Designer risks in commodity pricing and supply chain disruptions

As the US emerges from the COVID-19 pandemic, there is an increased demand for construction materials—a demand that will surge if Congress ever passes infrastructure revitalization investment legislation. Limited product inventory and ongoing supply change disruptions only compound the issue of swelling demand as this leads to increased construction costs and longer lead times for obtaining materials. In addition, experts anticipate increased construction pricing to accommodate the risks of material price escalation and limited availability combined with litigation resulting from the disarray.

This construction environment creates increased risks to design firms. Part of that risk is contractual—even the standard EJCDC engineering contract requires redesign at cost if bids come in higher than the owner’s budget for the cost of the work. The standard AIA contract states that the architect will redesign at no cost to the owner as no architect can claim that it “could not reasonably anticipate” that market conditions are driving up prices. The language states:

If the Owner requires the Architect to modify the Construction Documents because the lowest bona fide bid or negotiated proposal exceeds the Owner’s budget for the Cost of the Work due to market conditions the Architect could not reasonably anticipate, the Owner shall compensate the Architect for the modifications as an Additional Service…; otherwise the Architect’s services for modifying the Construction Documents shall be without additional compensation.

AIA document B101-2017, Standard Form of Agreement Between Owner and Architect

There is also the possibility of a design firm’s liability in the performance of professional services. A client, and in some cases a contractor or other party, is likely to bring a claim of negligent performance if they believe the design firm is responsible for not recognizing cost escalation, for project delays because of material or system unavailability, and for resultant economic losses.

As clients become more concerned about costs, they are likely to dictate more design characteristics rather than examine the recommendations of design firms. An example of guidance project clients might follow is from Cushman and Wakefield (C&W), an international property management company. In their publication, Commodities Volatility: Impacts on CRE & Construction, C&W offers the following suggestions to project owners:

Engage a Project Manager Early

Given the volatility of the commodities markets, engage early, and as soon as possible, with a professional project management firm that will provide the following value-added services:

  • Specific advice based on market conditions for the anticipated type of construction;
  • Valuable industry expertise with respect to budgeting, scheduling, procurement strategies, suppliers and effective design scope; and
  • Procurement leverage advantage with contractors, subcontractors and suppliers based on their buying activity within a market and/or larger geographic area.

Prepare for Alternative Solutions and Extended Schedules

The Project Team should create and vet all possible project solutions including developing an accurate customized Master Project Budget and Master Schedule, as well as conducting value engineering studies.

  • Consider alternatives to traditional in-demand building materials such as precast concrete panels, PEX plumbing, lumber, CMU, concrete, or steel depending on the material availability, cost and local construction capabilities/techniques.
  • Specify locally produced materials and suppliers with optimal inventory, location and transportation cost.
  • Pre-purchase materials such as steel joists for industrial buildings and steel studs for interior tenant improvement buildouts.
  • Evaluate the use of prefabrication and/or modular construction to expedite the off-site construction, reduce waste and improve field labor productivity.

Cushman and Wakefield becomes very specific when advising developers on specific project types. For example, the guidance on creating retail projects includes the following:

Embrace prefabrication wherever possible. Modularize key building elements—up to the entire structure, if possible—via a centralized hub to minimize transportation costs of raw materials.

Maximize tilt-up and/or precast construction to reduce structural steel.

Employ “lean construction” principles, particularly just-in-time delivery, to reduce raw materials stored on site.

Whether design firms can still provide value to clients or become a commodity service could depend on how they assist clients in putting capital assets in place during the continuing turmoil in the construction industry. To prepare for the questions, concerns, and demands of developers, design firms might want to download a copy of Commodities Volatility: Impacts on CRE & Construction from C&W’s website.

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