GLOBAL CONSTRUCTION

CONSTRUCTION IN LATIN AMERICA: TACKLING THE EVER-INCREASING COMPLEXITY OF PROJECTS FROM A TO ZBy Francisco Matta, Managing Consultant, Joseph Vergara, Associate Director, and Julio Villa, Managing Consultant

INTRODUCTION

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.1 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.2 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.

THE OWNER

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.

1. Francisco Triviño, “A New Century of Latin American Progress,” XL Group Press Center, July 14, 2014. (http://xlcatlin.com/fast-fast-forward/articles/a-new-century-of-latin-american-progress)

2. Ibid

2

PROJECT SCOPING

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.

MASTER SCHEDULING

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

and 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.

STRICT ENFORCEMENT

It is common to experience a variation-prone attitude from

contractors in the Latin America 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 RFIs, 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, hence 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 payments whenever

allowable under the contract can discourage these tendencies

and promote timely resolution of issues to the benefit of the

project.

CHANGE MANAGEMENT

Managing change is part of every project. Changes should be

dealt with expeditiously, to prevent them 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

3

3. “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.

4. Ibid, 45.

5. bid, 46.

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.

THE DESIGNER

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.

PRECONSTRUCTION

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, determine 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.3 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.4 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).5

4

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.6 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 excessive 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 unimportant. 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.

6. 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.

5

THE BUILDER

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 relation.

Onsite, 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 the 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 fulfilment 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.

COMMUNICATION

“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.

CHANGE MANAGEMENT

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.

SCHEDULING CONTROL

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 that, in our experience, more growth is needed from

the local players.

DOCUMENT CONTROL

Maintaining records of all engineering drawings, specifications,

information, directives, verbal instructions, and documents

received from other project participants is critical to achieve

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.

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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 make 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.

CONCLUSION

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.

CONTACTS

FRANCISCO MATTAManaging Consultant +1.602.528.8077francisco.matta@navigant.com

JOSEPH VERGARAAssociate Director +1.305.341.7860joseph.vergara@navigant.com

JULIO VILLAManaging Consultant +1.602.528.8098julio.villa@navigant.com

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