Are you a Project Manager

One of the most important yet commonly overlooked roles in residential construction is the Project Manager.

Owners know they need a builder and most recognize when they need an Architect but few ever consider hiring a Project Manager.

This results in the Owners taking all of the duties and responsibilities of the PM without even knowing.

This gap in the project is felt by all of the team but typically is most detrimental to the Owner himself.

This results in; increased fees, delays in schedule, and poor workmanship.  In addition, Owner's typically come away with a general sense of being overwhelmed and often other members of the team are blamed.

The Project Manager plays a key role in the project team.  The PM has a number of responsibilities.  Getting the most out of a PM means that the procurement of the PM should meet a few key conditions.

     1. The PM should be an experienced construction professional.

     2. The PM should have no affiliation with any of the project team. 

     2. The PM should be hired directly by the Owner.

The Project Manager's role is to act entirely in the owner's interest.  The PM drives scope, schedule, and budget on behalf of the Owner.  Employing an independent professional to work in your best interests can greatly reduce the stress of a construction project.

Follow these simple suggestions and you will reap the benefits of this important member of your project team.

Are you acting as your own Project Manager?  If so, how are things going?  Did you hire a PM and find they were not as helpful as you expected?  Write me and tell me your experience.

Find your builder match

Finding a Builder can be an overwhelming and scary task.

There are many sources where you can find a builder, but making sure he's the right one for you isn't an easy task.

Don't settle for the first guy that answers the phone.  Keep searching until you have at least three viable firms.

Do your due diligence by asking questions and calling references. 

Don't work with anyone who makes you feel intimidated or uncomfortable.

Don't loose sight of the fact that you are the Client.  You are not expected to know construction.  Anyone that acts condescending or does not take the time to walk you through things is not worth considering.

Above all, no matter how large or small your project find someone you feel comfortable with, but don't skip calling references or verifying licenses and insurances.

Were you successful in your search?  How did you find your match?  Did you make a bad choice?  What steps did you skip?

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?

Where do contractors hide profit?

Where do contractors hide profit?
By Luis Gile
December 2015

The title of this article suggest that's all contractors are out to hide profits, but I want to make sure that you don't take away that impression because it's simply not true.   The majority of contractors are honest and hard working.  They are running a business and every business is entitled to make a profit.   Unfortunately, there are instances where a contractors "double dips" (charges profit on top of profit) or deliberately hides profit in their invoicing.  In some cases these infractions, are the result of common but incorrect business practices.  Other times it may be intentional.  Either way, my goal for this article is to identify for you some of the potential pitfalls and call your attention to the places where this is most likely to occur.  

Number One:  General Conditions

The General Conditions of Construction is one of the most common places for double dips to happen.  This is also the place where additional charges are improperly applied when a construction change order is necessary.  The key to avoiding this is to make sure that you completely understand and have defined what general conditions include.  This MUST be done up front.  Before you even request the bids.  In other words, you need to tell the contractor what you expect the general conditions costs to include.  This will ensure that when you receive all of your bids (hopefully you have solicited at least 4), each of the bidders have quoted their price in the same way.

Number Two:  Self Performed Work

Self performed work refers to any trade or construction work that the General Contractor performs with his own workforce (as opposed to sub-contracting the work to another company).  In residential construction many of the companies that operate as general contractors began their businesses as trade contractors.  Some may have been carpenters, plumbers, or even electricians, but as they grew and started to get more and more work they evolved into a General Contractor.  This is good because it is a sign that they are very capable and if you understand this, it could be an opportunity for cost savings.  Unfortunately, most homeowners don't know to ask and actually end up paying the general contractor twice as much profit for the portions of work that the GC self-performs.  Don't be afraid to ask about which portions of the work the GC will self-perform and make sure to ask what the profit margins are for both the GC portion of the work and the trade work.  Keep in mind that each trade contract will include profit that the trade contractor needs to make for his business.  If your GC is self performing a portion of the trade work himself, then you should be able to either negotiate a lower profit margin or no profit margin at all for the work he is self performing.

