Expert Commentary

Commercial Wood Frame Construction Risks

Wood frame construction has long been a primary means of core/shell construction (e.g., senior living, midrise multifamily, or hospitality) in many market sectors. With the recent convergence of economic and demographic trends known as "new urbanism," we have seen an increased need for more projects in these predominately wood frame markets. Scale is also increasing. And, with an already limited resource of subcontractors, this boom has created elevated risks with this type of work.


Construction Quality
February 2017

There is a limited number of subcontractors available in the marketplace big enough, experienced enough, and with the financial strength/stability to handle complex wood frame construction projects. Therefore, not surprisingly, the wood frame market continues to be an area where we have seen poor performance and quality, schedule delays, and ultimately monetary loss.

Quality Matters

The subcontractors in the market for wood frame work are generally smaller. That's not a problem, in and of itself. However, smaller subs may not hire high-caliber craftsmen, so may produce lesser-quality work. They may not be as well capitalized or as sophisticated as larger commercial subs with regard to safety, technology, and so forth.

Given the recent upturn in economic conditions in some markets, many of these smaller subs are overbooked and understaffed (with trained/experienced labor force). They may also subcontract portions of their work or show up at your project outright understaffed. Neither is good and can either lead to potential production or quality-related issues.

Brokered or subcontracted field labor is often inconsistent and may have a different crew every week due to the volatile labor market. As a result, you will need to pay extremely close attention to quality assurance/quality control (QA/QC)—and it is common that the first-tier sub DOES NOT provide the necessary level of coordination and oversight. It is important, therefore, that you consider this in your sub selection (and budgeting) decisions. The real cost of managing a sub with brokered labor may easily overshadow any savings from the initial buyout. It may be in the project's best interest to move to a higher bidder for a sub who has available in-house—and therefore consistent and more loyal—labor or address the matter specifically through a focused general contractor (GC) and sub staffing/management plan. We have not seen performance issues like these in markets with union framers.

First-time subs present similar risks to those of smaller subs, and we've noticed a trend in defaults with some new players. Previous work history in large, busy markets is critical. Therefore, it's imperative that strong prequalification practices are implemented, including reference checks and visiting current projects, shops, etc. Risk mitigation planning is important when considering use of any first-time subs.

Another even more troubling issue we've seen with certain residential/wood frame subcontractors is their general inability or unwillingness to adhere to commercial construction's higher safety standards. These safety standards (and the subs' ability and willingness to meet them) need to be clear from the start and priced into the subcontract. We've even heard it reported that subs have walked away from jobs over this issue. If that happens to you, consider yourself fortunate.

Management teams are as much a concern as the trade labor in the field. The same "short labor force" exists on the management and supervisory side as growth is causing GCs and subs to ramp up. Know your team, know your sub's team, and take action to monitor performance. Make changes when necessary.

All the general concerns being what they are, we are seeing a lot more work and bigger sizes—much of it stretching the experience and performance capabilities of subcontractors on a project basis. Couple this with increasing backlogs/work in progress, potentially shorthanded labor force, less sophistication, less capitalization, etc., and there is general cause for concern.

Timing Is Everything

There is always a challenging balance for GCs with regard to project schedule commitments. Owners want their projects delivered as quickly as possible and, as we've explored here, the current subcontractor market presents challenges with qualified labor to achieve schedule goals. It is imperative that GCs realistically review schedule commitments and compare with anticipated availability of qualified labor. There are many markets where projects simply cannot be built as quickly as they once could. If the GC backs itself and its subcontractors into a corner with unrealistic schedule requirements, the tone is set for a difficult project from the start. Similarly, a realistic schedule needs to be considered when negotiating liquidated damages and/or consequential damages in your owner contracts. Damages can accumulate quickly when actual, quantifiable loss of income (rent) is on the line.

