December 5, 2019
By Ankura Construction Forum editorial team
Latin America has experienced a marked increase in construction projects, from residential and commercial developments to industrial and infrastructure facilities. Innovation in these types of projects has also been increasing. Recent projects include the construction of the New Mexico City International Airport, the planned development in Peru of San Lorenzo Island into a satellite city, and the creation of an inter-oceanic corridor to facilitate trade between Argentina and Chile. This increase in volume has resulted in a renewed interest from both local and foreign developers, which has necessitated a more structured, complex, and formal approach to the development of construction projects. Along with this increase in volume, technology is driving the industry toward faster development, albeit with greater risk. This article highlights common issues faced by local and regional owners, designers, and builders in the Latin America construction market that result from the higher degree of complexity as the region adjusts to this new paradigm.
Owners control how risks are distributed, avoided, or minimized throughout the life of a project — from inception through completion. In theory, they are masters of their own destiny, as they can set and guide a project to a successful completion by managing risks during its life, or they can fail to manage the project properly, assuring a long and litigious path to an uncertain conclusion.
Despite the owner’s unique ability and advantageous position, many disputes and controversies can be traced back to poor risk management practices, or lack of risk management altogether, by a project’s owner. These issues are exacerbated where multiple contractors and subcontractors with interdependent project deliverables work on a project site. When project stakeholders are multicultural and bring different management and interaction styles to the table, the chance of problems intensifies. Some risk management suggestions that may be employed by owners to avoid, minimize, or mitigate risks throughout the life of a project are discussed below.
Owners often employ a specialty-driven approach to scoping projects — where multiple prime contracts are issued based on the contractors’ specialties. A common reason for this approach, as repeatedly explained by owners, is to avoid paying additional markups by general contractors who would, in turn, subcontract work beyond their expertise. However, this approach can create risks that far offset its planned benefits. If not properly managed, the interaction and transition among multiple main contractors can result in a turbulent and costly project.
To avoid these problems, owners should follow a more holistic approach when scoping a project. Consider, among other factors: utilization of a project site, turnaround milestones among contractors, and procurement of major equipment and materials. Above all, owners should gauge the risks of potential scoping scenarios through proper scheduling, because project scoping issues often first manifest themselves as scheduling issues.
During a project’s initial stages, it is common for owners to rely on macro-level schedules to guide key decisions, such as how to partition scope and develop key contract documents. Yet, as the project progresses, and work packages are sequentially (but not necessarily logically) awarded, owners often abandon their initial scheduling and rely on uncoordinated project schedules from multiple contractors with different goals, positions, and agendas. Thus, a coordinated project with many moving pieces becomes a patchwork of poorly coordinated schedules and sequences.
To mitigate this risk, owners should prepare and maintain master schedules that allow them to properly monitor the overall project scheduling. This is not to say that owners should try to impose schedules on contractors, which would impede their means and methods, but to create, maintain, and monitor schedules that hold all the pieces together. As a result, the master schedule can serve to measure the status of the overall project, as well as each individual part separately. Owners should prepare, use, and enforce thorough specifications for scheduling, claims, and change matters, and require the prime contractor’s schedules to be maintained and coordinated with the owners’ master schedule.
It is common to experience a variation-prone attitude from contractors in the Latin American market. This approach is sometimes slow to take shape, but becomes pervasive under excessive informality by owners and their representatives, and lack of enforcement of contract provisions. It is common to see contractors promoting camaraderie with owners and their representatives in order to win concessions that push the limits of the contract. These concessions seep in gradually through repeated informal communications, which eventually set the stage for claims, despite the failure to follow the contract provisions. Common examples include: abuse of e-mail communications, improper use of requests for information (RFI), casual abandonment of change mechanisms for cost and delay, and other extra-contractual concessions between the parties.
Forensic claims analysts are often asked to examine projects where no defined baseline schedule or updates were developed, no time-impact analyses were produced (assuming they were required by contract), and where parties carried over dozens of lingering, schedule-affecting issues. Such poor management practices by both owners and contractors make it extremely difficult and time consuming to later analyze and attribute responsibility for any impacts to the project schedule, its critical path, or any project milestones among project participants.
