We’ve explored construction contracts before and the idea that they set the rules for a short-term “marriage of convenience” — from proposal through amicable divorce. But this month, we’re going to consider some of the pieces of that construction document that make things work smoothly for everybody involved.
Why break projects out of a “lump sum” project? Often, construction projects are prepared with a single bid item, meaning that the contractor will complete the project for a bottom line cost. From the owner’s perspective, that certainly is the literal bottom line of the project. Many design professionals will say breaking items out is too difficult to track and administer. That’s a lazy answer, though, because the contractors will have assembled their proposal in pieces usually by specific trades like framers / rough carpentry, electrical, and HVAC, either to allow them to engage subcontractors or because it simply makes sense to estimate the work by discipline. Even relatively simple projects requiring only one discipline (like installing a water or sewer line) have individual line item components on which the construction cost estimate and the contractor’s quote or bid is based. So if the contractor is preparing his estimate that way, why not break the project bid into those same components?
Let’s consider the construction of a new cabin on your site that will replace an existing one. In the simplest approach, the contractor puts a single price on all of the following work:
- Demolition of the existing building
- Additional clearing to access the site
- New footprint excavation and backfill • Foundation concrete and block work
- Framing, rough carpentry, siding, and glazing
- Heating, ventilation, and air conditioning
- Roofing, gutters, downspouts, and drainage
- Finished grading and soil stabilization
“Wow,” you’re thinking, “that sounds like a lot of extra work! Who cares what the individual prices are? I’m going to pay the bottom line anyway.” Yep. That’s all very true. By taking the extra time and effort required to prepare a bid with individual items broken out, who benefits? And how? The answer is in the very next step — the administration of the contract.
The project we’ve described is significant, but it’s not so large as to require a megacontractor who has all of those different specialties under one roof. A number of small, local outfits (subcontractors) can probably get the job done well and quickly, even if they’re working for a single managing contractor (the prime contractor). There are at least five benefits to both you and the contractor in having multiple line items in the bid and the construction contract.
First, by breaking out specialties as separate line items, these naturally translate to separate subcontracts for skills that the bidder may not have in house. In our example, a builder may have all of the plumbers, electricians, and carpenters he needs, but has structured his business to call for an excavator when he needs one. His business model allows him to take on all sorts of work on the structure proper without having to keep earthmoving equipment busy. In short, he’s specialized in what he knows best and does well and is allowing others to structure themselves to suit their interests, experience, and skills. By isolating work that’s associated with excavating, backfilling, pipe laying, fi ne grading, drainage, and soil stabilization, you’ve laid the groundwork for his subcontract with the excavator. This helps by having defined the scope of services expected from that subcontractor, who can then prepare a quote for that work with confidence. This affects your bottom line, because where there is uncertainty, contractors compensate the only way that they can: by increasing their prices. A clear scope of work for each distinct element of the work lets specialists prepare their quote for the final bid with confidence, delivering competitively lower prices for each part of the contract.
Another benefit to you (which not surprisingly translates again into lower project price!) is that while the construction contract is open, there is a basis under which additional work can be priced. What if, for example, you want to change the vinyl flooring for the new cabin from a residential to a commercial grade, or perhaps simply choose a different pattern? You know that the process for installing the material is the same, and having shopped at the local home store, you know what the difference is per square foot for the material. When you ask the contractor for a contract change for the new material (a change order), you should have a good sense of what that new price should be. If it’s substantially more or less than what you expect, the contract line item price is where the discussions start. Without that, how can you approach the change order discussion with confidence? There are a number of similar situations that would work to your advantage as the keeper of the checkbook. What if the originally chosen flooring is not available when it’s time to install it? What if the contractor substitutes something else without permission? A base price established at the outset of this marriage of convenience sets the bar for the whole project and makes great strides toward avoiding what could otherwise be very ugly disputes that could delay — or possibly derail — the project altogether.
What about paying the contractor? With a traditional “lump sum” project of any duration, how do you determine how much the contractor has earned at each step along the way? Having established the individual bid lines at the outset, bid items become pay items in the construction contract. Sequential items are paid for as they are installed. In our example, that’s largely in the order in which they are listed — with demolition first and fi ne grading last. This benefits your bottom line in two ways: It provides you confidence that you’re paying for complete work because you can see that progress. And when managed alongside the construction schedule, you have a very powerful tool by which you can budget and plan for payments.
What about the next cabin project or repairs to another building on camp? By collecting and tracking construction project components, you’ll be building a customized database of construction costs that you can use to estimate and plan for similar projects all over camp!
Problems can arise even with the best prepared plans. Let’s consider what happens when a project goes badly under the line item model we have been discussing. With payments tied to the construction schedule and bid line items, administrative surprises are few and far between. Warning flags should be flying long before the contractor quits the job, goes out of business, or you start getting nasty phone calls from suppliers that he’s not paying the bills. Cutting him loose and getting a new contractor aboard is much simpler when it is clear what has been done and what’s been paid for.
Incidentally, this is a perfect time to mention a trick of the trade that also helps to keep things from going south. Each notarized application for payment (a form that YOU should provide for the contractor’s use) should include a certification by the applying contractor that all suppliers and subcontractors have been paid prior to this application for payment and there is no outstanding debt related to your project. While that certainly doesn’t guarantee that everything is right and up to speed, it DOES provide some legal backing for you should supplier or subcontractor telephone calls start to roll in.
No marriage is without highs and lows, good times and rough waters. The construction contract marriage of convenience is no different. But by planning ahead and thinking through how things should work, you and your contractor will be able to roll with whatever crops up along the way, part as friends at the end, and look forward to the next opportunity to “tie the knot.”
Rick Stryker is a professional engineer with a particular passion for helping camps with infrastructure, planning, and regulatory issues. He can always be reached at email@example.com or 570.828.4004.
Originally published in the 2014 May/June Camping Magazine
Photo courtesy of Happy Hollow Children’s Camp, Nashville, Indiana