It's All in the Details

Wood frame projects usually have lower-quality design documents than commercial projects. This can leave detailing and coordinating special conditions to be managed by the subcontractor at the field level. If not addressed appropriately, this could lead to defects and potential litigation-related issues. Before operations start, it is imperative the design documents be reviewed and coordinated to ensure that they properly consider finished requirements—such as Americans with Disabilities Act (ADA) requirements, mechanical/electrical/plumbing interstitial space, and other dimensional constraints. Coordination is the responsibility of the GC and cannot be handed off to subs or other parties.

One way to help control this is for the GC to appoint a dedicated framing supervisor (or third-party inspection/QA specialist) to inspect and address issues and provide proof-positive documentation and task oversight. Remember to prequalify any consultant to understand their capabilities—this is an important role, and confidence in their abilities and history is needed.

Why the focus on framing? If not framed correctly, then all the finishes that go on the frame won't work properly, whether they be countertops, cabinets, flooring, ceiling, drywall, exterior, ADA requirements, and so on. You have to get this right from coordination to field installation. Taking a hands-off approach could seriously compromise your project.

When Things Escalate

Wood frame has seen a roller coaster of material and labor escalation across a variety of markets. Combined with lower capitalization, this makes wood frame subs a higher default risk. XL Catlin has experienced a claim where a rush to avoid escalation resulted in poor subcontract terms and payment practices. The client ultimately paid a more significant "escalation" price. Lesson learned: strong contract language around escalation and the management thereof are key.

Adhering to sound prequalification practices, bonding subs and joint-checking lumber suppliers can mitigate some of the risk associated with the actual framing contract.

Keep It Dry

Wood frame requires special materials handling and logistical conditions to avoid moisture and mold-related issues. Having an established moisture and mold mitigation plan is an essential starting point. Executing this plan and proper managing of day-to-day field logistics are the key to ensuring you don't wind up with costly rework due to moisture or mold down the line.

Aversion to Conversion

Condo conversion risk, though not typical with wood frame projects, presents a higher likelihood of having QA/QC or construction defect issues due to lower building standards, if they were to flip. Protect your business from this exposure by doing the following.

  • Implementing and documenting quality-management plans throughout construction and project closeout. This includes finalized design documents, as-builts, inspection and test results, and systematic photo documentation.
  • Managing warranties. Have a plan for tracking project warranties and addressing identified issues in a timely manner, including project walk-through prior to expiration of the warranty period.
  • Include "antiflip" contractual language with the owner. It can insulate your business from risks associated with downstream sale/conversion to condo.

You Have to Manage

For GCs who complete wood frame construction at high frequency, Project Management Policies and Procedures (PMPP)  and staff are usually more robust and more experienced to address the inherent risks of wood frame construction. GCs who are not necessarily focused in the market or simply dabble in wood frame construction sometimes lack the necessary controls or understanding to address the risks, which can result in more frequent and/or more costly losses. The experience and management practices of the GC are important. GCs that do not frequent the wood frame market are perhaps more susceptible to the inexperienced superintendent or project manager who thinks the work can be managed like more standard commercial projects. And, as we've already seen, such thinking can result in loss, delays, litigation, or any combination of the three.

Wood frame subs need to be managed differently. This kind of work can have lower-quality drawings, building information modeling (BIM), and other technology efficiencies that may not be on par with commercial projects. Therefore, you have to provide necessary oversight, QA/QC, and management on a high-frequency basis. There is a need to recognize what the broker or piecework sub is—and ensure there are management practices to ensure quality, production, tracking of issues, and simple coordination of dimensions have taken place. This is the GC's responsibility. Understand the risk, and apply necessary management practices.

Conclusion

There are unique risks associated with the use of wood frame subcontractors in commercial construction. These risks emphasize the importance of a mindful business approach, focused subcontractor prequalification practices, experienced project management, and focused quality management whenever wood frame subs are used on a commercial project.


Acknowledgment

The author would like to thank and acknowledge the contributions to this commentary by author Bill Lane, an associate with XL Catlin Construction Risk Engineering for Subcontractor Default Insurance.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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