt by the client or designers, prior to calling in the CMs, to compartmentalize or otherwise break larger projects down into smaller, more accessible work packages, thereby allowing smaller and more local concerns an opportunity to bid and do the work.

 

  1. One of the most fascinating phenomena during this CM period was the general reaction of the local building community toward our new visitors. The best word is fear. Not so much the “scared-of-the-work” type of fear (every builder thinks he can build anything), but more the “wading-into-a-perilously-incomprehensible-protocol-fueled-and-piously-corporate-structured-nightmare” variety of fear. Many of us had perused the voluminous specs and the consensus was that the whole thing felt well out of our collective comfort zone. Then add in the rumors (and, boy, were there rumors!) about this CM being horrible to work with, and this CM taking 150 days to pay, and you end up with an opportunity most locals simply felt ok about passing over. Life was just too short.

 

  1. Project schedules were completely out the window. One school project ran 1½ years over on their original 1½ year schedule , and none of the dozen or so major projects came in on time. And delay wasn’t just relegated to the site itself. Remember the cowboy developers mentioned earlier? Well, now they weren’t the only ones tying up the city and state. Zoning and permit approvals creeped out to 3 months, then 6 months, and then to over a year. The city couldn’t hire inspectors and clerks fast enough. As builders waited for permits, bids grew invalid, material prices increased, and commitments were broken. Back on site, scant (non-existent?) resources combined with mountains of change orders (see #7 below) to bring most construction sites to a grinding crawl. Bitterness grew exponentially, and client/CM relationships turned adversarial. In time, everyone just wanted to get done, get paid, and get away from all the chaos.
  2. Now let’s examine (what I believe to be) one of the most publicly-misunderstood and misapplied aspects of commercial construction: fast-tracking. Simply defined, fast-track construction (FTC) is when a building project begins on site before design and engineering is fully completed. Often, FTC goes so far as to start a project with only sitework or foundation plans complete. There are many good reasons to fast-track, mostly for the client. Schedules are shortened and, with that, downtime for the client’s operations is lessened. Interest on interim financing also shrinks. All good stuff. But as much as fast track construction proponents preach otherwise, there are inherent dangers when incorporating FTC into a project, not the least of which is:

The degree of fast track implementation on a construction project is inversely proportional to the amount of change orders there will be on that project.

Let that sink in. It’s really no more than commonsense. The more you cheat on preparation, the more it’s going to cost you later on. This isn’t just construction, it’s life. On the work site, this lack of preparation manifests itself through change orders, often due to (late discovered) constructability issues and oversights from pushing things too fast in the beginning. One of our fast-tracked schools racked up a 168 change orders in its less than 2-year schedule. So even with its benefits, there is a real and tangible trade-off associated with fast-tracking and it should be strongly factored into the overall decision to move forward.

  1. The Guaranteed Maximum Price (GMP) is the not-to-exceed cost the CM gives to the client and, presumably, it makes up a primary part of the eventual decision to award. In speaking with CMs during the time we worked together, many opened up about how they went about arriving at these GMPs. As it turned out, many created them using internal pricing models based on their company’s own historical pricing records combined with demographic information gleaned from price clearing houses (such as R.S. Means® or others). Once a “basis” for the GMP is established, the CM might incorporate a geographical-modifier or other such price index and then deem the GMP good to go.

In our case, however, this proved roughly equivalent to performing brain surgery based on your experience dissecting frogs in high school biology. Few CMs appeared to have devoted the appropriate time and energy necessary to ensure their pricing models matched their current reality (which in the end can only really be obtained through a formal bid process and period, which few chose to do). Realizing they were facing shortfalls, some went back to the clients for more money (NEVER a good meeting). Others tried to make it up in deals and change orders. Project meetings grew more tense, and tempers grew shorter.

 

  1. This next one is simple but scary—and 6th grade arithmetic is all you need to understand it. By choosing to go with a CM (over a GC), you will automatically from that point on incur an added layer of markup. The 3½ percent fee (plus reimbursables) will forever be tacked on to every sub-contract, material cost, and expense below it. If a GC is hired under the CM (which is more common than you think), this stack of markups may look something like this (read bottom to top):
  • All costs below PLUS CM markup
  • All costs below PLUS GC markup
  • All costs below PLUS sub-contractor markup
  • Cost below PLUS sub-contractor’s secondary sub/supplier markup
  • Net (actual direct) cost of work

Just thought you should know.

  1. I saved this one until last because it’s a little off the beaten path, but please bear with me because, in the end, it turned out to be the issue that stuck with me the most as I looked back on the whole flood/CM affair. Although this certainly isn’t the fault of the CM process, I believe it is an area where CMs – because they are the leading construction delivery vehicle for large commercial work – could prove tremendously influential and helpful in improving the lives of countless, ordinary people. Let me explain: before the flood, our community was already drawing an influx of nomadic workers (of the oil variety). After the flood hit, and news got out all over, this flow appeared to increase exponentially. The best phrase I can use is mass migration. Skilled/unskilled, dislocated/disenfranchised and, yes, transient and illegal souls seemed to materialize on street corners and congregate at home improvement stores. And because shelters were full due to the flood and motels/hotels were now unlivable or ludicrously expensive , there was nowhere to house them. Now, add the lamentable fact that most of our God-fearing residents (unaccustomed to such a varied array of ethnicities and stations) weren’t exactly extending open arms to our new guests.

So, the workers – most of whom were only trying to support themselves and their families – did the only thing they could do: they pitched camp where they stood. In parking lots, parks, on sidewalks, and in green spaces – anywhere that would draw little enough attention to be rousted off. Most were groups of males but some included wives, children, and even pets. Before long, it grew unremarkable to drive up North Broadway through a Mad-Max style gauntlet of plastic tarps and bedsheets slung over salvaged clothesline on each side of the road. A few locals began sharing leftovers with the dwellers.

Here’s where I’m going with this: throughout the entire period of our city’s re-construction, I never once witnessed (or even heard of through my own network of subs and suppliers) of any of these people being hired for construction. This during a time when clients and contractors and CMs and government officials were begging for workers. It was one of those things that you knew – simply by being human – was not right. To this day I refuse to believe there wasn’t some way that we as a community of government officials, private companies, and private citizens could have brought these seemingly interlocking puzzle pieces together to create a mutually beneficial arrangement for all involved. The work was right there. The workers were right there. We, as a society, simply weren’t smart enough or didn’t care enough to make it all work.

Closing

Ok, I’ve been a little hard on construction managers. It’s all right. They can take it. Remember, too, that these views are based on my personal experience and observation. Nothing’s scientific and there are no surveys, Gantt charts, or institutional studies (I’m guessing) that support my words. It’s simply how it felt to me. So, for what it’s worth, if I were to leave you with a message, it would go something like this: Construction management is a fine construction delivery vehicle for larger/complex commercial projects, but it is not the only one. I do believe building clients (I’m talking mostly to you, local governments) should strongly consider all options before rushing out to hire the first CM in the phone book simply because it’s what your sister county did. Educate yourselves, gather opinions, and get the designers involved early in the process. Then apply common sense (combined with a little local sensitivity) to everything you hear. You may just stumble onto a better way of doing things, while at the same time doing something genuinely beneficial for people who could really use your help.