Contractors Confront the Growing Costs of Rework
Rework plagues U.S. commercial construction projects, causing problems ranging from longer construction schedules and late delivery to worker injuries and billions a year in lost revenue. In the long term, rework can also affect a construction company's reputation and its ability to attract new business.
The problem of rework has been largely ignored by the construction industry, but tighter profit margins during the recent recession have prompted contractors to look for new ways to shave expenses as well as boost earnings. Preventing, or at least curtailing, rework is one cost-cutting measure embraced by more and more contractors. Those efforts include using processes such as building information modeling and lean construction techniques to detect and correct mistakes virtually, as well as common-sense practices such as involving owners, users and other stakeholders throughout planning and construction.
"Rework happens on every project … and the average cost is staggering," says Jim Zack, executive director of Chicago-based construction consultant Navigant Consulting Inc.'s annual Construction Forum. The group's most recent conference, held in August, was called "The Impact of Rework on Construction & Some Practical Remedies."
"Rework is something that's very expensive for contractors, in direct and soft costs as well," says Michael McLin, managing director at Maxim Consulting Group LLC, a Denver-based construction management-consulting firm.
The causes and costs of rework, as well as ways to prevent it, have been studied very little until recent years, but the Construction Industry Institute (CII) of Texas lately has produced major reports on rework to help the construction industry deal with it. The CII is part of the University of Texas at Austin's Cockrell School of Engineering.
"When you think about doing a job that costs a total of $100 million, you can spend something like $900,000 on rework," says Wayne Crew, CII director. "The questions become: Can you afford that and how much effort do you put into saving $900,000?"
The Cost of Rework
Rework costs—including labor, materials, equipment and subcontractors—can run from 2% to 20% of a project's total contract amount. That equates to an estimated total of $15 billion a year, according to CII. Breaking that down further, the institute found the direct cost of rework averaged 2.4% of total contract value for standard industrial construction projects and 12.4% for civil and heavy industrial projects.
Some construction industry executives and consultants call the CII's annual dollar estimates low. "The $15-billion figure is a drop in the bucket," says McLin.
"Those costs are being passed on to someone," adds Gene Hodge, Denver-based director of project development at Mortenson Construction, about the price of rework. "Eventually, our customers are paying for it."
Rework doesn't necessarily affect availability or cost of insurance and bonding for contractors, according to construction industry insiders, but it can have an indirect impact. "Rework has no direct effect on insurance and bonding, though anything that affects a company's profitability can affect bonding," says Hodge. "Planning cuts down on the reportable incident rate, and that does affect insurance."
Another significant indirect aspect of rework is its impact on a contractor's reputation and, therefore, its ability to attract and keep clients. Companies that used to participate in invitation-only bids, for example, are often no longer invited to bid.
Not only can a contractor with a bad rework track record lose the opportunity to do future business with an existing customer, it can also lose the chance to win other clients because its executives and senior project managers are so busy with rework that they're not available to pursue new construction work, says Rodd Merchant, senior vice president with Kansas City-based JE Dunn Construction Co.
"There is, of course, a huge cost to its impact on reputation, which can also prevent companies from getting new projects," Merchant adds.
On the other hand, with low-bid jobs, a company known for doing a lot of rework may still get the project—if it's the lowest bidder.
Causes of Rework
Common causes of rework include faulty design, inadequate planning, inefficient processes, poor materials, faulty fabrication and too much work done hastily at the end of a project. The combination of more complex construction projects in recent years and fewer available skilled workers, especially where struggling subcontractors are concerned, has been a recipe for disaster—and rework—contractors say. Economic pressures contribute to rework as well.
"Staffs got cut to bare bones during the recession," says McLin. "People are busy again, but they're afraid to add staff, so they're stretched too thin. Profit margins are terrible, and companies were skating on thin ice to start with." Construction projects are on average being completed with a 3% to 4% pretax profit margin, according to Navigant.
The data show that rework often has more than one cause. A recent CII study called "A Guide to Construction Rework Reduction" reveals that the biggest contributor to rework, at 25.4%, is scheduling, followed by issues related to materials and equipment (19%), design and engineering (14.6%) and instruction/monitoring (14.5%). Cutting costs too much can also drive rework. To save money, for example, some architects and engineers use old designs or templates for new projects, and those designs may have problems that were fixed on a previous job but remain in the original design and are passed along to a new one.
Rework Prevention
While the construction industry has a history of turning a blind eye to how much rework occurs and how much it costs, more contractors realize the best way to cut that cost is to develop strategies to prevent it. Some contractors track rework costs, but nearly all of them keep those figures confidential.
"People are sensitive to tracking the cost of rework," says Mortenson's Hodge. "We encourage people to report it, and [we] don't look negatively on it."
Preventing rework generally comes down to focusing on quality, worker safety and common sense, according to CII findings. "It's just people," says Crew. "Rework has to do with common-sense stuff slipping through the cracks."
Contractors can rely more on new technologies, including BIM, to find and fix problems virtually throughout a project's life, so they don't have to be handled on-site. As such, BIM use has skyrocketed in recent years—from 17% of architects, engineers, contractors and owners employing it in 2007 to 71% in 2012—according to McGraw-Hill Construction research released in October (see related story in this issue). Some 74% of contractors now use BIM.
Construction is starting to look more like manufacturing. Mortenson is applying computer-automated virtual environment (CAVE) technology to the 225,000-sq-ft, $100-million ice hockey arena it is building for Pennsylvania State University in University Park, Pa. For the new Pegula Ice Arena, scheduled to finish in September, Mortenson built a room with a 1:1 aspect ratio and rear-projection screens, where rink staff and others can walk virtually around the space.
Contractors also have created low-tech solutions to rework. Some projects have turned to freezing a design before construction starts and creating a single point of authority—a "project czar"—to be the owner's project manager, which cuts down on rework due to indecisive owners. For example, the University of Arizona in Tucson, according to Navigant, used a project czar for its new student activities center. While the czar represented all of the project's 25 stakeholders, he was the only one authorizing change orders.
"The czar was a retired Air Force colonel, someone who was used to following procedures," says Zack. "He knew policies and procedures and why they existed."
