Incentivizes, Part 2 ; How to Reduce Construction Costs and Avoid Change Orders for Your Next Remodel.
Two months ago, I wrote about how different players in the industry are incentivized and how owners can leverage that knowledge to control construction costs and avoid the nightmares that sometimes happen during remodeling.
There was so much to say that couldn’t be covered in one article, I decided to expand on it a bit and just focus on the General Contractor.
We’ll look specifically at the Pricing phase of the project. We’ll assume that the Owner is not using a Design-Build firm and is getting competitive bids for the project at the end of the design process.*
First, let’s be clear that any Design firm’s primary product is information. This comes in the form of plans and specifications that express a creative vision, and creating more information costs more $ than creating less.
Of course, the Owner does not want to pay for more information than they need to, and who would? But the primary problem here is that the average Owner is not experienced in knowing how much information and what kind is needed for their project.
Are specifications needed? To what extent and in what format? How much information does the city’s Design Review department need, and how much does the Building department need? How much information does the GC need to create a ballpark estimate? A final estimate? Cost-benefit analysis: Should destructive investigations be done or should assumptions be made about unknown conditions? What kind of engineering solution is the most cost-effective and how will different structural and waterproofing options affect the project budget? (Only a Design-Build firm can answer all of these questions accurately and from one source.)
In the Pricing phase, what is important to understand is that “The less information that is created by the designer, the lower the competitive bids will be. HOWEVER, this will unfortunately result in a higher number of surprise Change Orders during construction, increased project delays; and finally, overall higher construction costs than would have been incurred if all the information were there in the first place.” Here’s why:
When several GC’s get a set of plans to bid that generates more questions than it answers, they are incentivized to leave items out of the bid that are not included in the plans. This is because in a competitive bidding process, they know that all the other GC’s bidding the project will be doing the same thing.
The high-minded GC who includes in the bid everything he or she knows that will come up during construction that was not considered or included in the plans quickly learns that they never land any jobs.
This is because there is always someone who won’t do that, and their low-ball bid gets them a foot in the door they can leverage for higher profits during the project . After all, it’s not in the plans, and the construction contract clearly states that “this bid only covers what is in the plans, nothing more”.
Do a search for “making money with change orders”, and you’ll get quite an education. Here’s one article that states it very clearly:
All this bad news starts with trying to pay as little as possible for plans and specifications. The end result being higher construction costs that far, far exceed the additional costs of more information up front. This is because it costs FAR less to draw something than it does to build it.
So what to do about this sad state of affairs?
Conduct a “Constructability Review”. This is a several-hour meeting (you might want to do it in 2 parts- one for drawings, one for budget), and covers everything. All 3 legs of the stool should be there, Owner, Designer, Builder. This should be done after a GC is chosen, but before the contract is signed. I really can’t stress this enough. You might want to re-consider your other bids after this process is complete.
Start with the simple question: “Have we covered everything?” Review every single line of the drawings, each line item of the estimate. As I’ve stated in a previous article, your metric for maximum utility is an average of $1,000 to $1,500 per line item. More than that, and you’re not getting the transparency and visibility you need to “Value Engineer” the project for a maximum return on your investment (imagine getting a cost estimate for a project on a Word document with only one number for your entire project. Not very useful. There’s just nothing to talk about, nowhere you can go with it. The same is true for a breakdown of ten numbers. There’s just nothing you can do with that. They have all the numbers, request transparency).
What I promise you will find is that plans were vague or incomplete on at least one aspect, and the GC left out items that must be done, but were not in the bid because they were either not in the plans or not carefully detailed.
The other questions to ask at this meeting:
– What are my options?
– What are my risks?
– Are you sure that this waterproofing detail is the best; and if not, why not and what should we do instead and why is that OK?
I promise that the result of this meeting will either be a modified set of drawings, a modified bid, or both. One thing is certain, however. You have removed the incentive to low-ball the bid and your change orders will be reasonable and FAR fewer in number.
Next month: How the Design-Build process avoids all this…
* The only segment of the construction industry to use this model of operation is the lower end of the residential and commercial remodeling markets. All other construction projects (bridges, schools, hospitals, large custom homes, remodel projects over 3 million in value; ALL of these markets use the design-build models, because why wouldn’t you want the project budget to drive the project design? This makes sure that funds are not spent designing a project that won’t get built because it exceeds the budget…
Got a question about your home? Here’s your chance to “Ask The Design-Builder”! 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.