• Negotiating discounts up front on the mark-up allowed on change orders and including the discounts in the initial construction contract. Even in these tight economic times many construction companies are still adding a 10% or higher mark-up to change orders. On today’s building projects, owners should expect to pay a lower mark-up on change orders. If you aren’t sure what is fair based on the size of your project, contact us.
• Making sure that you have someone on your team who knows the plans and specs inside and out. Over 15% of the change order requests we deny are for work that by contract is included in the initial scope of work or should be paid for by someone else (i.e. the architect, subcontractor, etc.) Before approving any change order, check the plans and specs to ensure that this is indeed a change order and not part of the original scope of work. Also, keep detailed notes throughout all phases from planning and design through construction. These notes can be invaluable when trying to document the original agreement of the parties.
• From the very first change order it is critical that you ask for a detailed breakdown of all costs associated with each change order, including material, equipment and labor costs. If the number of labor hours or material costs seem high, press your general contractor to get you a discount. Remember, change orders are one of the best tools the construction industry has for increasing their overall project profitability. Remember, “You don’t get what you expect, you get what you inspect.”
• Before paying the final pay request, make sure you hire an outside firm to audit your project. Reputable audit firms like the team at Gilbert Cost Control are willing to be compensated on a percent of the savings recovered for you, so there is no risk to you for bringing in outside expertise.

To get more tips to help you cut the cost of change orders, call us today at 608-516-2414 or drop us an email at gilbertcostcontrol@gmail.com

The  materials whose costs remained flat or showed up to a 1% increase included:

• lumber & plywood
• millwork
• concrete & cement
• concrete block
• limestone
• gypsum board
• brick
• glass
• optic cable

Hot rolled steel and batt insulation showed increases in the 4-5% range while structural steel and crushed stone increased 5-7%. Adhesives & sealants also increased 5-6% in the first half of 2011, however, decreasing oil prices have caused these prices to steadily decline over the past 5 months. Vinyl floor covering, rubber & rubber products, paint and stainless steel all experienced price increases in the range of 5-7%.

Price increase leaders included copper which rose 9-10%, PVC piping which increased 10% and ductile iron pipe which was up 15% year to year.

Once we head into the early part of 2012 we will be providing more cost data and projections for 2012. For now though, those organizations and individuals in a growth mode with access to capital can continue to expect to benefit from tremendous savings on their land acquisition and building projects.

1. Clearly defining which contractor personnel will be assigned to the project, what their billing rates will be and the amount of time each person will be billed to your project. In the past, costs for project managers, project executives, estimators and safety directors were typically included the profit and overhead and were not a separate billable job cost. Today, most contracts (other than lump sum) show these costs to be billed on top of the profit and overhead and can easily add up to 3-5% or more of the overall project cost.
2. Determining in advance whether your contractor will be allowed to perform certain portions of the work with his own crews (like masonry or carpentry). If the contractor would like to self-perform certain divisions of the work, will he only be allowed to do so if his cost for this work is less than other qualified subcontractors? What will be the mechanism for collecting these bids and how many competitive bids must be obtained? Will the contractor be required to submit his bid for this work to the owner several days before the subcontractors bids? Will the subcontractor bids be sent directly to the contractor or will they instead go to both the contractor and the owner’s rep simultaneously? In our experience, the answers to these questions can have a huge impact on the number of qualified subcontractor bids received as well as the amount the contractor bids for work he will use his own crews to perform. By not properly addressing this in the contract, the cost of the project can easily rise by 4% or more.
3. If the contractor will be providing equipment on the jobsite, what is the projected usage including hours and billing rates for the equipment? Contractors can easily add an additional 2% or more to the project cost (and their profitability) by having more equipment on site than is necessary, keeping the equipment on site longer than is justified and billing at a higher rate than is reasonable. It is not uncommon on all but the smallest projects with durations of 6 months or more for a contractor to be able to bill 50% or more of the original acquisition cost of a piece of large equipment (like a bobcat) to the project. Even smaller pieces of equipment like ladders or levels can end up costing far more than the original purchase price.

