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Articles

Limiting Risks of Scope Gaps and Subcontract Exclusions in Completion Projects 

January 10, 2023

Completion projects are the most complex projects in the construction industry for many reasons. The owner requires the surety/bonding company to finish the project under the bond requirements. The bonding company requires a completion contractor who can take the position of the defaulted general contractor who can assist in determining the scope of work remaining to complete the bonded obligations, typically including reviewing: 

  • Project construction status 
  • Owner payment applications 
  • Schedule delays due to former contractor’s default 
  • Construction quality and any latent defects 
  • Design issues and omissions 
  • Scope gaps and subcontract exclusions 

Of these, scope gaps and subcontract exclusions are often the most critical factors to consider, requiring major scrutiny before a cost-to-complete estimate can be provided. 

In this post, we take a closer look at scope gaps and subcontract exclusions as they relate to the success, or potentially failure of completion projects.  

Avoiding Scope gap “Gotchas” in the Buy Out Process  

Scope gaps are construction activities intended for completion by the original general contractor but were not under contract at the time of default. When that happens, these scopes must be bought out or performed by a completion contractor at new pricing, which tends to be inflated. The scopes might also require acceleration by the completion contractor due to impact on critical path and to avoid schedule delays. For these reasons, scope gaps take a major role in the construction re-start process.  

An additional layer of complexity arises in cases where a particular scope is contracted between two subcontractors during the buy-out process. For example, a project includes civil work that requires two or more contractors to complete the scope of work. During the buy-out process, if final grading of earthwork is not included or bought out between an earthwork contractor and concrete/asphalt paving contractor, a scope gap results. To resolve the issue, the completion contractor may need to issue a change order to one of the two subcontractors at the last minute or find an entirely new subcontractor to perform the work, so the work can be finished without any delays. Identifying and addressing what may be seen as a minor detail matters a great deal if the completion contractor has any chance of meeting its intended schedule.  

Too Costly to Ignore:  

The uncertainty in scope of work requirements, discrepancies in construction documents, and improper allocation of scopes to a subcontractor during the bidding phase of a project can result in a subcontractor to exclude few scopes in his bid, which will require additional funds to complete at a later date. Often overlooked, these factors can quickly drive up the costs that a surety must assume in bringing in a new subcontractor or issuing a contract change order so the missed scope can be addressed, and the project can be completed on schedule to avoid any potential delay damages.  

Scope gaps and subcontract exclusions can also affect the completion schedule if the material and labor needed to complete the missed scope are not readily available. The completion contractor/bonding company needs to come up with a plan on how to tackle the problem of material and labor unavailability, which may cost them more funds than allocated in the budget for any scope of work when demand for material and labor exceeds supply. For this reason, completion contractor should perform a complete analysis of subcontract scopes vs. the prime contract requirements before providing a cost-to-complete estimate and entering into a completion agreement with the surety. 

Lock Down the Details When it Comes to Subcontractors and Exclusions 

Subcontractors, in general, provide a list of exclusions during the bidding process to maintain a low bid and be competitive against other subcontractors. When a subcontractor provides a bid, the contractor should carefully review the scopes included in the price as well as the list of generic exclusions to level the bids. These generic exclusions generally would cost the general contractor/completion contractors at the later stages of the project when premium rates are applied due to specific timely requirements.  

Many general contractors include the subcontractor’s bid proposal as an exhibit to the subcontract agreement to simplify the process, and sometimes subcontractors will require the inclusion of proposal in the agreement. This is a very poor practice which practically begs for scope gaps. A better practice is for the terms to be clearly defined and affirmed in final agreement, preferably by listing complete specification sections for a particular subcontractor to be responsible for. Simply attaching subcontract proposals as exhibits is likely to create issues for a general contractor or a completion contractor in the later stages of the project. A case in point: a civil work subcontractor includes material estimate quantities in their proposal. These estimated quantities might not be in line with the project requirements, but due to the inclusions of the bid proposal in the subcontract agreement, the subcontractor will have a strong case to prove the estimate didn’t include a particular scope. Due to this, the completion contractor may need to pay the subcontractors for the remaining/missed work that needs to be performed due to wrong/missed estimate in the bid proposal. In this example, the subcontract agreement should have been bound to 

  • Prime contract  
  • Construction documents 
  • Specification section of work to be performed by the subcontractor.  

In all cases, the general contractor/completion contractor should review the subcontractor proposals thoroughly and not include the bid proposal as an exhibit to the subcontract agreement, but instead can include baseline work to be performed by the subcontractor and bound them to the specific section of construction documents and prime contract requirements to avoid unexpected costs, delays, and risks.  

In the end, scope gaps and subcontract agreement exclusions play a significant role in determining the terms, conditions, and costs of project completion. For these reasons, detailed reviews of scopes are needed to mitigate issues and ensure the projects can be completed within the allowed schedule duration.  

For more information on scope gaps, subcontract exclusions and project completion best practices, contact Srinath Annu, call 888.298.5162 or submit an inquiry.

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