What's Happening?
The construction industry is facing significant challenges in managing risk and cost escalation on large-scale projects, particularly those spanning multiple years. Lisa Stalteri, a partner at Lathrop GPM, highlights the importance of effective project management and the construction manager at risk (CMAR) delivery method in mitigating these risks. This approach involves early collaboration between the construction manager, project owner, architects, and engineers to ensure better cost control and project management. The pandemic has led to the widespread adoption of material price escalation clauses, which allow contractors to request change orders if significant price changes occur after contract signing. These clauses are crucial in today's volatile market, characterized by fluctuating tariffs, labor shortages, and supply chain disruptions.
Why It's Important?
The adaptation of contract terms in the construction industry is crucial for the successful completion of megaprojects. With the private sector experiencing high abandonment rates due to economic uncertainties, including high interest rates and labor shortages, the ability to manage risk effectively is more important than ever. Material price escalation clauses provide a mechanism for contractors to address unforeseen cost increases, ensuring projects remain viable. This shift in contract terms reflects a broader trend towards more flexible and responsive project management strategies, which are essential for maintaining stability in the construction sector.
What's Next?
As the construction industry continues to navigate economic uncertainties, stakeholders may need to reevaluate the feasibility of starting new projects or delaying them. The balance of risk between owners and contractors is shifting, with some owners adopting a more collaborative approach to risk allocation. This could lead to more successful project outcomes, as owners focus on the contractor's creditworthiness and track record rather than solely on the lowest bid. The industry may see further adjustments in contract terms to accommodate ongoing challenges, such as fluctuating tariffs and supply chain disruptions.
Beyond the Headlines
The evolving contract terms in the construction industry may have long-term implications for project management practices. The emphasis on collaboration and risk-sharing could lead to more sustainable and resilient construction practices, benefiting both owners and contractors. Additionally, the focus on creditworthiness and track record may encourage higher standards and accountability within the industry, potentially reducing the incidence of project abandonment and insolvency.
