We study data, connecting dots and making plans (blueprints) as we go.
For many years, we have conscientiously logged, on spreadsheet after spreadsheet, the construction expenses of our completed projects. We place a particular emphasis on analyzing costs-per-square-foot, always looking to understand if client tastes or market trends are evolving. We are not the first to recognize that costs only go up over time, irrespective of underlying market conditions. We’ve seen costs rise when the real estate market is soft, as well as when the market is booming. Rarely do real estate or construction costs pull back, and no surprise, clients seldom feel they are getting a fair shake – nor do contractors generally admit to be making more than a living wage.
In the face of ever-rising costs, we work to minimize variables and to meet budget through rigorous analysis. While we strive to be efficient with our designs, gilding the cage as little as possible and concentrating on our clients’ highest priorities, design is only part of the equation. In the universal money-scope-time triangle, money alone is not always the first priority. Residential design and construction is a largely discretionary endeavor, and we have learned that our patrons want what they want, even while they may be disappointed with the expense or schedule.
Regardless of whether the budget is the foremost priority for a particular project, it is ALWAYS a priority. Once plans and specifications are complete and we are once again over budget, we deploy a number of expense management strategies, from value-engineering to competitive bidding. As we assist clients in picking a contractor, we always seek to best match builders and projects, fitting a contractor’s project management style, culture (corporate or artisan), size, overhead, reputation, price, and ability to cashflow with a particular project. Despite our rigorous and careful vetting and the clarity of our construction documents, we often see wide spreads in contractor proposals. Bids based on identical plans and specifications can vary as much as one hundred percent when contractors with different experience and overhead structures submit their proposals. Simply stated, more experienced and established contractors are more expensive. Their insurance is more burdensome, they pay greater sums to site supervisors, and most importantly, their subcontractors have greater resources and command higher rates. On the other hand, less expensive and experienced contractors submit lower bids, but trigger questions about quality, reliability, and resources.
When researching and recommending contractors and especially when overseeing a competitive bid, we find it essential to carefully match contractors to the expectations of the client and to the demands of the particular project. Can a smaller, less expensive contractor handle the project? Is the project too small for a more established firm? When a small contractor looks to jump scales by taking on a larger project, we question whether they have the project management team to successfully execute, as it is very difficult for a smaller contractor to meet the greater management and cashflow needs of a larger project. In addition, New York City residential construction contracts typically include a retainage provision, setting forth that a contractor can only bill for work completed at the time of billing, and with ten-percent held back (retained) until project completion. By definition, all contractors are essentially flight risks at the beginning of a project when their deposit check is cut, while at the end of the project the contractor has effectively become the client’s lender. Does a smaller contractor have the financial reserves available to cover the retainage at the end of the project and to complete the punchlist? For many years, we have used these two questions, project management capability and cashflow ability, to qualify contractors for projects. More than a few smaller contractors who saw opportunity in front of them were disappointed by our concerns and subsequent recommendations to clients to work with more established firms. Recently, we’ve added a third qualification criterion, essentially a price-per-square-foot qualification. Many contractors are not comfortable with overly technical or custom project components, especially as they are responsible for their fabrication, handling, installation and warranty. Contractors who are used to working at lower price points may not have the resources or experience needed to fabricate a curving, torquing stair rail to a smooth flowing ribbon, or to install full-size stone slabs at the walls of a bathroom. In construction, it is nearly impossible to bluff one’s way through the unfamiliar. At the end of the day, a contractor’s attempt to execute too many project components on a first-time basis represents a great risk. It can be a painful experience for all parties when collaborating with a contractor who is grasping for the brass ring.
While it is challenging to scaffold a smaller contractor seeking to grow, we’ve also struggled when helping more established contractors perform on modest projects. Even the most established firms have smaller projects they are compelled to undertake, sometimes for a repeat client or for friends and family. A number of the top-tier firms have asked us to brainstorm and to assist them in establishing a small-projects division within their company, so they can better compete and execute at different scales. Unexpectedly, there are a number of barriers to entry for larger firms attempting to succeed at smaller projects – an inverse corollary to the smaller contractor trying to grow. Bigger firms have larger overhead expenses and their insurance rates can be crippling. In addition to their offices, vans, and general overhead, they often employ a business development team, estimators, a billing department, and each project receives dedicated project managers, assistant project managers, and in many cases a full-time project superintendent. Pro-rated salaries alone may represent costs in excess of the budget for a modest project. The second challenge is the higher cost of subcontractors generally employed by the more established firms. If plumbers, electricians, millworkers and painters are all more expensive, and are in turn subject to the percentage-based fees of the general contractor and architect, how can the larger firm step down and successfully undertake a more modest project? Suggesting an established contractor put together a list of less expensive subcontractors and decrease the level of management provided to a project is generally a non-starter, and instead, smaller projects are placed into a pro-bono or favor category – virtually assuring an awkward and unsatisfactory outcome.
Seeking to short-circuit large spreads in bidding, we try to pre-qualify the experience and scale of firms bidding on a particular project. Bidding within the same tier makes for comparing apples to apples, and the range of bids is usually minimized. For smaller projects, we select from one tier, for larger and more complex projects, from a higher tier. If the competitive bidding process is well managed, each competing firm has an equal chance of winning the award, and the client has multiple acceptable bids from which to choose.