Design and Construction Work without a contract. The reason why Owner's should never allow it

Today I want to address the reasons why Owner's should never allow any work to be performed without a fully executed written agreement.

In Today's HGTV world where entire room renovations happen "While you were out" and "Restaurant Impossible" rebrands failing eateries in a weekend, the notion that construction should happen quickly is all too prevalent.  These shows don't reveal the pre-work that goes into performing these miraculous transformations and they don't account for the incredible amount of man-power that goes into these feats.  The most critical component of all of this work is the written agreements that must be in place for any of these projects to happen. 

Aside from the magical transformations that we are treated to on TV, it is all too common in the construction industry for Architects or Contractors to jump right into the work without taking the time to negotiate an agreement.  There are various reasons why these pros are so eager to get started.  For starters, you may have expressed a desire for a very aggressive project schedule, which they are all too happy to demonstrate how responsive they can be.  Maybe the scope of the work is exciting and they can't wait to get started.  Maybe they are short on work or coming off another project and they need the work.  Whatever their reason for wanting to jump right into your project, your reasons for not allowing this are stronger.  Take time to negotiate your agreement and don't skip any steps.

First, when you allow a vendor to start work you give up all of your leverage to negotiate.  Leverage is most important for negotiating pricing and favorable legal terms.  Without this leverage the Vendor has almost complete control over you.  This means you could be pushed into unfavorable agreements that limit your recourse when things don't go well. 

Written agreements are the prevailing document protecting both parties in the event of a dispute.  If you allow a vendor to commence the work or even perform the entire scope of the work without a contract you are relying on verbal communications between yourself and the vendor.  Verbal agreements are not only subject to interpretation, they are also prone to selective recollections.  Problems can arise at any stage of the project including very early on.  Don't allow any work to happen until you have things in writing.

Another reason Owner's should not allow work without a contract is that the scope of work needs to be carefully written and agreed to by both parties.  Without a well-written scope of work, you and your Vendor may have different interpretations of the scope.  Not only does this cause tension between the parties, but then it also opens the window for the Vendor to ask for more money.  

These three critical concepts illustrate the reasons why you should never allow anyone to perform any work without an executed written agreement.  It is too easy to get caught up in the urgency of a project.  Owner's need to take disciplined measures to ensure that they have all the protections possible before any work begins.  Expediting or skipping the contracting process puts Owner's at great risk.  Projects that are allowed to go on without written agreements tend to be more contentious, they cost more to complete, and can actually take longer than projects that are contracted.  Take the time up front to agree on the scope, schedule, cost, and legal terms and your project will run more smoothly and if you have any issue, you will have a basis for resolving whatever comes your way.

Tell me about your experience.  Have you done work without a contract?  Was it successful?  

Building Rules and Regulations for your home construction project.

I've just published my first Article for the year.  The topic I'm addressing this quarter is rules and regulations for a construction project.  I hope you find this helpful.  Here is an excerpt from the article check out my website to read the full text.


There are multiple level of clean-up required during a construction project. Each phase of construction should have clear rules about what you expect.

While construction is ongoing establish expectations to keep the floor free and clear of tools, screws, nails, or other tripping hazards.  Construction debris will be piled neatly until it is ready to be removed from the premises.  Appurtenances that are suspended above the work area will be safed and secured at all times.  Exposed wiring and plumbing lines to remain will be deactivated and safely secured in place.

Rules for daily end-of-day cleanup are also important.  The area of work will be broom swept daily.  No construction debris will be allowed to remain in the area of work overnight.  Tools will be collected and stored in a secure tool chest or carried off the job site daily.  Construction materials will be stored neatly in designated areas.  All electrical equipment will be unplugged from it's power source and stored in a secure designated location.


Check back next week when I return with my weekly blog.

What's new for 2016

Happy New Year everybody!

Yes, I know I'm a little late, but better late than never.

Im going to start 2016 in a slightly different way.

If you were with me from the start (launched my website in March 2015) you will note that the content and design of my site has evolved quite a bit.

From the start, I wanted my site to be a place where you could find articles full of in depth content to help you manage your projects more effectively.

I feel pretty good about the current state of the content and the design of the website so I want to shift my focus to shorter more frequent blog entries. 

My hope is that this shift will allow for more of a quick read along with more interactions between you and I.

I will still be producing articles (like the ones I published in 2015) but there will be fewer of them. 

I would love your feedback on this approach. 

Do you prefer long articles with lots of content or blogs that offer a quick snapshot on a single topic?

How to develop a budget for your construction project (Part 2)

How to develop a budget for your construction project (Part 2)

by Luis Gile

Building on the basic information we discussed in Part 1, we can now move forward with developing our project budget.

First lets talk about the various estimating methods that we can use.

Estimating methods

There are several methods for estimating projects.  The estimating method you choose will be determined by how well your scope is defined.  It is perfectly acceptable to change your estimating method as your project advances.  In fact I highly recommend that you revise your estimate each time your scope changes or becomes better defined.

At the earliest phases of work, your scope definition is very limited so your estimate will be less detailed and you should have a greater margin of error and contingency.  As the scope gets further defined, estimates become more detailed and should have lower margin of error and lower contingency.

The types of estimating methods I will cover are:

1. Area Pricing 

2. Unit Pricing

3. Budgetary Quotations

4. Percent Cost of Work

Regardless of the type of estimating method you choose, all estimating methods require two pieces of information.  The first piece of information is the scope.  The second piece of information is the market rate.   

Area pricing

Area pricing uses the area of the space you want to build multiplied by a cost per area.  This pricing method can be used for either hard costs or soft costs, but it's most commonly used for hard costs.  We use area pricing when our scope of work is very limited.