Number Three:  Rental Equipment

Construction Equipment such as bulldozers, backhoes, cranes, lifts, and dump-trucks are commonly used on construction projects.  Most of the time, sub-contractors will provide their own equipment and include the costs of the equipment in their price.  Other times, the GC might rent equipment from an equipment rental company, these costs are invariably passed along to the Owner as rental equipment costs.  Rental equipment costs could either be included as part of the cost of the work or as part of the general conditions.  In some cases, the GC might own his own construction equipment and he may charge the owner a rental fee for using that equipment for the project.  Construction equipment is expensive to own and maintain and contractors are entitled to charge fees to cover their costs.  However, the cost of maintaining equipment should not be the same as the cost for renting equipment.  Costs for GC owned equipment should be treated the same as self performed work.  Don't be afraid to ask who will be providing equipment for your project.  If the GC will be providing some of his own equipment, ask him to quote you his rates and make sure you understand how he will be applying profit to those rates.  

Number 4:  Change Orders

It may seem pretty obvious that change orders are a great place for profit to be hidden, but you may not know how profit is hidden in change orders and how to avoid overpaying for change orders.  The most common way that GC's overcharge on change orders, is to add general condition costs to every change order.  If you have properly defined what is included in the general conditions costs, then you should be able to discern when a change order should include general condition costs and when it should not.  To ensure that you are not overpaying for change orders, make sure you negotiate change order rates as part of your overall price negotiations.  Ask for change order rates as a percentage mark-up.  These rate can be applied to change orders by multiplying the costs of the change by the percentage markup to establish the GC's profit.  Also, if you know in advance that a certain portion of the scope is subject to change,  the best way to avoid overpaying for a change is to solicit alternate pricing.  Alternate pricing can be used to price alternative solutions for almost any part of the scope of work.  By soliciting this cost up front during the bid you are ensuring that you have competitive pricing for this alternative scope.

The various cost elements that make up the cost of a construction project can be very complex.  You have multiple contractors and lots of moving parts to track.  Being clear and deliberate about every cost element is the best way to ensure that you are getting a fair price.  Be fair to your General Contractor.  He should not be expected to eat costs or perform more work than you are not willing to pay for.  Keep in mind that he is running a business and he is entitled to earn a fair profit margin on everything he does for you.  Conversely, you are entitled to know and to negotiate just how much of a profit margin you are willing to pay.  Address all of these issues early on and you will have a much more successful project.  

How an Owner can influence Scope definition

How an Owner can influence Scope definition
By Luis Gile
November 2015

One of the most important factors in the success of a construction project is having a quality Scope of Work.  Scope of Work is the definition of what you expect your service providers to do for you.  A service provider could be an Architect or a Contractor.  You should have a Scope of Work for every phase of your project and for every service provider.

Owners have a great deal of influence over the Scope of Work.  The steps an Owner takes (and even the steps an Owner skips) could have profound influence over the quality of the Scope of Work and ultimately the quality of the final product.

In this article I will outline some of the ways in which an Owner can influence the quality of the Scope of Work.

Number One:  Invest in Preliminary Studies:
There are a number of preliminary studies that an Owner should undertake before beginning design.  The first and most important one is a Programming and Feasibility study.  Most of the time this is done as part of the schematic phase of work.  Assuming that this will be done and that it will be done correctly could be a costly mistake. 

This type of study has two parts.  The first is the project programming.  This establishes the basic parameters of what you want to build (for example, 2 bedrooms, one bath, and a garage).  The second part of this study is the code and zoning review.  A code and zoning review establishes the limitations of your project, this is absolutely necessary to establish the feasibility of your project.  It is a good practice to have this study done as a distinct phase of work.  I recommend that you pay a small fee for this study and share it with all of the Architects you wish to consider so that you can establish a common starting point for all. 

