Negotiating Your Construction Contract

L. Bruce McCardle Comments
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You have found, negotiated and purchased the piece of property. You have counted cars, researched demographics and developed a positive pro forma. You have convinced yourself, your family, your banker, the zoning board, the neighbors and the environmentalists. All of this, and you have yet to turn a shovel of dirt. You are already behind schedule. What's the next step?

The results of all the work you have done to this point will never be seen by any of your customers. Everything you do from here on, however, will result in the end product your customers will see and you will have to live with every day. What you do next will determine the extent of control you will have during the construction of your project.

In this article, we will look at the three most common construction-contract agreements. We will look at the relationships, processes, advantages and disadvantages of each. It would be impossible to address these all in detail in this format. The goal here is to show you the options available, familiarize you with some of the terminology and, most of all, make you aware of the commitment of time, money and resources that may be required with each of these methods. The next step is to choose a method that will determine what your role will be in the construction process.

The Hard-Bid Method

"Because That's the Way We've Always Done It." In this method, the relationships are very structured and rigid. Notice that while you, the owner, are at the top of this structure, you are not dominant. In the hard-bid method, the architect is in control. The architect, in this role, separates the general contractor from the owner, and further separates the subcontractors and suppliers from the owner. Let's look at the process to see how this works.

The first step in this method is to select an architect. You should interview at least two or three different firms. Ask for and talk to references--don't just go by the pretty pictures. I highly recommend you find an architect with some self-storage experience, or at least, with some knowledge of light-gauge steel framing. We will address this more later.

You will then negotiate a fee. The usual fee is from 8 percent to 12 percent of the total construction cost. Some firms may add administrative fees on top of this. What do you get for this kind of money? First, you will get what is referred to as a "design or architectural program." This is a thorough detailed written study of your project requirements. This study usually includes zoning research, code research, land-use studies, traffic studies, access, egress, life-safety code requirements, and ADA regulations, to name a few. Second, the architect will begin to develop some preliminary drawings. A basic footprint and elevations will be established for you to approve.

Next, the architect will involve the engineering team: a civil engineer for topographical studies, drainage and retention plans, and to establish setbacks and easements; a mechanical engineer for heating, ventilation, cooling and plumbing; an electrical engineer who will design the power and lighting requirements; and last, but certainly not least, a structural engineer, who will play a key role we will look at in more detail later.

Then the "working drawing" phase begins. The architect and engineers will produce a complete set of plans and specifications. Specifications are most often contained in large book form. Usually, the first third of the book will be the "boiler plate," legal issues, general conditions, applications for payment, scheduling, etc. The remainder will describe in detail, sometimes by brand name and model number, any and all materials to be used on your project. Instructions for the installation of these materials and warranty requirements will also be listed.

You will notice that instead of "plans" or "blueprints," they will be referred to as "contract documents." This is for good reason: These plans and specifications will become a part of your contract agreement with the general contractor and subcontractors.

The architect will next advertise for open bids. Your plans and specifications will be made available to any and all contractors and suppliers who would like to submit a bid for consideration. The more detailed and complete the drawings are, the more contiguous the bids will be. A bad set of plans will result in questions, confusion as to what is being provided, and wide disparity in the bid amounts. A good set of plans and specifications should result in overall bids that are within just a few percentage points of each other. This will usually allow for a smoother construction process; everyone knows what they are to provide, and when they are to provide it.

Next, a bid date will be set--a date, time and place that sealed bids will be received. You, the architect and, usually, the contractors or their representatives will be present. The sealed bids are opened and read publicly. You and the architect will review the bids, select a general contractor, and begin issuing notices to proceed, followed by contracts. The entire process to this point may take as little as four to six months, or up to a year or longer, depending on the complexity of your project.

Then the "submittal process" begins. Each subcontractor and supplier must submit complete material specifications, shop drawings and installation procedures for all areas of work for which they will be responsible, even if this information is exactly as described in the plans and specifications. The architect and engineers will then review and revise or approve this information prior to procuring any materials.

