The COVID-19 pandemic is reducing revenues and introducing new expenses for construction owners. But as Eric Schatz and Richard Citrine explain, some savings strategies come with hidden costs.
COVID-19 is putting construction budgets under a microscope. Many sectors are getting hit with a double whammy of sorts, as revenues dip while additional operational expenditures related to the pandemic (e.g., additional cleaning, working while social distancing, etc.) rise.
If your organization is looking to optimize cost-effectiveness, decisions on which construction projects to slow down, scale back or cancel must involve an assessment of long-term impacts. Certain moves that appear to be money-savers on the surface can harm return on investment (ROI) down the line.
Divide and conquer strategies add complexity
During the global financial crisis of 2007-08, many owners broke down large projects into smaller ones to reduce spending. However, the increased complexity of managing multiple project teams, contractors and job sites took more time and effort than executing one sizeable program.
Fine-tuned program plans optimize project schedules and resources. Taking away that coordination and integration means the expected benefits might be held up by lagging projects. Worse, if the integration is never restored, the final product will not deliver what was promised in the original design.
If you are segmenting a large project, take note of the interdependencies. Strategize ways to keep connections intact before sending project teams off on their separate ways.
Slowdowns and cancellations come with their own costs
Pressing pause on a project is not always a surefire spending freeze. Measure the maintenance and upkeep your organization will oversee while on hiatus. Also, remember that contracted team members could transfer to different projects or companies during the downtime, requiring rework when the project picks up. If possible, keep a small team involved to maintain consistency.
Delaying aspects of a project affects cost certainty as well. We are already seeing impacts to credit ratings, bondability and investment sources. Inflation could factor in, too, depending on the time it takes to restart.
Also, while many owners expect contractors to be hungry for work and offer competitive prices when work is available, that is not what we have seen lately. In some cities, supply chain issues and worksite restrictions are leading to higher-than-normal bids. There is no telling how long that will remain in play — especially when another wave of COVID-19 cases could be right around the corner. Do not push back a project simply because you expect the price of contract labor to go down.
Cancellations might be necessary but be sure to vet the details in the contract first. Shutting a project down could entitle contractors to additional payments, and the shutdown process itself is neither instant or free. Incorporate the cost of site cleanups, equipment mothballing and other related tasks into the decision-making process.
Cost reductions require full design coordination
Scaling back a design could be a way to optimize limited capital. Cost reduction measures are a common way to keep a project within budget throughout the design phase, and at times they are inevitable. However, beware of taking cost reduction measures late in the process, or even after initial bids, without reconciling the changes with the design. Cutting large aspects of work without design coordination increases the likelihood of additional change orders, delays and costs, which can deteriorate working relationships. Owners would be wise to capture input from all relevant design specialists, agencies and authorities before making a reduction.
In general, it might be prudent to focus on repair and rehabilitation projects for the time being. While new projects can offer tantalizing benefits, executing a major build under pandemic protocols might delay or dampen the final product.
Get additional insights on navigating COVID-19 construction impacts by downloading our COVID-19 Response Strategy Series. The quick-hitting guides will help you devise plans of action for continuing projects, stopped projects and projects restarting after a shutdown.
ABOUT THE AUTHORS
Richard Citrine, PMI-RMP, is a Principal Risk Manager with extensive experience in risk and value management. He has led risk management on a wide range of multi-billion-dollar rail, aviation and tunneling programs both in the UK and U.S. Richard’s completed complex analysis on a variety of large infrastructure and building projects for large public agencies and private sector clients. His specialties include workshop facilitation, risk analysis, Mote Carlo simulation, CPM scheduling, schedule variance analysis, contract reviews, procurement, bid leveling and value engineering.
Eric Schatz is a Vice President that has worked within the construction industry as a claims analyst, risk analyst, construction manager, scheduler, estimator and surety consultant. He has worked on projects and programs with construction values exceeding $500 million, performing delay analysis, CPM scheduling, cost estimating, risk assessments, forensic audits, condition assessments, and contract and budget administration. Eric’s diverse background offers a strong foundation in project controls and construction management expertise. He has prepared expert reports, participated in mediations, and testified in deposition, arbitration and at trial.
