Business News
A new risk landscape is reshaping owner-contractor relationships
Equipment that would previously have taken eight to 10 months to arrive now takes an average of 12-14 months. Other risks are increasing too. Soaring inflation and interest rates are increasing project costs and affecting capital project cost estimates. Recent financial sector instability including First Republic’s seizure by the FDIC which was the second biggest bank failure in US history are creating uncertainties around capital projects tied to the financial sector. It is unsurprising that industry players cite unmanaged or unexpected risks (such as supply chain, labor, or safety concerns) as the biggest barrier to project certainty. These risks often cause unforeseen increases in both costs and schedules as well as driving compensatory scope creep. A new contractor-owner relationship Uncertainty surrounding costs and schedules means contractors are no longer willing to shoulder the entire burden of risk through fixed- price construction contracts or delivery models with little owner involvement. Some contractors are responding to this unstable risk landscape by setting very cautious, conservative prices and schedules that load extra cost onto owners. Yet another way of mitigating growing risk is the adoption of progressive delivery models where owners, contractors, and designers collaboratively share risks, responsibilities, and resources. Industry surveys show that more collaborative shared-risk delivery models are on the rise while traditional models such as Design-Bid- Build are on the way out. The most widely used models in industry are now collaborative Integrated Project Delivery (IPD) methods and Design-Build models where contractors, owners and designers work together to mitigate risks from the design stage. This trend is expected to continue with use of design-bid-build projects set to decline by 9
By Steve Smith, EVP of Infrastructure at Graham Construction and Catie Williams, VP of Product Development at InEight
A volatile risk climate worsened by ongoing reverberations from COVID-19, geopolitical conflict, and severe weather events is reshaping the traditional relationship between owners and contractors. Concerns around labor shortages, stagnation and recession, and the political climate all featured prominently among the biggest construction industry challenges in InEight's recent Global Capital Projects Outlook survey. Others have pinpointed spiraling labor costs, inflation, and interest rate rises as major risks on the horizon. This is causing the construction industry to reevaluate traditional divisions of risk and responsibility between owners and contractors. Traditional design-bid-build models where the burden of risk was principally shouldered by contractors are gradually giving way to more collaborative models where risks and responsibilities are more evenly shared. Construction 4.0 technologies are bringing owners and contractors closer together by enabling remote, real-time collective visibility of risks across project lifecycles and helping all parties work together to find common solutions. A volatile risk landscape for contractors The rise of more collaborative shared-risk models is happening against a backdrop of an increasingly volatile risk landscape for contractors. Craft skills shortages have been exacerbated by the mass of experienced workers nearing retirement age and increased demand for a limited labor pool has also increased labor costs. Meanwhile, ongoing supply chain volatility has made it exceedingly difficult to source large steel-intensive elements such as bridge girders, electrical and control equipment, and large switch gear tools.
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csengineermag.com
October 2023
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