What do you need to solicit a quote

Whether you are hiring an architect or a general contractor, in order to ensure you receive a good comparable quotes, there are certain key pieces of information you must include with your solicitation.  If you are missing any of these items you could find that your quotes have a wide pricing spread.  Don't just assume that the high number is wrong, make sure that the basis of all bids is the same.  You can do this in hindsight after the bids come in, but best practice is to ensure that your initial quotes are all on the same basis.  Ensuring that your solicitation includes the following elements is a good way to make sure you get comparable bids.

Scope of Work

The most obvious piece of information is the scope of work.  Your scope of work depends greatly on what type of services you need and what phase of work you are in.  If you are just starting your project, you might need to have some preliminary work done in order to help document the scope for your Architect.  In later phases of work, your Architect's drawings become the scope of work. 

Scope of Services

Another piece of information you will need is the scope of services.  The difference between the scope of work and the scope of services is that the scope of work reflect what you want to build, the scope of services reflects how you want the services performed.  For your designer, this document should address how many design milestones your require, how drawings are to be presented to you, and what level of interaction your Architect is expected to have with the local building department.  For the GC, this should address, site clean-up, working hours, and parking.  These are just a few examples of the topics that should be included.  

Schedule

Another key piece of information that you will need to solicit a quote is your project's schedule.  It's important to let your consultant or contractor know what kind of time you have in mind for the work.  This could impact the amount of resources needed and how quickly they will need to mobilize.  When you are communicating your schedule you don't need to be very detailed.  All you need to have is your key milestone dates identified.  For example, you may only know that you want to start design on a particular date.  You may not know when construction will start or when construction will end.  Alternatively, you may have a specific need date in mind.  If so, communicate your intended end date and allow the bidders to plan the intermediate dates accordingly. 

Contract Terms

Contract terms are another key piece of information when soliciting a quote.  Make sure you know what form of agreement you expect to use before you even asking for numbers.  This will ensure that everybody is meeting the contract terms or at least they're aware of them.

Bid Form

Another key component of a good solicitation is a bid form.  This is less about information for the bidders and more about your ability to compare quotes.  It's not a good idea to allow bidders to submit their quotes in any format they choose.  There is no standard way to quote a project.  Invariably, what will happen is that you will be forced to try and reconcile the differences on the back end.  That can sometimes be impossible and you may find yourself working harder to confirm details with each bidder.  In the end, you may still be left with uncertainties and may be making an uninformed decision.

There are a number of best practices that go along in creating each of these documents.  I'll tackle each of these individually in future postings.  Regardless, the main idea here is that all of your bidders should have the same complete information on which to base their quotes.  If you are not clear, the bidders may make assumptions which could be reflected in higher or lower quotes.  This could lead you to bad award decisions.

Why you need a budget

So you have decided to take on a construction project.  You have a clear vision of what you want and you have a dollar limit in mind for the work.  Are you ready to move to the next level? 

If you have not sat down to estimate the cost of your vision the answer is no.

It is important to note that an estimate and setting a dollar limit are two different things.

Your budget should not be based simply on how much money you have available.  Your budget should be based on a well-developed estimate that meets the scope of work you want.  

You will need to do a little legwork in order to be ready to develop your budget. 

Make sure to invest in preliminary studies and conceptual designs to document your vision. 

Don't be discouraged if your first concept comes in higher than you expected.  There are a number of design options to help lower costs without compromising your vision.  Work with your concept designer to modify your concept until the design has been optimized. 

If your optimized design still exceeds your available funding you have three options:

1. Shrink your program.  If your vision was too grand, you might want to consider a smaller version of your vision.  Perhaps you can do with less square footage or one story instead of two.

2. Phase your project.  Do you need everything all at once to operate, or can you build a portion now and the rest later?  Consider a phased approach which allows you to begin operating while you generate revenue and save for phase 2.

3. Can you secure financing?  There are a number of financing options that can help you reach your dreams.  Perhaps you can finance the cost of the project and actually hang on to more capital.

Preparing an estimate will arm you with the information you need to anticipate your funding needs.   You don't want to start the project unless you know you have the funds to finish the project and you wont know this without an estimate.

Let me know your thoughts and write me if you have questions.

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?  

Should you hire an engineer directly or through an architect

Just about every project requires the services of both an architect and an engineer.  In some rare exceptions you might be able to do a project with an architect and not need an engineer.  Such projects are generally simple alterations that don't impact any building systems, but If you are building a new house or adding a substantial addition to an existing house, it is likely that an engineer will be required.

Once the decision to hire an engineer has been made, you will need to consider how to contract the engineer.  Some might suggest the engineer should be hired directly by the owner, while others recommend contracting the Engineer as a sub-consultant of the Architect.  There are pros and cons to both options.

Acknowledging my bias as an architect, I hold a pretty strong view that the architect should always be the lead designer and the engineer should be subcontracted to the architect.  It is true that you will pay some amount of mark-up to the architect in order for them to subcontract the engineer, but for most projects the risk vs reward evaluation does not support hiring the engineer directly.

To fully appreciate this statement it is important to know that the coordination of the building systems is an essential part of the architect's responsibility. 

It may surprise some that architects are responsible for coordination of building systems, but the only licensed professional in the design team that is educated in all of the major systems of a building is the architect.  Engineers are specifically trained in their respective disciplines and tend to know their part very well, but they are generally not familiar with the other systems of the building.  It's critical that you have one central figure responsible for coordination of the design to avoid a large amount of costly coordination during construction.