We will be providing more tips for negotiating better construction contracts in future posts. In the interim, if you have specific questions about construction contracts that you need answered, please contact us directly at gilbertcostcontrol@gmail.com

This time he left us with the challenge to shake off the hesitation caused by an uncertain economy, borrow as much as you can and invest in capital producing assets. He is convinced that inflation will be a long term reality and believes that real estate is a great hedge against inflation. Companies with long term leases should renegotiate them and companies without long term leases should lock in long term contracts now.

While non-residential construction is slowing in the rate of decline, there will be a long trough without much increase any time soon. As for new housing starts, well I think we can all guess where that is headed!

Beaulieu is predicting 24 months of positive business cycle before the next downturn. He also had some very interesting insights into the world economy and what is likely to happen from 2030-2040 if our political leaders aren’t willing to make the tough decisions we need to make as a nation to thrive.

If you’ve never heard the Beaulieu’s speak, I highly recommend it. To best position your company (and your personal finances) you need to understand where the economy is headed. To learn more about the Institute for Trend Research, check out their website at www.itreconomics.com

For the most part, construction material cost increases have remained relatively moderate however structural steel and rebar costs rose sharply in May, up more than 30% over costs from the same time last year. Not surprisingly, the increase in petroleum cost has driven up the cost of asphalt and concrete and has increased the delivery costs of materials across the board. Other notable cost increases over the past 12 months include:

• copper, which has risen almost 10% year to date
• ductile iron pipe, which rose 18% in 2010
• PVC piping , up 10% in 2010
• batt insulation, gaining 4-5%
• paint, rising 7% as a result of crude oil increases
• vinyl floor covering, up 5%
• wood siding and shingles rising 5%
• aluminum sheet, up 3%
• stainless steel, which has risen 7% year over year and more than 180% since 2009
• rubber, up 3-4%
• optic cable, up 3%
• sand and gravel, rising 1-2% in 2010 but likely to rise with increased fuel costs
• adhesives and sealants, up 2-3% but likely to increase with rising fuel costs

Material costs that have remained relatively flat or decreased include:

• gypsum board, up 1%
• carpet, rising 2%
• CMU, concrete block, up 1%
• crushed stone, rising 1%
• brick, flat
• plywood, flat
• precast concrete, flat
• millword, flat
• clay and ceramic, flat
• granite, flat
• glass, down 7% in 2010

Source: US Dept. of Labor, Producer Price Index

An experienced not-for-profit provider of senior housing was in the final design stage of a $6,500,000 project. The architect and contractor, acting as a design build team, had been providing services to the organization for more than 15 years. As the contractor worked to finalize the guaranteed maximum price, the Board of Directors of the senior housing organization decided that in order to fulfill their fiduciary obligation, they needed to have a third party analyze the final bid to make sure that they weren’t paying more than they should.

After evaluating several firms, Gilbert Cost Control Consultants Corp. was hired to review the guaranteed maximum price, bid and contract documents, and schedule to identify areas where the potential for cost over runs could cause the project to exceed the approved budget and timeline.

Primary Areas of Construction Cost Control & Risk Management Analysis:

The analysis by Gilbert Cost Control of the bid documents, plans and specs, contracts and budget identified a number of areas of potential risk to the organization. Due to the extensive changes in the plans that occurred shortly before bidding, the bid documents were incomplete and extensive clarifications and modifications were issued through a series of late addendum. Late addendum drive away potential bidders and confuse those who do bid, often resulting in low bidder turn out and costly change orders. Gilbert warned that careful monitoring of change order requests as well as tight controls of the $300,000 contractor contingency would be needed to keep the project within budget. Gilbert also suggested that the contingency be pulled out of the construction contract and instead controlled by the senior housing organizations CFO with input from Gilbert. Typically, owners that use a cost control consultant to manage and negotiate the change orders and contingency fund are still in possession of 90% of these funds upon completion of the project.