Similarly, it is common to see owners exposed to higher risks because they gave up their greatest leverage in projects: the ability to withhold payment for lack of contract compliance. While it is not in their best interests to squeeze contractors on payments during a project’s execution, owners must not relinquish their leverage by approving and paying contractors beyond the contractual requirements. Owners seldom enforce delay-triggered provisions, such as their right to request that contractors prepare, submit, and comply with recovery schedules to receive payments. Likewise, owners tend not to offset amounts due against accrued penalties, thereby relegating recovery of such penalties to the claims resolution process. Where contractors are prone to informal dealings and protracted claims resolution, the owner’s withholding of payments whenever allowable under the contract can discourage these tendencies and promote timely resolution of issues to the benefit of the project.
Managing change is part of every project. Changes should be dealt with expeditiously, to prevent them from affecting other areas of the project. Proper change management starts at creating and enforcing, through contract specifications, issues such as determination of costs (direct, indirect, and markups) and schedule impacts. Too often, analysts are faced with projects where the sole focus of change management is on direct cost issues, i.e., ensuring that the contractor gets paid for added work. In this situation, the change orders only include the approval of budgets for additional work, but omit consideration of the impact on other work or schedules. Aligned with a strict enforcement approach, owners should condition approval of additional work on contractors fully complying with change management specifications, including addressing all direct and indirect consequences of additional work and all schedule impacts. In this regard, accord and satisfaction provisions play a key role in change order management, as they permit having a clean slate associated with every approved change order and prevent contractors from reopening their case after the fact by seeking time extensions and impact damages on agreed-upon changes.
A designer’s responsibilities include the preparation of the construction documents, including a project manual, and a set of technical specifications and construction drawings that are compliant with all applicable codes, laws, and regulations. Other common services for designers include review and approval of shop drawings and submissions, as well as active participation in the permit application process. Additionally, construction administration services, depending on the design contract, are often required. The designer’s level of participation and knowledge of the local environment, during all phases of construction, can minimize risks and help the project succeed.
The preconstruction phase is the most active and important for the designer. It is during this phase that the design evolves from its initial conception to a detailed set of construction drawings and specifications, and project sequencing is determined. Code requirements and other legal requisites are also implemented at this phase, since they affect the final design of a project. Permit requirements affect the final design, as government requirements are incorporated into the owner’s initial program. This final design, along with the owner’s financial and practical considerations, determines the phasing or sequencing of a project and, at the same time, serves as the official approved permit set to guide the construction of the project. Therefore, understanding the local permit environment and anticipating potential obstacles is paramount for the designer to assure an efficient and cost-effective design outcome.
In Latin America, the permit process can be significantly slower than in Europe and the United States. According to the World Bank Group, there are, on average, about twice as many procedures required to obtain a building permit in Latin America when compared to the more expedited economies in the world. Some countries, like Uruguay and Argentina, have three times as many procedures. Similarly, it takes an average of 181 days to obtain permits in this region, with some countries, like Venezuela and Brazil, requiring over 425 days. In the European Union, the price of obtaining construction permits averages around 2 percent of a project’s cost. In countries like Puerto Rico, Honduras, Colombia, and Guatemala, the permit price can be more than three times that amount, while in Mexico it can be almost five times higher (9.8 percent).
Understanding and implementing the appropriate building and land-use code requirements is essential to avoid untimely and costly changes later. While many codes in Latin American countries follow widely known codes such as the UBC or the IBC, which in turn adopt international standards like AISC and ACI, other countries have implemented local codes, like CIRSOC in Argentina. Understanding the interrelationship between the applicable codes and regulations for each country is essential. Faulty code applications by any team member can turn into project delays and cost overruns due to the required time to find and correct the offending elements of the design.
