Best Practices
A Fistful of Dollars
Surviving project buyout

by Jim Atkins, FAIA, and Grant A. Simpson, FAIA

A billion here, a billion there, and pretty soon you're talking real money.
—Sen. Everett Dirksen

Summary: Almost everyone wants to build projects at the lowest cost, while maintaining relative quality. Owners generally want the most building for their money, either to buy more scope or to sell the project at a higher margin. The period between the time the cost is fixed, either through an accepted bid or an established guaranteed maximum cost, and the time all of the labor and materials for construction of the building are purchased, is called project buyout. During this time the contractor can generally increase their profits if they can find a better deal on the specified products and get the architect and owner to accept them. Better yet, if there is a shared savings with the owner on reduced project costs, both the owner and contractor stand to gain.

Below is a synopsis of the article. Follow this link for the full text.

A popular vehicle for achieving these gains is the substitution process, which is often imposed within a very short time frame, late in the game when time is critical, often causing the architect to render product evaluations without extended research. We touched on substitutions in our May 2006 AIArchitect article, “According to Hoyle,” and again in our September 2006 AIArchitect article, “Ch-Ch-Changes.” When the substitution requests come in, the architect must scramble to evaluate the proposal and decide if that product or system is as good as what was specified. There is often a great amount of pressure put on the architect to accept the proposed substitution, quality concerns notwithstanding, usually because of cost savings benefits.

This article is about project buyout and the risks involved, including the value analysis/substitution process (or value engineering, if you prefer) and its effect on the owner, architect, and contractor. Because substituting elements of the architect’s design involves product evaluation, coordination with related or affected elements, and possible manipulation of the overall building configuration, some posit that owner or contractor selected substitutions constitutes “design,” and possibly the practice of architecture. We will provide our observations on this position along with a review of tactics used to get substitutions accepted, and we will offer some suggestions for improving your chances for surviving the substitution assault on your project.

Concepts covered

• Prices slashed, today only explains how contractors may depend on competition among subcontractors to lower project costs and thus boost profitability
• Shop till you drop details the process of “bid shopping” for lower bidders as well as alternative materials and systems
• Buyout substitutions explains how contractors may employ substitution of products, often under the misused banner of “value engineering” to save money
• Time is money explains how the architect, who may require additional review time when a substitution is proposed, needs to avoid the “squeeze play” of project delay
• What the AIA Documents say details how A201, General Conditions of the Contract for Construction, in Section 3.4.2, allows that substitutions will be added to the work by change order, not necessarily on the drawings
• What can you do? explains alternatives for the architect when the owner insists on a change, including change orders, hold-harmless agreements, and notes on payment certifications and certificates of substantial completion.

We also offer some examples along the way.

Architects will likely always be challenged by project buyout, even if integrated project delivery brings enhanced team interaction and cooperation as many speculate. The primary risk lies in the widely accepted viewpoint that only one person or company is legally responsible for the selection of the products and systems that go into projects. An architect’s reputation and financial survival often rest on the ability to select appropriate products and administer incorporation into the building effectively.

Owners and contractors are not concerned and do not worry about the architect’s license or the responsibilities that go with it. It therefore becomes incumbent upon the architect to provide protection from detrimental compromises in building designs and systems by issuing warnings of the consequences of value engineering, asking for releases of liability, rejecting and refusing to detail the substitutions that are demanded, and noting substitutions as owner-accepted nonconforming work. These actions and discussions are not always well accepted by owners and contractors because they appear to be detrimental to the cost reduction process, and the architect is not viewed as a “team player.” The architect can benefit by taking the initiative and informing and educating the contractor and the owner regarding the risks involved, whether they listen or not.

So, as you review with your fellow architects what your recourse will be when the next unacceptable proposed buyout substitution comes around—such as eliminating the waterproofing from the basement wall—think about what you can do to protect yourself better with documentation, think about how you can help the owner and contractor better understand your view of reasonable objectives … oh, and of course, don’t forget to be careful out there.