When Gilbert evaluated the bids they determined that the contractor solicited subcontractor bids in key divisions of the work from a very limited number of subcontractors. Additionally, many of these subcontractors were located in remote geographic areas that would escalate the bids due to the cost to travel to the job site. By limiting the number of subcontractors, the owner was likely to pay more then they would if a larger number of qualified subcontractors were invited to bid. Gilbert Cost Control recommended that the contractor request additional bids and provided a list of potential subcontractors to the owner.

Additionally, the contractor’s price for those divisions of work he planned to perform with his own crews (concrete, carpentry, clean-up, etc.) was much higher than the senior housing organization would expect to pay if they had obtained competitive bids for those portions of the work. In fact, Gilbert was able to obtain a subcontractor bid in just one non-critical area of the work that the contractor intended to perform with his own crew that could save the senior housing organization more than $50,000.

After reviewing the proposed building schedule, Gilbert showed evidence of similar projects in similar climates being completed in far shorter durations. Gilbert Cost Control pointed out that reducing the timeline by just 6 weeks (which would still allow the contractor far more time than typically allowed) would result in a direct savings to the organization of more than $25,000.

Proven Results:

Gilbert Cost Control was able to help the senior housing organization identify contracting and bid management “best practices” for this project that would result in substantial savings and reduced risk to the organization for all future projects. Gilbert helped the organization negotiate a $150,000 reduction in the guaranteed maximum price of the work with a commitment from the contractor to provide an additional $150,000 in savings over the duration of the project. The savings to the organization far exceeded Gilbert’s fees for their services. The Board of Directors felt confident that they were upholding their fiduciary responsibility to the organization. And the Executive Director was able to ensure that the ethics of the organization remained at the forefront of all negotiation throughout the duration of the project.

When you’re working with a developer to design, build and lease a building back to you, how can you be sure that the building will meet all your needs and have low maintenance and utility costs over time? That was the question a large international manufacturer asked themselves when they were faced with relocating their operations to a new facility. The organization was in an expansion mode and in order to preserve cash to fund their growth, they did not want to own the building themselves, but wanted instead to select a developer to lease the facility back to them. Since the lease was going to be a triple net lease, with the manufacturer paying for all maintenance and utility costs, the manufacturer wanted to control all aspects of the design and construction to ensure the building would meet all their operational needs and have low maintenance and energy costs over time.

 Primary Areas of Construction Cost Control & Risk Management Analysis:

The manufacturer had met with more than ten general contractors over the past year trying to determine how much a new facility would cost. While the manufacturer had preliminary drawings that had been created by their in-house engineers, there was a wide variance in prices from the 10 contractors with costs ranging from a low of $2,500,000 to more than $8,000,000. The management team quickly decided that they needed help from an expert, a construction cost control company that would look out for their best interests in holding the developer,  architect and contractor teams accountable to specifications, deadlines, quality expectations and budgets.

The leadership team chose Gilbert Cost Control Consultants Corp. to provide comprehensive Owner Representative services. By utilizing their knowledge of the expertise of various firms in the local architectural and construction market, the Gilbert team was able to narrow the field from ten to three prospective design build teams. Rather than constrain the teams by asking them to all price off of the same design, the manufacturer asked Gilbert Cost Control Consultants Corp. to structure a design scope of work and Design Build RFP that would allow each team to exercise creativity in design. When the three teams came back with their final independent design and construction renderings and budgets, the three prices all fell within a range of $5,000,000 to $5,200,000. The manufacturer was then able to select the team and design they felt were best suited to meet their needs.

