Best Practices for Managing sub-contractors

In most construction projects, sub-contractors represent the majority of the Cost of Work.  Most residential Owners spend no time considering who their sub-contractors are.  While it is not prudent to come between a General Contractor and his subcontractors, it is prudent to establish some parameters for accepting a subcontractor.

In considering the best practices for managing subcontractors, we need to keep in mind that the legal relationship is expressly between the General Contractor and the sub-contractor.  While you can and should establish parameters to govern who the General Contractor can hire, the final decision should ultimately be theirs.

Requiring that all sub-contractor's hold a minimum level of insurance is a must.  There are many trade contractors with little or no insurance and some GC insurances include provisions that could put you at risk if an insurable event occurs.  Speak with your property insurance carrier to establish what minimum insurance requirements you should require from the GC and his subs.

Request proof of licensing for sub-contractor.  This is not cut and dry, there are some trades that are not required to hold licenses.  Call your local Building Department to determine which trades require licensure and require that those trades that do, provide proof of licensure prior to award.

Request copies of the sub-contractor agreement.  The GC must have a written agreement with every sub-contractor.  The GC may be hesitant to provide you with his subcontractor agreements.  This is so because part of the way a GC makes money is by marking up the trade contracts.  The point here is not to uncover overcharges or to negotiate price.  It is important to see that a formal agreement exists between the GC and the subs and that the provisions of the the GC's agreement provide adequate protections for the Owner.  If your GC objects to sharing his agreements allow him to redact any pricing information from the agreements first.  This allows you to see the terms of the agreement without revealing too much of the GC's financials.

Establish communication protocols.  All communications should flow through the GC.  Dont ever give directives to a sub-contractor.  You must respect that the GC has to retain control over the site.  If you give a trade contractor direction to make a change without the GC's knowledge you will be compromising the GC's control over the job. There could also be gaps in the direction you gave which could impact other trades.

Its important to know just how much control is appropriate when managing sub-contractors. Too few controls could mean poor quality, unsafe working conditions, or illegally performed work. Too much control could delay your project, add cost to the work, or increase the owner's risk.  Strike a perfect balance and your project will benefit greatly.

What level of controls have you placed on your subcontractors? Do you feel you had too much or not enough?

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

How to ask a Builder for a quote

Asking a Builder to quote a project sounds like a simple task.  Most people put very little thought into requesting a quote, but taking this too casually could be a terrible mistake.

Your first formal communication with an Architect or a General Contractor is when you ask for a quote for your project.

If you don't take the time to communicate how you want the pricing to be presented, you could receive quotations that are difficult to compare.  In the construction industry, there is no standard way to present a quote, so while one bidder may provide you with a detailed quote, another may simply quote you one all-in number.  If you are not clear about how you want the quote to be presented, you may not be able to compare one quote to another.  This will make it difficult to discern which bidder addressed your scope completely and which one will be hitting you with change orders during the work. 

Another common oversight is soliciting a quote without a complete scope.  There are several ways that an Owner can (and should) influence scope.  When soliciting a quote from an Architect, there are several preliminary studies and preliminary design work that you should commission before you solicit a quote for construction documents.  When requesting a quote from an Builder, be mindful that the Architect's drawings alone will not fully address every aspect of your project scope.  If you fail to address all of the elements of the scope, assumptions will be made and you may not be pleased with the results.

Give yourself sufficient time to prepare.  Don't skip any of the typical phases of work.  Spend the time up front to understand your project scope before you make expensive commitments.  The cost of making a change can be as much as six times more expensive during construction phase than it is during design phase.

If you follow these basic steps;  you will be more confident when you solicit your quotes, bidders will know you are serious, you will have bids that can be readily compared, and you will have all you need to make an educated award decision.

What information did you request in your solicitation? Were you able to compare bids? Was your scope clear and complete, or did you deal with several change orders?  Tell me your best or worst experience.

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.