An Aggressive Bidding Environment ... the Perfect Storm for Claims

Posted on October 2, 2009 by Timothy R. Hughes

The construction industry is receiving somewhat mixed economic signals lately. On the good news front, the home building industry which has been mired in recession far longer than the rest of the economy is showing signs of life. Bloomberg reported that sales of new homes climbed in August to a high for the year. The news was tinged with some contrary news that pricing reflected competition from large numbers of foreclosures of existing homes in the marketplace. Bloomberg also reportedly separately that estimates of new home sales for 2010 may increase substantially as well, particularly if Congress extends the tax credit for first-time buyers.

On the other hand, reports on pricing and cost figures in the commercial and government sectors do not appear as rosy. Engineering News Record recently described (subscription only) the “sharp and prolonged decline in construction costs” in our current economy as unparalleled since the Great Depression. In particular, the article by Tim Grogan and Tom Nicholson pointed to year-to-year decreases in construction pricing of 10.8% in the Turner Construction building cost index. Karl Almstead, the vice president of Turner who is responsible for their building index, is quoted in ENR as stating:

This is the largest drop in costs for a given year that we have seen in our index since the Great Depression of the 1930s. Materials prices recently have been fairly level, and labor costs are pretty flat too. It is market conditions that are driving costs down.

In the absence of much activity in the commercial markets, many firms are flocking towards the government contracting arena. Initial reports over the summer indicated that GSA was receiving bids that were as much as 15% lower than expected on projects funded with stimulus dollars. The official GSA press release couched the level at costs 8-10% lower than expected. We are anecdotally hearing of some players bidding jobs below their actual costs simply to try to generate modest cash flow in the short term.

The availability of some increased government funding in a tight market, a highly aggressive bidding environment, and the nature of competitive government low bidding delivery methods collectively appear to create the perfect storm for claims and litigation. This environment leads to a number of conclusions:

  • Unreasonably low bids translate to far more change order claims.
  • Subcontractors or contractors who cannot profit based on their bids are more likely to fail
  • This translates to terminations, defective workmanship, takeovers and claims
  • The smart money will sit and wait rather than chase unreasonable numbers
  • Our prediction is that we see a huge increase in delay claims, change order claims, and general litigation chaos over the next 2-4 years in the construction industry.

Image by TopTechWriter.US

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New York Times, LEED and GSA: The Ghost of LEED Past?

Posted on September 13, 2009 by Timothy R. Hughes

The legal blogosphere has been active the last two weeks with discussion of the recent article in the New York Times critical of LEED. The article in essence uses the example project of the Federal Building in Youngstown, Ohio as a sample for LEED projects that fail to be "green". The Times in particular attacks the actual energy performance of a specific project as an example of why the LEED certified project is not in fact green. Reaction has been varied, from Shari Shapiro pointing out these discussions have been in the mix for some time  to an impassioned, relatively emotional, reaction from Rob Watson, a board member of USGBC and significant national player in the green movement.  Chris Cheatham has pointed out for discussion the interplay between green building success on the one hand and risk associated with projects receiving funding under the American Recovery and Reinvestment Act.  Before we move on to the bigger picture, the article deserves the specific focus on the example project, called by the Times the "Federal Building", but more properly known as the Nathaniel R. Jones Federal Building and US Courthouse (Youngstown, OH).  

After first glance, the Times article raises more questions than it purports to answer. The article states, "[T]he building is hardly a model of energy efficiency. According to an environmental assessment last year, it did not score high enough to qualify for the Energy Star Label[.]"  A review of the GSA study on its website reveals a few interesting facts that the Times left out of the article:

  • The GSA study was of 14 first wave green GSA buildings ; 8 were LEED certified, 2 were LEED registered, one used Green Building Challenge, and three were designed with an emphasis on energy efficiency
  • The Federal Building project did not seek any credits for energy efficiency under EA Credit 1. Similarly, the project did not seek points for additional commissioning, measurement and verification, or green power 
  • While the Federal Building project did not receive the 75 score required to qualify for Energy Star, it did in fact reach a 58 despite the fact the building did not even try for the energy efficiency credits. Every other GSA project contained in the study qualified for Energy Star

So how did a project that is alleged by the Times to have a "major gas guzzler" of a cooling system reach LEED certification in 2002? A review of the GSA's webpage describing the project, and further discussion at BuildingGreen.com, reveals that the site is a downtown redevelopment of a previously paved site. The project included restoration and planting with native and adapted vegetation and reduction of impervious area by a whopping 58%. The project reduced ozone depletion by use of HFC refrigerants and the fire suppression system includes no halons. Over 72% of project waste was recycled and the project used structural steel with 90% post-consumer recycled content. Over 62% of the project's building materials were manufactured locally.

The New York Times' focus on the Federal Building project does bring a couple of key themes into focus.  First, "green" is not the same to everyone.  Indeed, Build2Sustain has had a fascinating discussion on-going on its blog and also on its various members blogs and twitter accounts comparing use of "green" and use of "sustainable" terminology. The use of loose labels where everyone does not agree on a shared meaning can create misunderstandings. Green does not necessarily mean energy efficient as there are plenty of areas allowing points under LEED that can in fact inhibit energy efficiency.

Second, the project used as the centerpiece of the article was completed in September 2002. LEED has come a long way since then and trying to extrapolate structures that were designed roughly ten years ago and apply that to current conditions may be suspect.

Finally, the USGBC has in fact already taken steps to address these issues. The new LEED 2009 standards incorporate a shift in greater emphasis towards energy efficiency in particular. Further, USGBC is taking steps to require on-going reporting and has indeed discussed using decertification as a means to require on-going compliance. (Please visit Matt Devries' blog for an excellent recap of the commentary that erupted when the decertification discussion first broke several months ago). 

In summation, it appears like the NYT dug and found an example of an old project to raise objections that the USGBC has already been addressing with LEED ... in short, they are perhaps trying to resurrect the Ghost of LEED Past.  In a few days, we will visit with the Ghosts of LEED Present and Future and try to extrapolate where LEED may be heading and what that means in terms of future risk management, contract exposure, and potential economic pitfalls associated with these trends.

Image (Courthouse): by OZinOH

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