I am going to focus on negotiating with a general contractor rather than the low bid process. See the post Contractor – Bid vs Negotiate for discussion of the choice to bid among a group of contractors or negotiate with a single contractor
I suggest that you engage your contractor as soon has you have even a general idea of the project scope, to advise the design team during the master plan or schematic design phase and to prepare the end of phase cost estimates. Never wait later than the beginning of the design development phase.
Your project manager should lead you through this process but here is what you might expect.
Identify a small group of qualified contractors and compare them based on their response to a Request for Qualifications, similar to that described in my post Building Your Project Team, though the process with contractors is sufficiently different to warrant a separate discussion. See the post Contractor – Union vs Non-union for discussion the issue of using union vs non-union contractors
What are you looking for in a contractor
- You don’t want to be their biggest or smallest project.
- You want them to have substaitial experience with similar buildings and with clients like you.
- You will want to meet their team and get a feeling of how they will work with your project manager and architect.
- You want to know whether they subcontract all trade work or employ building trades in their organization which allows them to be more nimble in working around site logistics and coordination issues.
- What is their history and how are their references from owners, architects and others
- On time and on budget delivery
- Responsiveness
- Preconstruction services & estimating
- Change order history
- Collaborative interaction with the design team
- It’s reasonable to ask them to propose a high level schedule for your project, even though it involves a lot guesswork. It gives you a good chance to see how they work.
- And finally there is cost.
You’re bringing your contractor on early, the project is hardly defined. You’re hungry for some indication of the project cost. Why not ask them for their best guess, nothing binding, just their best guess? I never do that. The truth is, once there is a price on the table, people can never quite bring themselves to pick the firm with the higher price, especially if there is a substantial difference. The contractor who has particular insight into this project and sees complexity and high costs and wants to give the owner their best advice will almost never prevail over a contractor who paints a rosy picture, either out of lack of attention or by strategically suggesting a low price. Providing an estimate involves a lot of effort by candidates and doesn’t really help you make the right decision.
The fee and general conditions proposal
You should get competitive proposals for fee, overhead and general conditions. This is a good way to compare contractors’ costs. Remember, all of the actual trade costs, about 80% of the contract will be bid competitively among multiple subcontractors.
The following is a breakdown of what might be included in such a proposal. Every contractor handles this differently so it may take a little work on your project manager’s part to arrive at a apples to apples comparison. Some contractors promote a very low overhead and fee making them seem much less expensive while moving many costs into general conditions or work of trades.
Preconstruction services – This includes project manager, estimators & staff time and trade workers involved in field investigation. Their plans for providing construction cost estimating, collaboration with the design team and field investation may be a factor that influences your choice. Additionally if the contractor is prepared to defer those costs until the beginning of construction, that may be a factor.
General conditions – Every contractor deals with this differently and it takes a little effort to make an apples and apples comparison. General conditions include:
- Physical field office, security, temporary facilities utilities, tools and equipment, site logistics, general site labor, waste management and trade permit costs.
- The project manager is the primary contact with the owner and is responsible for the budget and the overall schedule and all the contractual relations with subcontractors.
- The superintendent and any assistants run the work on the site, manage their own trade workers and coordinate with building officials.
Some site logistics will still only be estimates and not directly comparable. The interesting costs here relate field office costs, how they plan to staff the project and the rates for project managers, superintendents and other staff.
Home Office Overhead – This is most commonly expressed as a percent of the other costs but is important to confirm what is and what isn’t included in this number.
- Everything relating to their home office
- Insurance (sometimes a separate category)
- Principal time
- Accounting, legal and subcontract management
- Cash flow financing
Contractor’s contingency – This the contingency for the contractor’s use both during design and into constuction. See my post Contingeny Breakdown for further description. They should be able to tell you what that contingency will be when they start work and and where it will typically end up at the start of construction.
Fee – profit – This is want it sounds like.
Guaranteed Maximum Price – GMP
What form does the negotiated agreement take? Most often it is a GMP contract. During the contractor selection process you have reached an agreement on the contractor’s profit, overhead and general conditions. At the conclusion of construction document preparation, the contractor prepares a detailed bid for the project which includes competitive bids from subcontractors for all of the work. This constitutes the Guaranteed Maximum Price. The contractor is entitled only to the actual cost of the work up to that maximum. Any savings or unused contactor contingency at the end of the project is either returned to the owner or shared between the owner and contractor. If the cost is greater than the maximum, the contractor absorbs the overage.
However, if the contractor can demonstrate that there has been a change in the work by the owner or unidentified field conditions or problems with the construction documents, they are entitled to a change order which will increase the value of the GMP. There is more detailed description of the GMP contract in my post Contractor – Bid vs Negotiate