It is essential to know the local permitting environment (contacts, time, procedures, costs, etc.) or hire a local expeditor who does. Blindly working with unfamiliar permitting procedures will almost certainly result in wasted time and efforts, especially considering the bureaucratic obstacles in the permit processes of Latin American countries. Furthermore, becoming knowledgeable about applicable codes and understanding how to integrate them to avoid implementation of unnecessary requisites or, worse, insufficient application of requirements and safeguards, is key. Not only do codes vary by country, they can vary by zones within each country. Experience shows that some local and regional designers fail to grasp these concepts, especially considering the increasing formalization of processes.
CONSTRUCTION AND CLOSEOUT
During the construction and closeout phases of the project, the role of the designer becomes less intense, although by no means less important. Depending on the obligations assumed by the designer for these two phases, supervisory, managerial, and inspection duties may be required. Typical duties for the designer during the construction phase of a project include: review of submissions, shop drawings, and other material; review of payment applications; periodic visits to the project to observe and document the progress, and often keep the owner informed; quick and resolute investigation of differing existing conditions and their corresponding revisions to the design; coordination of any other revisions required that may affect the proposed design; and the response to RFIs and issuance of additional sketches and other clarifications during the execution of the project. Most of these duties are time-sensitive and require the designer to evaluate and respond quickly. Finally, during the closeout phase the designer reviews punch lists, helps in formalizing change orders, and, if required by contract, issues the final payment application, among other duties.
Unfortunately, in Latin America these requirements have often been treated by designers as secondary and less important than their design and preconstruction duties. This practice exacerbates problems, as the necessary decision-making skills and professionalism are reduced. It is important to clearly understand the contractual duties of a designer, including the required response time to review items (submissions, shop drawings, RFIs, etc.), since failure to comply with those requirements could lead to problems, in light of the more integrated, stricter, and highly formalized contract configurations becoming commonplace in Latin America.
The increasing complexity of construction projects in Latin America, coupled with the generally weak historical contract management in the region, poses increased risks for contractors. Local contractors must deal with subcontractor coordination, scheduling control, cost control, labor and union relations, procurement and expediting of materials and equipment, and many other functions related to the project — all the normal risks associated with construction contracting, plus the increased risks due to changes in the traditional owner/contractor relationship.
On site, construction phase management may include the coordination of several subcontractors, implementation of phased or fast-track construction, monitoring progress of work, adjustment of the work due to changed conditions or unanticipated interferences, determination of materials, equipment and workmanship conformance with the contract documents, management of inspection and testing where required, change order management, review of payments, and other issues. These considerations become especially challenging considering regional and cultural aspects of the projects in Latin America.
The opening of international investment in infrastructure in some Latin American nations, and globalization in general, have resulted in increased participation by international players in the local construction market. In response to contract requirements, these new players have brought more complex and formal construction management practices to a local environment that may not have adapted correspondingly. Some examples of this increased formality include, but may not be limited to:
- Robust quality assurance systems.
- Enhanced safety plans enforced on job sites.
- Maintaining auditable project files.
- Extensive prequalification procedures for subcontractors and vendors.
- Background checks of construction company principals.
- Anti-corruption and compliance policies and procedures.
- Evidence of compliance with environmental rules and regulations.
- Step-by-step dispute resolution procedures at international forums.
- Detailed reporting requirements on a daily/weekly/monthly basis.
Based on the previous description of the current construction environment and the above-mentioned considerations, the following suggestions could contribute to the effective execution of a project while mitigating certain risks for the contractor and promoting effective project coordination among contractors.
‘Speaking the same language’ is an important issue for the contractor, both literally and figuratively. While it is obvious that foreign parties must be able to communicate with the local parties and subcontractors in their spoken language, it is also important to speak the same ‘contractual language’. Effective, clear, and direct communication is paramount for the successful coordination of a project. It is essential in delineating and clarifying the scope of work, the roles and responsibilities of each party, and the resolution of disputes or disagreements on a wide variety of issues related to the project. A well-established strategy to comply with the agreed-upon contract language, as well as in-place procedures for management and storage of project correspondence and electronic communications, is imperative.