There are a number of additional specialty reports and studies that you might also need.  Geo-technical Reports, Site Surveys, and building conditions reports might be needed depending on your project.  If you attempt to proceed without the proper preliminary studies, it is possible that you may have to pay for additional services later on or face steep penalties for violations.

Number Two:  Invest on Schematic Designs:
Schematic Design (also called conceptual design) is a phase of work under which a Designer will work with the Owner to design what they want.  This is the phase where you can change your mind as frequently as you would like without incurring huge costs. 

A lot of people rush right into construction documents because they think they know what they want and think it will save them money.  Unfortunately, most people do not realize that the cost of making changes later in the process can be more than 10 times the cost of making the same change during schematic design.  If you invest a little more time and money up front to refine your design the next phases of work will run much more smoothly.

Number Three: Establish your contract terms:
There are a number of options for establishing the contract terms for a construction project.  Most of the time Contractors will use a third party template from the American Institute of Architects or from Consensus Docs (produced by the Associated General Contractors of America). 

I recommend that you consult with a Construction Attorney before you accept any form of agreement.  You should note that just because these are considered "templates" does not mean that they cannot be modified or that these terms are right for you.  An Attorney skilled in construction will be the best person to advise you on which terms to accept.  Regardless of which template you use and how your attorney decides to modify them, make sure that you establish these terms up front.  Do not wait until you are ready to award the work to decide on which template to use and don't try to interpret these contracts on your own.

Number Four:  Define the General Conditions:
The General Conditions of Construction are terms that establish the services that the Contractor will be required to perform.  General Conditions are often overlooked or added in as an after-thought, but these are the most important part of the Construction Documents. 

Your Architect's drawings will tell the General Contractor what to build, the General Conditions tell the contractor how you want the project managed.  You should review the General Conditions well before you solicit pricing.  Make sure that you establish clear expectations with respect to meetings, reporting, scheduling, and cleaning.  Ultimately, the Owner has the responsibility for making sure that the General Conditions are aligned with their expectations.  You should not expect your General Contractor to perform these services the way you want them unless you communicated them clearly up front.

Number Five: Establish Close-Out Procedures:
Closeout Procedures refer to the final steps that the General Contractor or possibly even your Architect will have to perform in order to receive final payment.  Close out procedures are often part of the General Conditions, but I have called these out specifically because these are very important. 

You need to be very careful here.  If you release final payment before all of your closeout procedures have been completed you may find yourself missing critical documents.  One of the most overlooked items is the lien waiver.  Lien waivers are documents that prove you paid the contractor and that the contract acknowledges receipt of the payment.  Your close-out procedures should require a lien waiver for the full value of the work (including change orders).    Without this document if a contractor places a mechanic's lien on your property, it will be more difficult to lift the lien.  This will make it impossible for you to sell or refinance your property.  Other documents that you might need are warranty's for labor and equipment, release of surety if you had a bond, or inspection approvals from the local authority.

These are just some of the things that an Owner can do to make sure that their scope of work is as good as it can be.  Consult with a professional if you are unsure of anything and keep in mind that no scope of work will ever be perfect.  These are the challenges of construction and this is why you need to be vigilant and careful through every step of the process to make sure that you make as few mistakes as possible.

What steps have you taken to influence your scope of work?  Have you overlooked any of these and had a tough time? Email me with your experiences.

Could I live in a "Tiny House"?

When tiny living makes sense 

By Luis Gile

There seems to be a lot of interest in what is being referred to as the Small House Movement (also known as the Tiny House Movement).  The term "Tiny House" refers to any residential structure that is below 1000 sf.  The idea of living "small" has been around since the 1970's but recently this concept has experienced a resurgence. 