Finally, you actually start construction of your project. The architect's administration role then begins. The architect and his staff will oversee scheduling, billing and payments and change orders; make site visits and reports; moderate progress meetings; arbitrate any disputes; make final inspections and ensure the project is properly closed out. Does the architect earn 8 percent to 12 percent of the total construction cost? Most do. In the hard-bid method, the architect totally controls every aspect of your project from inception to completion.

What are the advantages of this method? First, it greatly reduces your investment of time and energy. This method can catch mistakes or problems up front. The goal of the architect is to ensure to the greatest degree possible that every material has been specified, these materials will be properly installed, every contractor and supplier understands the scope and extent of his work, and all of this happens in a timely manner. It is the architect's job to see that you get what you pay for.

This brings us to "bonding." Almost always in this process, the contractors will be required to provide bonds. Bonds are simply insurance. A "bid bond" does not allow the general contractor to withdraw his bid after it has been submitted. There may be an error or something has been left out. Unfortunately, the contractor is often forced to take a contract at the original bid price or forfeit the amount of the bond. A "payment and performance bond" ensures that if, for any reason--bankruptcy, death, etc.--the contractor cannot complete your project, monies will be made available so someone can. Again, you are buying insurance, and insurance can be expensive.

What are the disadvantages to the hard-bid method? The cost and the front-end time. It is a thorough but timely process. Other disadvantages are possible over design and over specifying. Finally, the architect or engineers may specify materials or practices that are not common to the self-storage industry, or not common or readily available in your area.

The goal of every contractor and supplier on bid day is to have the lowest price by whatever means. To be competitive, he may be forced to use a sub or supplier he does not want to work with, someone who does poor work or does not finish on time. He may realize a subcontractor's bid is too low or something has been left out, but he knows this is the low number on the street, and his competitors will be using it. The lowest bid is not necessarily the best!

If a contractor or supplier has been forced to cut to the lowest price in order to get the job, what is going happen when you want to add or change something? The dreaded "change order" presents an opportunity to make up some of the difference.

This process creates adversarial relationships. Again, the structure is very rigid. The general contractor, subcontractors and suppliers are not allowed to communicate with you directly. All communication will go through the architect. If a supplier has an idea that may save time or money, he must submit this in writing to the general, who in turn submits it in writing to the architect, who then reviews this to determine whether it will even be offered to you for consideration. No matter how competent your architect may be, after the money you have paid and the time that has been expended, how likely is it he is going to admit he made a mistake or that there is a better way to do something? This method tends to result in a great deal of finger-pointing when there is a problem or a dispute.

It is essential the structural engineer coordinate with the building supplier before drawings are completed and submitted. Building suppliers will provide the engineering design and certified drawings for your building structure. If your engineer decides to reinvent the wheel and come up with his own design, "bad things happen." You must decide if you are going to make the building suppliers bid according to the engineer's design or according to their standard design specifications and practices.

If the building suppliers revert to their standard design and materials, how do you ensure all suppliers are providing the same quality and quantity of materials and labor? If you have submitted the plans with the engineer's design for permit and change that design, you may have to resubmit these revised drawings. You need to strongly recommend that your structural engineer consult with the building suppliers you are considering. This will save them some time, and save you some headaches and money.

The Design-Build Method

"Sleeping With The Enemy." Notice the change in the relationships. The general contractor becomes dominant. The structure becomes less rigid, and everyone involved becomes a part of the "design-build team." The team element is key to this process.

The first step in the design-build process is to select a general contractor, one who has had some design-build experience and, hopefully, some experience with building self-storage facilities.

Here is an outline of how this process works most effectively. You will do a great deal of the front-end work. You will meet with two or three general contractors and give them all the same information: your site requirements, budget, schedule, building requirements, materials you would like to use--a detailed "scope of work." You must have a way to communicate exactly what you expect from each of these contractors.

The contractors will then prepare a design-build proposal. At this point, they will involve the architect and engineers as needed. They will ask the subcontractors and suppliers to give their input on materials to be used and how to use them.

The contractors will then present you with preliminary drawings and an estimate. It will be up to you to carefully review these proposals. Many of the items that were listed as advantages under the hard-bid method now become disadvantages under the design-build method. You need to ensure the correct materials are being proposed, the scope of work is complete, and the schedule is reasonable. You have taken on that responsibility.

