Selecting a construction contractor — what’s included in their fee
Hiring a general contractor during the design phase of a project can help ensure that the project that is being designed stays within the owner’s budget. Unfortunately, picking a general contractor before plans are complete can be tricky.
When owner’s seek to hire a contractor during the design phase, they often select their contractor based on two things: experience and mark-up (usually called profit and overhead). This approach can be dangerous if you don’t ask for a breakdown of the contractor’s fees.
For example, we were recently the Owner’s Representative or Project Manager for a 33,000 sf build-out (tenant improvement) project. We first asked the question “What will your profit and overhead (mark-up) be on this project?” Contractor #1 said $30,846, Contractor #2 said $43,184 and Contractor #3 said $45,112. To see the results go to cg-bid-form-evaluation.
This is the point at which most owners stop and pick Contractor #1. We however asked for more detail regarding other costs the contractor was going to include like insurance, general conditions, safety directors, etc. When we added these other costs to the initial bid, Contractor #1 had an adjusted fee of $96,471. Contractor #2 had an adjusted fee of $96,909 and Contractor #3 had an astronomical fee increase to $196,353! After interviewing the three contractors, guess which contractor the owner selected? [polldaddy poll=1009765].
Remember, getting contractor input during the design phase can help keep the project costs on budget. But if you’re paying for more contractor overhead costs than you were aware of, the hard-earned savings you achieved during design can be eaten up in the form of additional margin in the contractor’s pocket.
Oh, and for those of you who are dying to know the rest of the story, the owner picked Contractor #2 and they ended up being very happy with their choice!
To learn more about ways you can control your construction costs, send me a comment or e-mail me at gilbertcostcontrol@gmail.com
October 24th, 2008 at 3:38 pm
How about the 3rd constraint in Project Management, which is quality. The only thing that is mentioned here is the price (excluding/including the services).
Nothing has been said about the quality and/or the reputation of the contractors (do they finish on time, hidden fees, etc…).