The Small House Movement advocates living simply.  It may be associated with environmentally friendly housing (a modern concept) but in reality it's a return to housing as it was many many years ago.  Early pioneer homes were nothing more than an eat-in kitchen and a sleeping loft.  These homes could house large families in less than 500 sf.  Over the years, trends towards personal space, individual privacy, advents in construction technology, and the increasing affluence of Americans has ballooned the average US one family home from 1200 sf in the 1970's to 1800 sf in 2012.

Having lived in spaces that were well under 1,000 sf and in an apartment that was no more than 500 sf, I can tell you that living in quarters within that range is very viable.  You'll have very little storage space, but you dont need to make huge lifestyle changes to adapt to living in 500sf spaces.
That said, the most extreme examples of tiny house living are what we see on HGTV.  Living in spaces that are well below 500 sf are both challenging and life changing.  Living in a space that small is not for everyone, but there are some cases where an extreme tiny house could be viable.

Here are my top 6 reasons for considering a tiny house.

Number One:  You want mobility
If you or your spouse has a job that causes you to move around a lot and you don't feel like you're in a position to plant roots in any one place, a tiny house might be right for you.  Of course the type of tiny house that you'd be considering would be more like a trailer or a mobile home, but the concept is still the same.  There are certain considerations in designing a home like this because the movement and vibration from the roadway places unique stresses on the interiors of the home, but in the end it is very practical and very possible for one to live in a tiny house that is also portable. 

Number Two:  You want to save money
If you are on a tight budget or you are looking to save the majority of your income for the future, tiny house living is an extremely affordable way to live.  If you are willing to live in a very modest way with very few amenities, you can have a custom tiny house built for very little money.  For the price of the down-payment on a conventional home, you could have your own tiny house allowing you to save the majority of your income for other things.

Number Three:  You don't have too much "STUFF"
If you are the type of person that has few possessions and don't expect to accumulate a lot of things tiny house living may be a very viable option for you.  One of the biggest challenges in tiny house living is that you have very little space for storage.  A family of 4 or an individual that has a lot of stuff will find tiny house living to be absolutely impractical.  This may sound improbable in our consumerist society, but a lot of people find living with fewer things to be very liberating.  The key is to have a few really good quality items with multiple uses and not accumulate a lot of unnecessary things.

Number Four:  Save on Taxes
One of the great advantages about living in a tiny house is that depending on how you build the house and where you build the house, you may be able to avoid real estate taxes.  Mobile homes or temporary housing is treated differently in the real estate tax code than a conventional home.  In fact some jurisdictions are catching up with this and realizing that they are losing out on property real estate taxes from people who have chosen to live in a tiny home.  Houses without foundations or houses that are mobile are excluded from real estate taxes in some jurisdictions.  If you are interested in avoiding real estate taxes, a tiny house may be right for you.  Just make sure to check with a local tax professional before you commission your home.

Number Five:  You need Guest housing
If you need temporary housing or you need a guest house, a tiny house may be the perfect option for you.  As previously mentioned, tiny houses are more economical to build, but besides that they are also more economical to maintain than a conventional house.  In addition, certain jurisdictions may prevent building a conventional sized house as a guest house, but a tiny house may be permissible.  Your tiny guest house could also serve as a space for extended family or as quarters for service people such as a live-in Nanny. 

Number Six:  Green Living
Green living is also a major trend in construction today.  If you are concerned for the environment, you can reduce your carbon footprint with a tiny house.  You will have to do without a lot of modern conveniences, but if you're willing to make lifestyle adjustments, you may find tiny house living very gratifying.  Tiny houses need very little energy to run themselves and water consumption could be less as well.

Tiny House living is not for everyone.  It requires a lot of compromises, but this alternative to conventional housing may help you meet other goals.  Before you take the leap into a tiny house situation, try closing off portions of your home and experience what life would be like with less space.  Make sure you are comfortable with the compromises before you take any additional steps.

Are you considering a tiny house or are you already in a tiny house?  If so, what are (were) your reasons for making this change? 

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.