The shared risk/reward project management paradigm

Jan. 1, 2011
The newest incarnation of the shared risk/reward project management paradigm

Step right up ladies and gentlemen, and let me sell you a bottle of the newest incarnation of the shared risk/reward project management paradigm. It's the latest and greatest incarnation being fostered in the mechanical contracting community in general and project management in particular.

Since the ingredients are not secret to this magic elixir, it's a wonder some fools haven't thought of this before. Wait … remember the concepts of "empowered enterprise partnerships" that made its way through the PM ranks in the 1970s and “the customer as partner” in the 1950s? It seems like this has come up a time or two before throughout the years.

Just take one part owner's greed and two parts contractors' stupidity, with a healthy shake of around-the-bend stretching of accounting practices that would make Al Capone blush, then add a lobotomy to management teams on all sides and a massive dose of collective amnesia, and it's easy to see that this nonsense hasn't worked before, so it is highly unlikely to work this time around. It doesn’t matter that it has a newer, fancier label slapped on it. You have even more contractor bankruptcies just waiting to happen.

The concept of carrots and sticks — of rewards for doing a good job and punishments for making a mess of things — isn't new to the industry. They've been part of most contract documents for decades. Severe monetary penalties for every day the building hasn’t reached substantial completion otherwise known as "liquidated damages" and chump-change reimbursements for figuring out how to save the owner money by material or system substitutions as part of value-added process proposals are part and parcel of virtually all contracts today.

What is new, however, is the use of exhibits and codifiers to introduce a new insidious language that only lawyers can understand since they're the ones that apparently came up with it.

Terms such as "base manufactured material commodity adjustment non-parallel indexing" or "local labor force burden adjustments" found in some contracts now usually mean just one thing and one thing only: if your prices on materials, equipment or labor go up, then tough cookies, you're screwed, but if your prices actually go down in this near-deflationary economy irrespective of any earned-value analysis proposals you do, then those benefits go directly and almost totally to the owner, not to you.

Their logic is simple: you're a contractor, so you're used to taking risks insofar as unexpected price increases. But if prices actually do go down or other efficiencies are achieved, which you’re not used to that happening, why on earth should you be rewarded for it?

This begs the question: what the heck are we, contractors or ersatz insurance or factoring companies? One thing we are not for sure is the owner's bank!

Myself, I'd love to see contracts where there is a true partnership of sharing both risk and reward, but to do that would mean both the owner and my company having zero secrets regarding both actual costs and desired-for profits on both our parts respectively. However, I don't know of many if any companies, especially in the contracting field, that would be willing to do that.

So, since the owners are the ones who write the checks and also write the contracts, watch out for this latest round of even more lawyer-like language contracts that you’ll have to pay your lawyer to review before signing away your company's future on the bottom line.

This new language will make you assume even more of the risk for everything, from bad weather delay allowances (there won't be any such thing in the future) to unlimited non-adjusted material and labor costs escalated adjustments (no allowance for the same), and even more stretch on individual and jointly several-liability umbrella catch-all clauses.

In other words, as tough as you think times are now, in 10 years you'll be yearning for the good old days when owners were at least honest about wanting to ruin you, bankrupt you and stab you in the front, not in the back, by use of the floweriest contract trap language out there.

Kent Craig is a second-generation mechanical contractor with unlimited Master's licenses in boilers, air conditioning, heating and plumbing. You may contact him via e-mail at: [email protected].

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