COLORADO: An Introduction to Construction
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As we transition past the unique challenges of 2020, the fundamental goal of every Colorado contractor, and expectation of every owner, remains the same: deliver a quality project on time and within budget. However that aim is about the only thing that has not changed drastically in the past year. The burgeoning Colorado construction industry is increasingly constrained by escalating material prices, additional regulation, and volatile global markets.
Initially, COVID-19 hit the reset button on construction in Colorado. Uncertainty paralyzed projects in the planning stage and the pandemic made industry predictions, forecasts and historical trends unreliable, if not obsolete. Fortunately, through jobsite adaptation, a healthy project backlog kept contractors earning through 2020. Now, however, that surplus is beginning to evaporate as an inevitable effect of the shutdown. In Q1 of 2021, 26% of Colorado contractors had a project start delayed; another 14% had a planned project canceled altogether. Cummings Insights is projecting a 9% loss in Denver’s construction market volume in 2021.
Despite this trend, contractors are reluctant to reduce staff—69% of them expect to hold steady or add staff in 2021. They have not forgotten the explosive statewide construction market in the decade leading up to the pandemic, or how it stretched the available labor pool, cutting short the learning time for new trade workers and apprentices. Untrained workers increase project risks associated with safety, quality, and management. Thus, even after everything that has happened over the past year, contractors are willing to risk lower profits to hold onto good people. That long-term view should be rewarded as market indicators are beginning to signal a backlog recovery. For the first time in three years, all building sectors and regions posted positive scores on the AIA’s Architecture Billings Index (ABI). The March ABI score was a high not seen since before the 2008 recession. The ABI is a leading indicator for non-residential construction activity 9 to 12 months into the future.
After the recession in 2008, contractors used a variety of strategies to bounce back, including offering to work for little to no fee, or expanding hastily into new markets. But these methods are not sufficient to combat the unique challenges presented by a global pandemic. Lenders now require larger equity stakes from owners. Insurers and regulatory agencies have increased requirements, making it harder to gain the approvals necessary to move a project forward. Even after a project begins, it faces escalating material prices and snarled supply chains. This combination of challenges led the AGC to issue a Construction Inflation Alert in April 2021. Diesel fuel, lumber, copper, and steel have all increased in cost by over 20% since April 2020, while the bid price for non-residential construction has remained flat. It is a perfect storm of external forces threatening the success of any project. A squeeze on profits—whether in the owner’s pro forma or in the contractor’s price—increases both the probability and frequency of disputes.
Likewise, several pending state and federal bills add further complexity to the mix. If passed, they will have a drastic impact, both positive and negative, on the construction industry. For example, President Biden’s proposed $2 trillion infrastructure bill would inject the sector with much needed capital, while also increasing corporate tax rates and incorporating sweeping labor policy revisions. In Colorado, HB-1167 proposes to cap retainage on Colorado private construction projects to just 5%. Proponents contend the legislation will improve cash flow for trade contractors, but others caution it may lead to increased bonding requirements or other barriers to entry for smaller, unproven contractors.
For participants in this rapidly changing industry, success requires a disciplined and strategic recognition and response to risk and uncertainty. Deploying best practices from project inception to completion, developed in partnership with experienced legal counsel, has never been more crucial. Gone are the days of resolving disputes at the end of the project. Instead, owners and contractors alike have learned that the longer an issue remains unresolved, the more expensive it likely becomes. Dispute Review Boards (DRBs) and similar early interventions are increasingly common contract inclusions, allowing for dispute resolution to be performed concurrent with project execution. Project legal counsel, when engaged from the start, can help cost-effectively manage disputes.
Project counsel services enable construction professionals to successfully navigate the precarious post-pandemic landscape by utilizing the following strategies:
Identifying project risks - An independent Internal and external risk assessment benefits the project and helps initiate an honest dialog with the other contracting party. Owners inherently have different priorities and viewpoints than the contractors they employ. This dialog allows for collective and active issue resolution in lieu of finger pointing and costly disputes.
Thinking globally - Local construction projects are now impacted by the global market. For example, 30% of all US building materials come from China, according to Dodge Data and Analytics. Owners who desire Italian cabinets or Chinese textiles should be informed of the risks to both project budget and schedule inherent to a volatile global economy.
Being Innovative - Innovative hiring strategies and benefit packages can attract skilled workers in a competitive labor market. Innovative project delivery methods, such as modular construction, can also combat labor shortages. Novel thinking is just as important in minimizing and cost-effectively resolving disputes. Innovative construction law firms employ seasoned construction management professionals to analyze claims, bridge the gap between the field and the courtroom and, ultimately, reduce the legal spend.
Unprecedented times call for unprecedented solutions. Today’s challenges are best met through a symbiotic “best practices” approach to project management, interweaving project legal counsel into project execution. That way, the global constraints on the local economy can be overcome by mitigating risks, managing expectations, and resolving disputes timelier and for a fraction of the cost of litigation.