Once the architect and contractor design build wsa chosen, the manufacturer then selected a developer and negotiated a long term lease for the facility. Because the developer, rather than the manufacturer held the design build contract, the contactor’s superintendent was initially skeptical and wary of Gilbert’s role. Due to the fast track nature of the project and the number of decisions that had to be made quickly by the manufacturer, the superintendent quickly became a raving fan as Gilbert Cost Control was able to help the manufacturer rapidly make the best decisions for their organization to keep the project progressing on time and on budget. The superintendent later admitted that in his more than 20 years in the construction industry, he had never had the pleasure of working on a project that progressed as smoothly as this one.

 Gilbert Cost Control played a critical role in monitoring the quality of construction and ensured that the developer install only the most energy efficient mechanical systems to keep operating costs low. Gilbert also ensured that the building met the manufacturers high quality standards.

As Dan J., Vice President of Operations, later commented, “With the help of the Gilbert Cost Control owner’s rep team, we were able to make sure it was a good spec, a good design, and their extra set of eyes during the construction phase assured that it was well built.”

 Results:

 In the end, the manufacturer was able to achieve the goals they had set:

• An easily expandable facility built to meet high quality standards
• A sustainable and energy efficient facility that greatly reduced past operating and utility costs
• More time for their in-house facility team to focus on their daily responsibilities rather than being stretched thin during the construction phase
• On time and on budget project completion
• The peace of mind to know that all their bases were covered and no important details were left to slip through the cracks

In the end the Gilbert Cost Control team was able to save the client far more than their owners rep fee. The client described Gilbert’s Construction Project Management process as a “very enjoyable experience” and told us that by working together, Gilbert was able to help them build “much more facility for our money than we could have expected.”

In his Executive Summary to the Board of Directors, Dan J. made the following report: “no changes in cost, no issues to management, no changes in schedule—I give them an ‘A’.” His only regret, not utilizing Gilbert Cost Control to help them negotiate better lease terms with the developer.

In the fall of 2005, Gilbert Cost Control Consultants Corp. was contacted by a taxpayer in a small town. His local volunteer fire department was nearing the end of a year-long design process for a new Fire and EMS facility that was to service a number of area communities.  The taxpayer was concerned that the project would end up costing more than was initially budgeted. 

Primary Areas of Construction Cost Control & Risk Management Analysis:

After being hired by the Fire and EMS District to provide construction cost control services, the Gilbert team met with the representatives from the Fire District and the architect to review the plans and to get an updated cost estimate.  As the taxpayer feared, the architect’s new cost estimate for the project came in 10% higher than the initial estimate. 

After performing a value engineering analysis of the plans and specifications Gilbert identified areas where changes could easily be made that would save money, meet the Fire Districts needs and ensure that the building remained a quality structure with low maintenance costs. After reviewing the value engineering suggestions made by Gilbert, the architect assured the owner that the bids would come in within budget and recommended that only a few of Gilbert’s alternates be included in the bid document. Confident that the architect’s estimate was accurate, the Fire District directed the architect to include some, but not all of the Gilbert value engineering alternates in the bid documents.

 Proven Results:

Three weeks later, when the project bids came in, nine contractors submitted prices.  The low bidding contractors’ base price was higher than the architect’s estimate and the project costs were still $100,000 – $150,000 over budget.

Gilbert again provided the architect with a list of potential value engineering and design alternates that could reduce the cost of the project.  Gilbert also offered the Fire and EMS District options for material purchasing that would allow them to save $20,000 – $25,000.  The low-bidding contractor then worked with the team to price out Gilbert’s recommended design changes. While the changes had little impact on the building aesthetic and in no way diminished the quality of the end product, the Gilbert-recommended modifications brought the project costs within budget and construction was able to begin. Gilbert Cost Control stayed on throughout the construction phase to ensure that the project remained on budget by performing construction audits of all draw requests and negotiating all change orders. Gilbert’s recommendations saved the Fire District far more than their fee, allowed a project that originally exceeded budget to be built within budget,  and ensured that the Fire District board upheld their fiduciary responsibility to the taxpayers.

