Understanding the Residential Construction Industry and The Incentives of the 6 Key Players Involved

  • Residential Construction Roles

Incentivizes, Part 1 ; The Six Key Players Involved.

“I’m contemplating a project and trying to understand the residential construction industry and how different players have conflicting incentives. Can you say a few words about that?”

Design-Builder John Fraine of Building Solutions replies:

Wow. Great question. I usually tell clients that after purchasing the home, remodeling can be the greatest single expenditure (and investment) they will ever commit themselves to. And unlike the initial purchase, which is essentially something that you mostly just need to show up and sign papers for, remodeling is FAR more complex in terms of the number of players and how they are incentivized. Quite often, those incentives can be competing, and it’s often the end user who suffers the most from not understanding those competitions.

In order to navigate your way through all this, let’s look at who all the relevant players are in a residential construction conversation (in order of appearance):

1. You, the Owner
2. The Designer(s)
3. The General Contractor
4. The Governing Municipality
5. The Neighbors
6. The Sub-Contractors

Let’s look a each one in turn and how they are incentivized:

1. Owners. This one is easy. The end user clearly wants the best value for their investment dollars. The biggest bang for their buck. They are obviously incentivized to achieve this through the interview and competitive bidding process for all retained service providers, being:

2 and 3. The Designers (Architectural, Interior, Exterior, Structural) and the General Contractor. A little more complex here… Their incentivizations stem mostly from the structure of their contract. If they are providing services at a fixed cost; the mandate is, obviously, to provide an acceptable product using the least amount of resources. Nothing wrong with that, certainly.

The biggest problem here is that the Owners usually have very little experience in determining what an acceptable product looks like for Design (how much and the quality of information produced) or construction (technical procedures for waterproofing, etc.). If they are working on a not-to-exceed basis (that is to say an hourly fee with a well-defined cap of some sort), the incentive is pretty much the same. However, there is an additional incentive to bring the cost in under the cap, creating a good client experience, one likely to result in more referrals.

If they are working on an hourly-rate-with-no-cap basis, the above incentives still exist (they still want a good referral), but they are potentially more likely to provide a better product for the end user (an extreme oversimplification that deserves it’s own treatment…).

4. The Governing Municipality. It’s important to remember that these often-misunderstood individuals are public sector workers charged to uphold community standards for the greater good.

While we may strive to understand their motives, their methods, or their reasoning, keeping this one contextual fact in mind will help to understand why they do what they do.

In addition,

there are many departments charged with public safety, health, historical preservation, etc. that must all work together to streamline the process and satisfy their individual mandates. One can take comfort from the fact that although the hoops to jump through may seem arduous at times, when it is your neighbors that must go through it, you are generally thankful that your property values, sunlight and views are protected through their efforts and decisions.

Which leads us to…

5. The Neighbors. The bane or blessing (or both) of urban living.

Incentives that help: They want their property values and neighborhood standards to rise by your efforts. They want good relations with you. They may well be truly altruistic and kind and generous people by nature. Your project makes their home look better.

Incentives that hinder: They want peace and quiet, at least until a civilized hour in the morning (read: well after 8am!). They want to maintain the views and sunlight they currently enjoy, and would dearly love to have more of those, not less. They don’t enjoy nails in their tires from your workers. Your project makes their home look worse.

Understanding these very human experiences and doing your best to accentuate the positive and mitigate the negative in both design and construction will make everyone a lot happier. Flowers and cookies help!

6. The Sub-Contractors. What’s important to understand is that their contract is with the General Contractor, not anyone else. For reasons too numerous to list here, keeping this context in mind will smooth communications, speed progress, and hold everyone properly accountable for a good end result.

They almost always work off of a fixed price for a fixed scope, and that is usually in everyone’s best interest for this particular type of participant in your project. Take my word for it, these two conditions incentivize them to produce the best end result for the least amount of money, benefitting both the Owner and the General Contractor.

This subject is deep and wide and far too complex to give a full treatment to in this piece. However, let me offer this one most important piece of advice: Understanding where these incentives conflict or compete between project participants is absolutely critical to navigating your residential construction project to a successful completion. Think it through, be intuitive. This is social anthropology writ specific and germane. If you have questions or comments on this, I’d love to hear them!

Got a question about your home? Here’s your chance to ask the “Design-Build Advisor!” Give us a call at 415-459-3349 or send your question to john@theperfectbuilder and we’ll answer either in this blog or by e-mail.

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