Condo boards face mounting pressure to manage reserve funds efficiently while protecting future owners from unnecessary financial strain. This means looking beyond upfront costs and recognizing that the lowest tender does not necessarily deliver the greatest long-term value.
Importance of value in engineering services
One area of concern is the provision of engineering services to support the execution of capital expenditures within the condominium. Since the output of engineering services does not result directly in a physical upgrade to the condominium, boards often mistake these services as low-hanging fruit that can be reduced, or worse, eliminated to lessen the financial burden of a project. Condo corporations often undervalue engineering services, despite their importance.
As engineering services become less valued by their clients, consultants are asked to reduce the scope of their services. Like all professional service businesses, engineering consultants rely on working for and getting paid by their clients to run a viable business.
When a client requests their engineering consultant to accommodate a reduced scope of services, the consultant often complies; otherwise, they risk losing business. The race to the bottom for engineering consultants in the condominium sector remains alive and well.
Reducing the scope of engineering services can be more costly in the long run. For example, consider an engineering consultant engaged by a condominium to design and administer a capital expenditure project. The consultant must be informed on the existing conditions to design a site-specific repair/renovation program. This requires time to investigate, document, and understand the implications of the existing conditions on the proposed work.
If the scope of the consultant’s services is reduced to save costs, the consultant must make assumptions about the existing conditions based on incomplete information, such as “as-built” drawings, which are very often inaccurate or incomplete. There is a real risk that these assumptions do not truly reflect the existing conditions, which can lead to a cascade of problems during construction.
The engineer’s relationship with the contractor becomes tested, the board is left looking for answers, condominium owners grow frustrated, and fingers start pointing. Such situations are all too common, but generally avoidable.
Consequences of the lowest price engineering approach
Depending on the size of the capital expenditure project, the costs of engineering design services can vary, but in general, they represent a small percentage of the overall project cost. Consider an example wherein the full scope of proposed engineering design services, including investigations with exploratory openings to understand the built condition, is $10,000 more than the minimum scope of design services. The minimum scope will prepare drawings based solely on assumed conditions, on which future contractor tenders will be based and the forecasted construction value of the work is $2,000,000, based on these assumed conditions.
The condominium board selects the minimum scope to better fit within the reserve fund, which is already underfunded for the project. Due to the current financial position of the condominium, special assessments are issued to the owners based on this forecasted project value and a 10 per cent contingency allowance.
As the project proceeds, the assumptions made during design prove to be incorrect, and the conditions require a change in scope to accommodate these unforeseen issues. The engineering consultant reviews the contract documents and instructs the contractor to provide pricing for extra work, in accordance with the terms of the contract. Through extensive efforts, the engineering consultant works with the contractor to lower the cost of the extra work yet the “best deal” is $500,000. However, the condominium has no reserve funds to cover this overage beyond the contingency allowance. The owners have already been subjected to a special assessment, and any further assessments would likely be met with resistance.
Moreover, the condo’s borrowing bylaw does not permit borrowing from financial institutions to cover such costs. All parties become frustrated and dispute resolution mechanisms outlined in the contract may be exercised. The project schedule is delayed while resolution is reached, and multiple meetings are held with the corporation’s legal counsel to discuss options for resolution.
The engineering consultant, as the first interpreter of the contract, determines that the extra work is due to concealed and unknown conditions at the time of the tender. As a result, the consultant requests additional fees from the board to manage the dispute and design a solution to accommodate these newly discovered conditions. As the dust settles, the costs associated with the change are in the range of $600,000.
Overall, the $10,000 savings on engineering design services during the planning stages of the project is small compared to the downstream implications. Along with the additional costs associated with this extra work, there are further cost implications due to the potential reduction in the long term durability of the repair work, resulting from the assumptions made during the design stage.
The numbers change, but the story is regrettably all too common; experts continue to provide opinions on such files, which have escalated to litigation. Five years after these events, litigation may remain ongoing, with the legal system continuing to churn and issue monthly invoices for its service. The initial savings can quickly be surpassed—10 times, 20 times, even 100 times over.
Small initial investment. High financial risk reduction
In the end, the short-term savings from rejecting more robust engineering design services become negligible when compared to the long-term financial risks incurred. The trend of reducing the scope of services in engineering requests for proposals and minimizing upfront costs robs condominiums of the potential value these services could provide, leaving them financially vulnerable in the long run.
The fortunate ones manage to survive by depleting their reserve fund and deferring optional expenditures. The less fortunate, however, become entangled in years of dispute resolution efforts, which adversely affect their financial position and hinder their ability to complete other projects on time.
In some cases, the ability of the owners to sell their units may be impacted. These undesirable outcomes are often avoided with a simple change to the project planning and design process. If engineers are pressured to cut corners, everyone loses.
Jonathan Dickson, M.Eng., P.Eng., BSS is a Senior Forensic Engineer at Arbitech Inc. ([email protected]). He has managed hundreds of investigations and capital expenditure projects within existing buildings and provides expert witness services to legal counsel on matters involving construction disputes and building failures.
Mina Tesseris P. Eng., LEED AP, LCCI is a Senior Forensic Engineer/General Manager at Arbitech Inc. ([email protected]). He has completed a multitude of engineering services to condominium boards for over 30 years and provides expert witness services to legal counsel on matters involving construction disputes and building failures.