A publishing company was considering remodeling their corporate offices. They contracted with a space planner to define their overall requirements and obtain some preliminary construction estimate for budgeting purposes. The project was relatively modest, in the $300,000-400,000 range, and the preliminary estimate came in at $399,000. Subsequently, the owner had a good sense of what they wanted to accomplish, felt the preliminary construction estimate was within their expectations, but realized they didn’t have the time to monitor the project themselves. The owner hired Gilbert Cost Control Consultants Corp. to provide comprehensive owners rep and construction cost control consulting services. In this role, Gilbert Cost Control was charged with evaluating the bids for the project, negotiating the cost plus guaranteed maximum price contract (GMP), and monitoring the quality and construction costs throughout the construction phase. With Gilbert’s assistance, the winning construction bid came in at $319,000.

Primary Areas of Construction Cost Control Analysis:

By performing a pre construction audit of the initial proposal, blueprints and specifications, as well as contracts and initial budgets against the GMP contract (guaranteed maximum price) Gilbert Cost Control uncovered several areas where the owner could realize significant cost savings. Construction cost control efforts focused on the following areas:

GMP Analysis and Contract Negotiation: Analysis by Gilbert of the low bid revealed the contractor had not adequately accounted for demolishing and remodeling certain areas of the building, providing carpeting in all offices and removing asbestos in areas to be demolished. By working with the contractor to ensure that all work was included in their GMP contract, the final bid for the project came in at $363,251. After discovering that the contractor was proposing a 15% mark-up for profit and overhead, Gilbert Cost Control was able to negotiate a fee of 12% which more accurately reflected current market conditions and worked with the owner’s attorney to include clauses in the contract that helped reduce risk to the owner. The detailed bid was broken down into 25 line items for all facets of the work. The project was fairly straightforward and should have been easy to track and complete. Immediately, several issues arose which threatened the timeline of the project and it’s cost. The first indication of issues came with the request for the first draw. Although, the pay request was still broken down into the 25 lines items, the amounts had changed substantially in almost every category from the initial schedule of values, yet the project total remained the same, immediately raising concern.

Several additional issues, besides the confusion created with the reclassification of costs, included:

Construction Audits: By carefully analyzing the subcontractor invoices during the monthly cost of construction audit, Gilbert found that the contractor added 15% profit to each subcontractor’s billing and again added 12% profit on the overall billing.  The result was that contractor attempted to charge a 27% mark-up instead of the agreed upon 12%.

Contractor Performed Work and Wage Rates:  The contractor submitted a bill for $25,092 for unauthorized material and labor. The contractor argued that his crews were not performing the work as efficiently as planned and it resulted in additional labor and material costs to the contractor.

Change Orders: An owner initiated change order for $4930 was charged to the project contingency and also added to a request to increase the Guaranteed Maximum Price (GMP).

Accounting Errors: An invoice of $3152 for another owner’s project was incorrectly billed to this project.

Proven Results:

Using Gilbert Cost Control’s owner rep and construction cost control services allowed the owner to legitimately avoid over $65,000 or more than 15% in unauthorized cost over runs and double billing. Also, with Gilbert monitoring the project and providing timely information to the owner, the only change orders for the project were those that were owner-initiated, essentially a fire alarm system, additional sidewalks, and additional asbestos removal. The savings to the owner far exceeded the fees paid for Gilbert’s services and the owner was confident that he paid a fair price for the work that was done. The overall quality was outstanding and staff members loved the look and feel of their new space.

Construction Equipment Audit Stopped Charges for $750 Level

Situation:
The school district of a growing community contracted with Gilbert Cost Control Consultants Corp. to assist the school district with the construction of a new school and an addition to an existing school. Although the taxpayers of the district had approved a school referendum to pay for the cost of construction, the School Board decided they needed help in evaluating the GMP (guaranteed maximum price) provided by the construction management firm and help with construction cost control once building actually commenced.