The only scope information needed to use area pricing is the approximate area of the space you want to build.  In the United States the unit of measure we use for area measurements is square feet.  We can use the project program we discussed in Part 1 to estimate our area.

The market rate needed for area pricing is a cost per square foot.  The cost per square foot is affected by a number of factors including, the type of project, your geographic area, and the scale of the project.

Unit Pricing

Unit pricing can be used in a variety of ways.  Most often unit pricing is used when the scope of work is more detailed and well defined.  

Scope definition for unit pricing typically requires a detailed set of design drawings.  If you have detailed design drawings you can use the drawings to perform material take-offs.  The term "material take-off" is a method of estimating material quantities by taking scaled dimensions off of design drawings.  

Market rates used in unit pricing are typically specific rates for materials, equipment , and labor.  Unit pricing can be collected from a variety of sources including directly from suppliers and also from historical pricing.   

Budgetary Quotations

Soliciting budgetary quotations directly from trade contractors and material suppliers is another common method of cost estimating.  Soliciting budgetary quotations can be even more accurate than unit pricing but can take longer than other methods.  

The scope of work for this estimating method can vary greatly from very little scope definition to a very detailed set of design drawings.  The value and accuracy of budgetary quotations varies equally with the amount of scope definition.  It's also common to rely on the trade contractor to perform the take-offs for his specific trade.

You wont need any market rates for this estimating method because the budgetary quotes will come from each trade contractor.  All you need to do is add each contractor's price together.  When you use budgetary quotations it is important to ensure that there are no gaps in scope between trades contractors and that each contractor is clear about what scope they need to quote.

Percent Cost of Work

Percent Cost of Work rates use rule-of-thumb percentage rates to estimate soft costs.  

This estimating method is dependent on having an estimate of your hard costs.  You can use any combination of the previously discussed estimating methods to estimate your hard costs.

Once you have your hard costs estimated, you can apply the percentage rates to estimate your soft costs and then add the hard costs and soft costs together.

Hybrid pricing

It is common to use a hybrid or blend of these options.  How you combine these methods is entirely up to you.  

In this article we will focus on a hybrid approach that uses area pricing for hard costs and percent cost of work for soft costs.  This blend of pricing methods is the simplest and most effective way to budget a project at an early phase of development.

How to budget

If you have been following my blog you may recall the May 2015 entry entitled "What are the phases of work of any construction project".  In that article we took a step by step approach that began with high level scope definition and methodically made our way through design.  When planning and executing a project we always begin with design and we add layers of detail until we know what we want to build.  The construction work is always the last step.  For budgeting we actually start backwards.  

We will be using percentage of cost of work rates to estimate our soft costs, so we will need the Cost of Work as our multiplier for these rates.  Establishing the Cost of Work up front will also help us understand the scale of the work we are taking on. 

First we'll estimate the hard costs using your program's estimated square footage (established when you developed your program) and a cost per square foot market rate.  The math on this is pretty simple, simply take your estimated square footage multiplied by the area market rate

EXAMPLE:

From Part 1 we estimated the program to be 421 SF

Estimating your hard costs

To estimate your hard costs, we will need a cost per square foot market rate.  

All area pricing rates will be based on historical rates.  These rates are highly influenced by the location, date, and scope of the project that the rate is based on.  in other words, if you use a rate from a garage addition in New York from 5 years ago and your project is a kitchen addition in Kentucky that you expect to start one year from now, you wont have an accurate budget.  Try to find rates that are as closely matched to your specific circumstances as possible.

I recommend getting at least three area market rates and averaging the three together.  This eliminates any guess work and gives you the best chance at using an accurate figure.

Here are a few sources that I recommend.  You can type in "cost per square foot" into your web browser and I'm certain you will find others.

http://www.building-cost.net/CornersType.asp

http://www.home-cost.com/construction-cost-per-sf.html

For this example, we will use an area market rate of $200 per square foot.  Now we multiply the square footage by the area market rate as follows:

421X 200 = $84,200

Therefore our hard costs for this project are $84,200 eighty-four thousand two hundred dollars.  This is the cost of the labor, materials, and equipment needed for the project.

Estimating soft costs

 For the soft costs of this example we will focus on estimating Architectural fees, contractor fees, and general conditions costs.  These costs are the most common soft costs applicable to most projects.  

We will use percent cost of work rates to estimate these costs.  These rates are typically within the following ranges.  The specific rate you use is dependent on the location and scale of your project.

1. Architectural fees, (6% to 15%)

2. Contractor fees, (5% to 15%)

3. General conditions costs,  (10% to 20%)

If we use the $84,200 estimate for our hard costs we can estimate the following:

Architectural Fees (15%) = $12,630

Contractor Fees (15%) = $12,630

General Conditions Costs (10%) = $8420

Sum up your costs then add contingency and margin of error

          We now add up all your costs and add our contingency and margin of error

          Hard Costs...................................$84,200

          Architectural Fees........................$12,630

          Construction Management Fees....$12,630

          General Conditions Costs...............$8,420

          

          Subtotal....................................$112,000

          Owner's Contingency (@15%) .....$16,800

          Margin or error (@20%) .............$22,400

          Total Budget.............................$151,200

Keep in mind that the "Owner's Contingency" and the "Margin of Error" are essentially funds that you need as safety nets.  These costs are not to be shared.  You and maybe your Project Manager (if you have one) should be the only people who know you have this money set aside.

Never reveal your budget to your Contractor and when you speak with an Architect about your project, reveal only your estimate for the hard costs.  When an Architect asks for your budget, what they want to know is whether you are looking for higher end finishes or a basic design, so giving them your estimated cost for hard costs should suffice.

Now you should have enough information to develop your budget.  Let me know how well the process works for you and when your project is completed, email me back to tell me how close your numbers were.