You will choose a contractor, and plans and specifications will be completed. Again, these documents will become a part of the contract. Get everything in writing. The drawings required for this method are much less than those required for the hard-bid method, since you are not dealing with an open-bid situation. These drawings serve three purposes: to get a building permit; to clearly communicate to contractors and suppliers what they are to provide; and to clearly communicate to you what you are getting (and not getting).

How do you ensure you are getting a competitive price? The best way is for the contractor to set up a competitive bid situation. The general will hand select two or three subcontractors and suppliers in each area of work, subcontractors who have worked with this general before, and in a design-build environment. A bid date will be set, and the subcontractors will drop off their sealed bids. The general contractor will open and record these bids on a tally sheet, add up the low bids in each category, add his overhead and profit, and show you the result. When an amount is agreed upon, contracts are issued, and you are ready to submit for a permit.

There are some other important issues for you to consider:

  • Liquidated damages are a dollar-amount penalty paid by the contractor for each day the project goes beyond the scheduled completion date. This practice is fair if you have set a reasonable amount and date. If you are going to penalize your contractor for being late, are you willing to pay a bonus for finishing early?
  • Shared savings is another common practice. Should the contractor find ways to save money after the project has begun, these savings can be split, usually 60 percent to you and 40 percent to the contractor.
  • A bid bond is usually not practical with a design-build agreement. Adding the cost of a payment and performance bond will be your call. I suggest you ask that the payment and performance bond be an alternate price with the bid. If the contractor is bondable, this will not be a problem. If the contractor is unable to obtain a bond, you should find out why.
  • The greatest advantages to the design-build method are the savings of time and money. You have greatly reduced the front-end time and saved a major portion of the architect's fee. You have taken away the adversarial relationships and created a team environment. The subcontractors and suppliers have some ownership in the design of the project. There will be less finger-pointing--there is no one else to blame! And you have opened up the lines of communication. If there is a problem on the job, instead of taking time to process forms to find a resolution, everyone meets at the site, agrees on a solution and keeps working.
  • What are the disadvantages? Your investment of time is greatly increased. You will have to be very involved with the construction process. It will be up to you to make jobsite visits, moderate progress meetings, review and approve payment applications, etc. The architect will not be in an oversight role providing checks and balances for you. You have exposed yourself to greater liability and increased the possibility for disputes.

The Construction-Management Method

"Who's on First?" This method can take on so many forms, it would be difficult to define. Ultimately, you design how the relationships will be structured. We can look at a couple of options.

The professional construction manager is an individual or organization that will basically set up a design-build process, with him/itself at the head of the process. He will take on the administrative and organizational role of the architect. He will become the intermediary and assume some of the responsibility and liability. He will also take the general contractor out of the total-control role and provide some oversight. The construction manager obviously charges a fee for these services. You may save some money over the hard-bid method, you may not.

Another option is you become your own construction manager. It has been my goal to make you aware of some of the issues and difficulties you will encounter throughout the construction process, not to scare you out of this option, but to help you understand the task at hand. I hope you are now more informed about where you might need to enlist professionals or handle things on your own.

This is the role of the construction manager--pulling all of the elements together. Take some of the steps from the hard-bid and design-build methods and put together a plan that best fits you and your project. Most of all, it should be a plan that works with your level of expertise and availability to be involved.

The biggest advantage with the construction-management method is you are in total control. The biggest disadvantage is, you are in total control.

I have found that the majority of self-storage owners are involved in more than just this business. Some are involved in several. If I have accomplished nothing else, I hope I have been able to show you the time, energy and resources required to construct a project. As you consider what method will work best for you, don't just look at the money that you might save, consider the cost to your other endeavors. General contracting is a full-time job.

L. Bruce McCardle has been involved in many aspects of the steel and construction industries for more than twenty years and has designed and built numerous self- storage facilities. Mr. McCardle also manages the East Coast operations of Mako Steel Inc., a supplier and installer of storage buildings from coast to coast. Look for his complete seminar on the issue of construction at the next Inside Self-Storage Expo. For more information, call 800. 383.4932.

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