Changes within a construction project are one of the most frequent causes of cost escalation and schedule overruns. When (not if) changes arise, the contractor must be aware of all the contractual obligations and their consequences. If the scope or budget of the project is affected due to changes, the contractor must know the causes and effects, determine who is responsible, and must assure those alterations in the scope or budget are properly documented and transmitted to the other project stakeholders.
Identifying strategic activities and potential delays, as well as ensuring the timeliness of all work carried out, is paramount, but documenting those activities that affect critical tasks in revised versions of the project´s construction schedule is key to leaving a sound contemporaneous project scheduling record. This is the main area in which, based on our experience, more growth is needed from the local players.
Maintaining records of all engineering drawings, specifications, information, directives, verbal instructions, and documents received from other project participants is critical to achieving effective coordination both within and among the various project stakeholders. The records generated, from the conception through the final acceptance of the proposed change, are very valuable in any type of analysis during the project’s execution, but they are often more critical during post-completion evaluations. In complex projects, cloud-based document management platforms have proven to be valuable tools. They allow everyone involved in the project access to the latest revisions of documents, regardless of their location.
QUALITY ASSURANCE/QUALITY CONTROL
QA/QC teams in construction projects must be vigilant about performing their duties: analyzing the project’s performance, detecting deviations from the issued documents and their impacts, managing the quality of all work carried out, documenting nonconforming work, implementing corrective actions, and getting written approval of any repaired/reworked jobs. Some government clients in Latin America include among their contract requirements the establishment of a fully documented quality control system, often linking contractual responsibilities to results of quality control audits regularly performed throughout the execution of the project.
INTERINSTITUTIONAL RELATIONSHIP MANAGEMENT
Relationships are crucial in all business endeavors. The large number of different stakeholders makes this especially true in the construction industry. In Latin American countries, maintaining good relationships with government entities is crucial. However, there is always a risk of politically influenced hurdles. Officials may base decisions on external considerations like unnecessary media exposure, preference to local or familiar companies both for job creation objectives as well as campaigning purposes. This is yet another reason to become familiar with the local regulating and contracting entities, or hire a representative who knows the ins and outs of the local political and business environment.
Issues of bribery and corruption are rampant in this region, and regional players need to understand that the influx of international players may require compliance with stricter anti-corruption and anti-bribery policies and procedures. Furthermore, knowledge of local companies would be an added advantage, as being able to confidently hire local entities will go a long way in facilitating a smooth project execution.
This article is based on our experience in the Latin American construction industry. As such, we have aimed to illustrate the most common hurdles encountered by local and regional parties commonly involved in construction projects. Owners, designers, and contractors looking to participate in this more formalized construction market will certainly benefit from anticipating potential obstacles that could arise during the project. Undoubtedly, the increased sophistication of the Latin American construction industry requires no less than the most attentive, efficient, and diligent execution of contracted obligations and standard of care duties.
The opinions and information provided herein are provided with the understanding that the opinions and information are general in nature, do not relate to any specific project or matter and do not necessarily reflect the official policy or position of Ankura. Because each project and matter is unique and professionals may differ in their opinions, the information presented herein should not be construed as being relevant or true for any individual project or matter. Ankura makes no representations or warranties, expressed or implied, and is not responsible for the reader’s use of, or reliance upon, this paper, nor any decisions made based on this paper.
 Francisco Triviño, “A New Century of Latin American Progress,” XL Group Press Center, July 14, 2014.
 “Doing Business 2017 – Latin America and Caribbean (LAC),” Internationall Bank for Reconstruction and Development/The World Bank, New York, 2017, 44. http://www.doingbusiness.org/reports/~/media/WBG/DoingBusiness/Documents/Profiles/Regional/DB2017/LAC.pdf.
 Ibid, 45.
 Ibid, 46.
 J. Chavez et al., “Building Codes and Relative Seismic Vulnerability in Latin American Countries,” 15th World Conference on Earthquake Engineering, Lisbon, 2012, 1 and 8. http://www.iitk.ac.in/nicee/wcee/article/WCEE2012_4534.pdf.