Greater competition, higher prices challenge A&E market

July 2, 2007

For architects and engineers (A&E) the new mantra is: “They want it done better, cheaper, and faster,” according to Mark Henderson, architects and engineers product line manager for Chicago-based Shand Morhand and Co. Henderson discussed new pressures and challenges facing insurance professionals covering architects and engineers as part of a recent Insurance Journal “How to Write” Webinar. With rising prices, “better, cheaper and faster” is a real challenge in the A&E market, Henderson said. There have been financial pressures on projects and owners going back as far as the ’80s and ’90s, but today’s high prices make it different for several reasons, the Shand Morhand manager indicated.

“Everything costs more, and owners are in “hyper-competitive” situations,” Henderson emphasized. “Owners are dealing with project costs that have skyrocketed in the last few years. To find available land in any metro area, or anywhere for that matter, is extremely costly, especially if you need large acreages for your building projects. Increased competition and rising cost factors are all having an impact on this line of business.”

Henderson said that in addition to the increased cost of land, particularly in metro areas, building materials such as steel and concrete continue to escalate along with the price of all other building materials.

“A lot of times it’s hard to even put together a budget for a project because you are not able to tell what materials will cost at the time you may need them — which could be two or three years down the road,” Henderson said. “In any event, owners are passing these financial pressures down the chain and also are contracting away a lot of the risk that goes with those pressures.”

Public sector double whammy
Henderson said that although the private sector has its share of cost and competition issues, the double whammy for insurance professionals is often more dramatic on the public sector side. Henderson provided an example of a school district that puts out a bid for a project with a budget that is pretty much “set in stone.”

“The problems start when the school district wants to get the job done for X dollars that the district has in its budget, irrespective of whether the job can actually be completed for that amount,” Henderson said. “Costs can be dramatically different one year or two years into completing a project. School boards do not often take these facts into account, and that’s where the trouble can start.”

The other part of the double whammy involves who is allowed to bid on public sector construction projects and how they are “qualified.” In many states it is relatively easy to become a “qualified bidder.” There are minimum standards, yet even in today’s contentious and litigious society, anybody who meets those minimum standards is given an opportunity to bid to work on a public construction project, Henderson explained.

What can happen is that although the bidder selected may meet the statutory requirements as a qualified bidder, the construction group may not have the wherewithal to really put the job together.

“If the unqualified bidder gets the job, the company will try to marshal the resources and even bootstrap the situation up to get the job done,” Henderson said. “So what you have is a project that is doomed from the start. Why? The contract was awarded at a price of $5 million, but it is really going to cost $7 million or $8 million dollars to actually get the building up to the standards and building codes the school district will need to meet.”

When that type of shortfall occurs, Henderson said often school board members react by saying, “Hey, wait a minute, we bid this out, you said you could get this done, you’re obligated to do it by contract. We simply don’t have any other funds in the school district budget this year and you’ve got to get this done.”

And so according to Henderson, at that point, the construction firm will continue to get the job done. Generally, the building job will get finished, but there may be a large cost over-run claim by the school district against the contractor, the construction manager, the A&E firm and whoever else was involved in the project.

Quality can suffer
Additionally, Henderson said in an effort to meet the initial construction contract price of $5 million, contractors may take many shortcuts that can affect the quality of the construction and create potential liability issues.

“Some shortcuts include using subcontractors who may not be qualified to do the work, or contractors that are not conscientious and diligent as they should be, or maybe they don’t have the track record of performance,” Henderson explained. Using less expensive building materials and not following specifications carefully also are problems when construction projects go over budgeted cost, he said. All of those situations can contribute to the claims process.

Outsourcing, computers move in
Another emerging trend is the outsourcing of A&E services, particularly in the area of design requirements.

“I was in Phoenix recently and had an opportunity to visit four or five different A&E firms, Henderson recalled. “My colleagues and I were somewhat taken aback when we visited one old line Phoenix firm that told us that all of their back room work, meaning their design work, was now being outsourced over to India.

“One of the things I think a lot of people don’t realize is there would seem to be barriers to having projects outsourced in an A&E context,” Henderson continued. “However, what we’re seeing is [that] the barriers really aren’t there, because of the Internet and with Federal Express, UPS and others able to deliver material in a day or two, these barriers just aren’t there anymore,” he said.

Computer-aided design and greater use of computers for record storage and claims data by architects and engineers is another trend that has caught on.

“A lot of architects and engineers don’t like computers because they think that their jobs will be computerized away. It’s not too far out of the realm of possibility where one day there could just be a bank of designs and there’s already been inroads made in this area,” Henderson said.

“But for a lot of firms, the real motivation for utilizing computerized technology is to get ahead of the game from a competitive and from a service standpoint. Better record keeping can make a difference, too. This trend to utilize computers and the Internet is going to continue,” Henderson predicted.

To view the entire “How to write architects and engineers” Webinar online, visit www.insurancejournal.com/webcasts/archives.php

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