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Week of 9 Jan 2017: Lawyers and Capital Projects

Email Jim at jthompson@taii.com

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Having been in the industry for over forty years and having written my fair share of expert witness reports, I can tell you that major capital projects (over, say, USD 5 million) are more likely to end up in court than not. This does not have to be.

OK, Jim, you say this does not have to be, then why does it happen?

There are two or three conditions that cause construction court cases. They come up repeatedly.

At the top of the list are mistakes due to the fault of the board of directors. Boards of directors put pressure on projects, through the CEO, to come in at a certain dollar figure. They do this because (a) they have only so much money to spend or (b) they have a ridiculous ROI target (ridiculous for the circumstances at hand). Seldom do members of boards have the expertise to judge capital projects properly. Look at them: they have finance, manufacturing, or marketing expertise. Occasionally they have regulatory expertise. Almost never do they have construction expertise, unless they are on the board of a construction company. If you think about this, it all makes sense; why would a board of a manufacturing company have members that do not fit the business model of that company?

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What is the remedy? The board itself should hire an expert to assess the veracity of any estimate brought forward for a capital expenditure consideration. This should be an expert who has no other reason to work for the board than this. In other words, do not hire an engineering firm that might have been in the running for the entire project. (I have personally performed this service within the last six weeks for one company). It is a high-level review, but the right expert can do this quickly and economically, saving a lot of pain later on.

The next item on the list is fantasy land, usually promulgated by production. Production folks, like boards of directors, think most capital projects cost too much, take too long to install (too much downtime) and are overcomplicated by nerdy engineers.

The third item on the list is actually two items. The first is inexperienced engineers put in charge of projects too early in their careers (before they know better) and who thus succumb to the pressure from production and the board previously mentioned above. These poor engineers never have a chance. They are doomed to failure from the start because the project has been in fantasyland from the start. The second item is engineers with a bit more experience but who are spineless. These folks are miserable creatures, careening from project to project, counting the days until retirement.

The fourth item is one that can actually make up for the sins of the other items if properly employed. This item is insurance. You can buy policies for about everything imaginable that will go wrong on a project. Most organizations fail to do this for they think it is unnecessary or too expensive. Good insurance underwriters are worth their weight in gold, for they will actually examine your conditions in depth before they will write coverage. Listen to them, even if you don't buy their policies. These are the organizations who have spent the most time in court and seen all the unimaginable things (you think) that really go wrong.

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Join Jim Thompson on the 2nd Annual Papermakers Mission Trip to Guatemala, 22 - 29 July 17. Build houses, talk about the pulp and paper industry. For more information, email jthompson@taii.com with "Guatemala" in the subject line.

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Who, what, when, where, why and how are questions that are your friends in capital projects, just as they are in journalism. If the answers to any of these queries concerning your project produce fantasy answers (no matter the source of the fantasy: the board, production, suppliers, or others) you are in for a rough, life-changing event.

And, for balance, let me add that some engineers indeed are too conservative. However, I would prefer to see them under-promise and over-perform rather than the other way around. It is a way for all parties to survive intact.

As for the livelihood of my construction lawyer acquaintances? I wouldn't worry about that, enough of you will ignore these admonishments to keep them in play money for weekend jaunts to St. Barts. I know--I will have been dabbling in construction for 46 years as of March of this year.

Have you ever seen a bad project? Answer our one question quiz this week here.

For safety this week, bad projects lead to terrible construction experiences and many, many safety problems. Enough said.

Be safe and we will talk next week.

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Nip Impressions has been honored for Editorial Excellence by winning a 2016 Tabbie Award!

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