COLORADO: An Introduction to Construction
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Over the past decade, Colorado’s construction industry directly benefited from unprecedented population growth, which created a steady demand for housing, schools and office space. Now, as Colorado begins to emerge from the pandemic, the state continues to experience population growth, but the pace has fallen steadily. In 2021, for example, Colorado’s population grew by just 28,000 residents - the lowest increase in 15 years. For context, Colorado’s population grew by almost a million new residents between 2010 and 2020, with the largest yearly gains between 2010 and 2015. Most new residents move to the Denver metropolitan area.
During the pandemic, many in-progress projects were put on hold, but only for a short time, as most public health orders deemed construction an essential service. Projects in planning, on the other hand, were disparately impacted - particularly in the residential construction sector. Indeed, the ongoing population growth, coupled with a litigation-averse condominium market, resulted in a historic leap in prices. The median price of a single-family home in the Denver metropolitan area has been rising for years but jumped to a record high of $635,000 in March 2022, up almost 18% from the year prior. Similarly, town homes and condos reached a record median price of $426,000, up over 20% in a year. Condominium construction has been sparse, while apartment construction has been robust, leading to concerns the market is saturated.
In contrast, the commercial sector - including the office market - experienced consistent growth, with leasing activities rebounding in quality buildings and central business districts. The real estate firm CBRE reports Denver’s tenant requirements are 5% above the city’s pre-pandemic levels. The industrial market also continues to rise with established companies such as Amazon building fulfillment centers up and down the Front Range.
As a result of these trends, there has been a significant increase in the cost of construction, with labor, materials and land as the primary drivers. Burying your head in the sand has never been a recipe for success and that idiom applies even more today. Successful projects are proactively managed to address risk and to implement appropriate measures to quickly resolve issues - including transitions to dispute resolution processes. Owners, developers and contractors must position themselves to manage these costs and risks, execute the work to completion, and make a profit. Project partners must address:
•Timely and reliable communication. Owners and contractors must understand and communicate reliable information to all stakeholders regarding current market conditions and changes impacting project cost and schedule. Timely communication helps the parties adjust and work through any impacts. Project partners should be flexible and consider preconstruction services or limited notices to proceed as planning tools to tackle long lead procurement items and potential delivery delays.
•Collaborate to address labor costs. The shortage of qualified labor, in addition to rising costs, can cause a contractor to forgo a project pursuit, leaving owners with fewer contractors to choose from. Many projects are short-handed or suffer high staffing turnover. Given these conditions, contractors should consider teaming agreements and joint ventures to spread out staff (as well as risk) across more opportunities and capture new projects. This approach benefits contractors and owners alike and promotes project success.
•Fairly address material price escalation. The parties should discuss and contractually address the risk of material price escalation in a fair and reasonable manner. No one has a crystal ball - but owners and contractors can still plan for increased costs. The risk of material price increases should be appropriately and fairly allocated. An owner should not bear unlimited risk for price fluctuations, but neither should the contractor. Further, decisions regarding design criteria, project starts and subcontractor and supplier buyout are interrelated and require risk allocation between the parties. For example, the ConsensusDocs form 200.1 presents a workable solution to identify materials subject to price escalation with agreed-upon price thresholds to trigger cost increases or savings.
•Consider alternative dispute resolution. While often ignored or considered a legal issue to be handled by attorneys, parties should carefully consider including a tailored dispute resolution process, especially given local conditions. Any dispute resolution process should be tiered to encourage early resolution before problems escalate - such as requiring direct discussions amongst project managers, followed by company executives, followed by mediation. Other options include incorporating a third-party neutral to evaluate and assist with disputes involving technical issues. Most courts face severe case backlogs and must prioritize certain criminal and civil matters over commercial contract disputes. Therefore, arbitration is often preferable to litigation for efficient resolution.
In sum, market conditions are challenging, and successful projects are not achieved by accident. Project partners must effectively plan and openly communicate project issues to fairly address risk. While collaboration has always been a best practice, it is more important in today’s environment than ever before.