The primary concern of the Board was proper monitoring of the cost of construction, including the effect of change orders on the total price. The negotiated construction contract was for a cost plus fee structure, so the Board wanted to ensure actual costs were being quoted. The Board was primarily interested in uncovering major areas where the potential for cost over runs could cause the project to exceed the approved budget. The specific guidance was to use a rake, not a fine-toothed comb to identify savings.

Primary Areas of Construction Cost Control Analysis:

By performing a pre construction audit of the initial proposal, blueprints and specifications, as well as contracts and initial budgets against the GMP contract (guaranteed maximum price) Gilbert Cost Control uncovered several areas where the district could realize significant cost savings. Construction cost control efforts focused on the following areas:

Contractor performed work: Most construction contractors and construction project management firms prefer to use their own crews to perform work like concrete and carpentry. While most construction firms will argue that they need to self-perform these divisions of work to control the schedule, a significant amount of cost and gross profit can be added to a project (and the contractor’s bottom line) if proper construction cost control and construction audits are not utilized. According to experts in the legal and accounting industries, many contractors will add another 7-10% to their project margin by utilizing their own crews.

Wage Rates and Accounting Errors: The wage rates quoted in the proposal included the impact of Federal and State Unemployment rates. While this is a legitimate cost, the effective cost is capped at an accumulated wage of $10,500 per worker for tax purposes. If not properly monitored, contractors often continue to charge their clients for these taxes in their wage rates long after they have reached the statutory caps–this can add an additional $300 to $500 per month per worker. Worker’s Compensation Rates are also adjusted annually based on actual workplace performance of the contractor. While many contractors receive rebates from their insurance companies at the end of the year, few companies pass these savings on to their clients. Finally, accounting errors can result in subcontractor costs, workers and materials being charged to the wrong construction project or to the correct project at the wrong rates.

Equipment Audits: Contractor’s generally quote rental rates for contractor owned equipment at a small discount from the prevailing market rates for rental equipment. These rates are not reflective of the actual cost of operation and, in fact, are significantly higher than the actual cost. If not monitored, the amount paid for equipment, even for a relatively short project can significantly exceed the cost if the equipment was purchased, then resold at Fair Market Value at the conclusion of the project. On construction projects, most owners equate lots of equipment with increased productivity. However, when equipment is delivered to the site before it is needed or remains on site after it is no longer required, project costs can increase without justification. By limiting the rental rates to a value more reflective of cost, significant cost was removed.

Construction Means and Methods: While worker productivity in the United States is improving in the manufacturing industry, construction productivity continues to fall short. By most estimates, the average construction worker spends as much as 50% of his or her time in unproductive endeavors. By analyzing the building design as well as the means and methods used on a construction project, productivity can increase dramatically and construction costs can be reduced significantly.

Value Engineering and Design Review: The design of a project and the materials used can have a significant impact on both the initial cost as well as the maintenance and energy costs of a building. By reviewing the plans, Gilbert Cost Control was able to identify a number of areas where design changes would reduce construction costs, improve sustainability and save facility management staff time.

Construction Audits: By carefully reviewing the initial project scope and analyzing draw requests, invoices and change orders, Gilbert Cost Control was able to identify charges for work that were included in both the initial GMP contract (guaranteed maximum price) and also charged as additional work. All change orders were carefully scrutinized to identify all billing errors and overcharges.

Proven Results:

By focusing on the primary areas described above, Gilbert realized over $300,000 in cost savings on a $14,000,000 project, or a cost reduction of over 2%, before construction even began. By the end of the project, the school district had an unprecedented $1,200,000 in savings and unspent contingency dollars. For a district that had always spent every contingency dollar in the past, the savings was both surprising and welcome.

School was able to open on time, the school board and taxpayers were confident that taxpayer dollars were spent wisely and the new district administrator was able to start his tenure with a highly successful project.

With the savings that were realized, the school district was able to invest in a geothermal heat pump system to reduce long-term energy costs and another school facility in the district was able to replace an old, leaking roof without requiring yet another costly school referendum.