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Electronic Data Exchange—Cost-Saving or Costly?

Subcontractors that use plans sent via email, or downloaded from a project Website, may be risking responsibility for extra costs if the plans prove to be incomplete. They also may be transmitting confidential information embedded in the electronic records that is not intended for public viewing.

While the construction industry has been criticized for failing to take advantage of innovations to improve productivity, construction contract provisions are sometimes written to the disadvantage of contractors and subcontractors that employ productivity-enhancing information management technologies. Considering construction contract terms are typically written by buyers or project owners, which stand to benefit the most from productivity gains that reduce construction costs, contractors and subcontractors should insist on contract terms that recognize, implement and fairly apportion associated risks.

Two major studies of productivity in the construction industry have concluded that current management practices inflate the cost of construction that is paid by project owners. Although these studies were published several years ago, the basic findings still hold true. U.S. Construction Labor Productivity Trends, 1970-1998, published by the Center for Construction Industry Studies at the University of Texas at Austin, concluded that although construction labor “productivity has increased in the 1980s and 1990s,” the data analyzed for the study indicated that “management practices were not a leading contributor to construction  productivity changes over time.”

A 2004 study, Cost Analysis of Inadequate Interoperability in the U.S. Capital Facilities Industry by the National Institute of Standards and Technology, which is part of the U.S. Department of Commerce, attempted to quantify the cost of lack of information “interoperability” in the construction industry. The study quantified costs associated with lack of interoperability “by comparing current business activities and costs with a hypothetical counter-factual scenario in which electronic data exchange, management, and access are fluid and seamless.”

This implies that information need only be entered into electronic systems once, and it is then available to all stakeholders instantaneously through information technology networks on an as-needed basis. Much of the cost to project owners that is associated with lack of interoperability, according to the study, relates to post-completion facilities management.

However, considerable costs are also associated with design and construction phases, increasing costs for architects, general contractors and subcontractors:

  •  Quantified interoperability costs for architects and engineers are estimated to be $1.2 billion [for 2002], with more than 80 percent of these costs incurred during the design life-cycle phase. In addition, respondents indicated that seamless electronic information exchange and management could compress their schedules by as much as 10 percent.
  • Based on the data available, general contractors incurred an estimated $1.8 billion in inadequate interoperability costs in 2002. Just more than half of these costs, $1.1 billion, were inefficient business process management costs.
  • Inadequate interoperability costs for specialty fabricators and suppliers are estimated to be $2.2 billion for 2002, $400 million more than general contractors.
  • Eighty percent of costs are incurred during the construction phase, primarily because of collaboration with general contractors to move the facility toward completion. The balance of costs are incurred during the design phase as specialty fabricators and suppliers coordinate with other stakeholder groups on design and engineering issues related to their technical area of expertise, such as structural steel associated with elevator systems.

It is fair to conclude that many billions of dollars that project owners spend each year on construction services might be saved if information management technologies were better utilized. Project owners that insist on contract terms that discourage use of advanced information technologies are working counter to their own interests. Subcontractors also need to be aware of the costs and risk associated with the use of electronic records, especially as it relates to potential litigation.

The Fulbright & Jaworski 9th Annual Litigation Trends Survey reported that engineering and construction firms led in litigation, with 80 percent of them filing at least one suit last year. That group also faced suits at an even greater rate than it initiated them with almost half the survey respondents reporting they faced at least one high-dollar suit during the last year. Not surprisingly, 57 percent of engineering and construction respondents reported an annual litigation spend of $5 million or more–the highest for all respondents to Fulbright’s survey.

A significant portion of litigation costs arises from the preservation, processing, reviewing and production of electronic discovery. It is important to prepare for the possibility of electronic discovery as part of the contract negotiation process. This includes identifying the custodian of electronic records and agreeing to a document retention policy, including the retention or elimination of metadata generated by electronic documents.

Common formats of discoverable data include:

  • Email and attachments (See: Some things to consider when selecting an email provider)
  • Text files (such as Word, Excel, PowerPoint, and Access)
    • CAD, BIM and engineering files
    • Contracts, including those created using AIA and ConsensusDocs software
    • Construction administration documents
    • Accounting systems, such as Quickbooks
    • Proprietary applications.

Less obvious sources of electronic information include:

  • Internet cache files, cookies, favorites and Internet browsing trails
  • Instant and text messages
  • Voicemail stored in VOIP (Voice Over Internet Protocol) and email systems
    • Digital photos and video images
    • Thumb drives
    • Data stored on cell phones, Blackberries, and PDAs (any handheld device)

There are routine measures subcontractors can take to significantly reduce the costs and risks associated with electronic information. For example, subcontractors usually will not want to provide recipients with documents containing an internal history of document changes or metadata. Metadata is embedded information within each electronic record that reveals how the document was created and when, including changes and deletions the user made while preparing the final version of the document. When a file is deleted, it is not destroyed; “delete” simply means “ignore” in computer language. One strategy is to implement an outgoing email policy—the sender must “scrub” any electronically transmitted file.

Once a lawsuit is “reasonably anticipated,” however, the parties to a construction project have an obligation to preserve potentially relevant evidence or face the prospect of court sanctions. The subcontractor should issue a “litigation hold” that suspends all routine destruction of physical or electronic records and begins the process of preserving all materially relevant data related to the claims. This obligation may also arise if a subpoena is issued to the subcontractor by another party or as a result of a governmental agency’s investigation. The duty to preserve electronic information may also include the preservation of metadata. In 2006, the Federal Rules of Civil Procedure (FRCP) were implemented, relating to electronically stored information. The FRCP requires electronically stored information to be turned over as part of any lawsuit in federal court. Many states have adopted similar rules.

Construction subcontractors should avoid accepting an unfair share of risk related to their use of electronically provided information. Buyers of construction services would benefit the most from productivity gains resulting from increased use of modern information technology in the construction industry. Contractors and subcontractors should therefore insist on contract terms that reflect actual uses of information technology and that fairly apportion the associated risks. In adopting the information technology, contractors should also be aware and prepare in advance for proper management and retention of electronic information, especially as it is passed between the parties to the construction project.