Three Critical Steps to Reviving Stalled Projects
By Barry B. LePatner, Esq., LePatner & Associates LLP\Insights+ LLC
Innumerable real estate projects become “distressed” or “suspended” for a multitude of reasons. A “distressed” situation can be defined as a construction project that has exceeded (or is projected to exceed) its project budget and\or its project schedule by more than 25 percent. A “suspended” project is one that has been halted during the course of construction due to a recognized shortfall in funding or other indicia of an owner’s inability to proceed.
In either case, three separate steps are required to stop the bleeding on such projects: analyze the critical causes of distress; decide whether or not to “mothball: a project, i.e., close up and secure the project for an indefinite time; and develop a definitive plan to complete the project to achieve the goals of the owner.
But make no mistake, addressing the trauma of a distressed project requires outside expertise and a commitment from ownership to act with decisiveness. As such, I strongly recommend such owners proceed accordingly to the prescriptive set out here.
To effectively make a critical assessment of a failed project, it is essential to identify not only the elements of the process that have gone awry but to find the precise moment when those elements failed to work during the design and\or construction phases. I have come to call this process “walking back the dog.” Interviews with team members can effectively identify these critical junctures. But nothing is more important than knowing where in the project records to look.
On one recent investigation involving a major institutional facility, it was the monthly requisitions that revealed the startling truth – in the first two months of the project, when critical demolition and structural installations should have resulted in millions of dollars of work, the CM’s requisitions showed a fraction of such expenditures in time and materials. No one on the ownership side questioned this. As the project progressed, what was not disclosed to the owner or its project team was the failure of the structural steel sub to deliver and install critical work, leading to millions of dollars in unwarranted overtime that ownership was asked to fund after the project was “completed.”
The investigation must then be followed by a clear assessment as to the scope of what is left to complete and a determination if design or construction defects require remediation of the work already installed. Every owner will need outside consultants to bring a fresh eye to the failed project. This is critical since team members often will be reluctant to admit mistakes (their insurers or counsel will certainly encourage them to remain silent in most instances).
This process will require necessary revisions to the project schedule along with revisions, where needed, to the design documents charting the balance of work to be accomplished.
Once schedule and design document revisions are made, however, it is essential then to develop a Completion Agreement. This document reflects the steps needed to achieve completion of the work, payments to be made, retention to ensure that adequate funding is there through completion, and adjustments to the business terms of the original contracts for design and construction.
If defective construction must be ripped out and reinstalled, new design documents must be prepared and reviewed by the contractors involved and an agreement must be reached that such work will be paid for by the team members involved.
All of this must be carefully reviewed and approved by ownership before implementation. A clear game plan of reasonable expectations must be presented and alternatives explored. Not all existing team members may agree to join in the new plan but ownership must understand that the status quo is what got the project into a “distress” mode in the first place. Only decisive action can remedy the situation.
STEP 2: THE EXECUTION PHASE – OWNERS MUST EXERT STRICT OVERSIGHT
Once a realistic assessment is in place, it is necessary to gather all team members and introduce them to the critical inflection points needed to accomplish these goals. Owners should provide increased oversight of all activities.
Experienced advisors will work with the design team to ensure that no complicated design elements will get in the way of accomplishing the work of the trades. In turn, the trades must work with the owner team to identify the needed tasks to be accomplished each week to meet the critical path dates of the new completion schedule. Shortfalls should not be tolerated.
Rather than making matters worse by harping on mistakes already made, incorporate back charges or claims that must be referenced into the Completion Agreement. Or address issues once the work is completed. It is not advisable to commence dispute resolution procedures during this completion phase.
You want to avoid disrupting the teamwork needed for accomplishing the owner’s goals.
STEP 3: CLOSING OUT THE DISTRESSED PROJECT – DON’T GET EMOTIONAL; FOLLOW THE AGREEMENTS
It is important to remember that, except as revised by the Completion Agreement, all terms of the General Construction Contract or the Construction Management Agreement must remain in full force and effect. This agreement will detail the close-out procedures needed to secure governmental approvals, the commencement of warranties and guarantees, turnover of operational manuals, receipt of needed “as-built” drawings of the completed project and securing required certificates of occupancy.
Strategic planning will be necessary to address subcontractor filing of mechanics liens, the issue of unapproved change orders (in many states they are invalid without owner approvals before the performance), and any decisions to pursue claims for the extended schedule, like additional costs incurred by ownership for late delivery of the project.
Emotional decisions by owners while addressing the distressed project are self-defeating. Any finger-pointing must be deferred to a time after the project is completed. That will be the most appropriate time to introduce each team member to the documented causes that led to their contribution to the loss of control of the project.
The reputation of the owner’s advisor is essential to command the respect of the team retained for completion of the project. The objective outside advisor will gain that respect by focusing on the importance of completing the project in the least amount of time and as efficiently as possible. An experienced advisor knows that the simple recitation of the facts – without emotion – makes it easier to deal with the team members who had a role in creating the problem but now have an opportunity to be part of the solution.
Barry B. LePatner is the founder of the New York City-based law firm LePatner & Associates, LLP and LePatner Project Solutions LLC. For over four decades, he has been a prominent thought leader on business and legal issues affecting the real estate, design, and construction industries. He is recognized as one of the nation’s leading advisors to corporate and institutional clients, real estate owners, and design professionals. Mr. LePatner has also been awarded the distinction of Super Lawyer by Super Lawyers magazine. He has been ranked as one of the top ten real estate attorneys in New York City by the New York Observer.
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