Construction Case Study
Summary of a Case Study by James E. Acret
“It’s better to fall flat on your face than to bend over too far backward”
When he took his MBA at Columbia Elmer specialized in real estate. He knew just about everything there was to know about calculating the probable discounted return on capital invested in a development after taking into account maintenance, depreciation, management, taxes, insurance, marketing, and projected vacancy factors. He had a business plan to develop luxury apartments in Orange County, where the rental market was strong. Admittedly he didn't know a great deal about construction. He would hire an owner's representative to look after that side. Elmer put together a package that included land, zoning, construction financing, takeout financing, and marketing. Investors could expect a cash flow that would be virtually tax-free for seven years. A native of Detroit, Elmer was a fanatical hockey fan. He befriended some NHL players and got himself a pair of seats next to the penalty box. He had no trouble selling the development package to his hockey buddies. They were looking for an outlet for their ridiculous salaries. He knew that contractors always whine and snivel about losing money on a job and try to make up for it by claiming extras. He started looking around for a contract form that would protect him. He found the AIA form to be very weak in this area. The provisions dealing with change orders were lengthy, and gave the contractor way too many opportunities to claim extra compensation, especially if the contractor was working in cahoots with the architect.
Work was proceeding on schedule when the city building inspector red-tagged the job. The rebar design, according to the inspector, did not meet code. The only practical solution was to add reinforcing steel. Elmer did his homework. He knew his contractor, J&G, would try to rob him, so he got check bids in advance. The number...