If your architect does not have a contractual relationship with the engineer and the engineer does not have to answer directly to the architect, the architects authority over the engineer will be limited.  This may put the burden of coordination on to the owner and the owner could take on a needless risk and expense. 

We also need to recognize that the mark-up added to the engineer's fee will be minimal.  Also, most architects are generally willing to negotiate the markup, so if you are concerned about how much you are paying you can discuss this upfront.  Generally a 10% to 15% fee is common.  The lower the value of the engineer's fee the higher you should expect the percentage mark-up paid to the architect.

You may pay a bit more allowing the architect to hold the engineer's contract, but empowering your architect to coordinate the various parts of the project will pay dividends well into the construction phase of work.  What do you think?  Is it worth the additional mark-up for design phase coordination or would you prefer a lower design fee?

For more tips on how to manage your project, check out my articles on www.luisgile.com.

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.

How to develop a budget for your construction project (Part 1)

How to develop a budget for your construction project (Part 1)
By Luis Gile

Developing a project budget is one of the most important early steps of any construction project. This will be a multi-part series that will give you the background and information you need to develop a budget for your project.

Taking the time to develop an accurate budget is an essential step prior to contracting an Architect or a General Contractor. This will ensure that you have the capital to complete your project and that you don't commit yourself to any contracts without knowing your spending limit.

Before you begin building your project budget, there are specific pieces of information that you need and some concepts you should understand. In this first article we will go over the basics so that you can have good foundation for starting your budget.

Project Program

Before we begin budgeting, we have to estimate how much space we need. We can do this by by developing a project program. Your project's program is a list of spaces with critical design information such as square footage, adjacencies, and other specific requirements. I will publish a more detailed article about how to develop a program in a future blog.

For now, to simply estimate your square footage, note down all of the spaces you want with an approximate width and length of each room. Multiply the width and length for each room to come up with the square footage for that space. Add up all of the square footages for all of the spaces you need to determine the total footprint of your new space.

The best way to estimate the size of a room is to consider the furniture you will be needing in each space and then adding an appropriate amount of space for circulation. For example a dining room should be large enough to accommodate a dining table, chairs, and at least one hutch or credenza. The clear space around the table should be no less than 4 feet, but if you want a more comfortable space, you may choose to add 5 feet or more. You may also want to add an additional 10% to 15% more square footage to the total to allow for structure and connecting space between multiple rooms.

Here is a sample list for reference:
Galley Kitchen........10 feet wide 15 feet long......150 square feet
Dining area............12 feet wide 18 feet long......216 square feet

TOTAL SQUARE FOOTAGE................................366 square feet
Circulation 15% of total.................................... 55 square feet

Total program..................................................421 square feet

Adjust the room names a sizes to suit your project. Once you are armed with this information, we can move on to the next concept.

Margin of Error

Margin of error refers to how much higher or lower your actual project costs will be from your budget. Margin of error is meant to account for fluctuations in cost and or square area. During early stages of a project it is common to assume that any cost estimate will have a 20% to 25% margin of error. To account for this margin of error, your budget should include a line item specifically called "Margin of Error".

As you get closer to the start of construction, your margin of error can be reduced. Keep in mind that an estimate is always just an estimate. There is no such thing as a 0% margin of error on an estimate, so no matter how accurate you think you are, always carry a margin of error in your estimate.

Contingency

Contingency is a word used to add monies to a project to cover the cost of unknowns. Contingency is different than margin of error in that contingency is meant to capture things your budget missed. 

The word contingency may be used by contractors, estimators, or even architects. The use of the word has different implications depending on who is using it. I mention this only to convey that when we talk about contingency for your budget, we are talking about the "Owner's Contingency". Owner Contingency is meant to cover hidden conditions of the site or other unknown costs of the project. This is not a fund for making changes to the scope. This is your safety net for completing the work.

As the Owner, you have a responsibility to pay for the services, labor, materials, and equipment needed to complete the work. Failure to make payment to any service provider places you and your property at great financial risk. As such, you have an obligation to ensure that you have sufficient financing to cover all costs. You don't want to find yourself 3/4 of the way through construction only to realize you have run out of money. Make sure you carry 15% to 20% of Owner's contingency throughout the project. This is over and above any margin of error.

Also, please make sure that your contingency is fully funded. This means that you either have the capital or sufficient financing to cover the contingency. It's not enough to include the line item on your budget, you must also have the funds set aside and ready to use if needed.

Cost components
Your project budget will include a combination of estimates to cover hard and soft costs.

Hard costs refer to the cost of construction.
Hard costs include the following:
1. Trade labor such as masons, carpenters, plumbers, etc.
2. Material costs such as concrete, wood, light fixtures, etc.
3. Permanent equipment such as boilers, air conditioners, water heaters, etc.
4. Temporary equipment such as cranes, scaffolding, etc.

Soft costs refer to all of the other costs of the project.
Soft costs include:
1. Architectural fees,
2. Contractor fees,
3. General conditions costs,
4. legal fees,
5. real estate fees,
6. cost of land acquisition,
7. permit fees,
8. zoning fees,
9. filing fees.

We will begin our estimate with the hard costs first and then use the hard costs as a basis for estimating the soft costs.

With these basic concepts in mind we have set the stage for developing your project budget.

In my next entry, I will go over the various estimating methods that we have at our disposal and then go over a few examples of how we can apply these methods. Please join me again next month where we will continue to explore how to develop your budget.