The Value of Negotiating With Your General Contractor

22 04 2010

Tired of re-bidding, re-designing, or managing excessive change orders typical within the design/bid/build project delivery process?

Hiring a general contractor with negotiated general conditions, profit and overhead (“GC & Fee“) may be a delivery solution for you. However, it’s a process that requires trust and dedication from all parties involved. Although the competitive environment of the low-bid process is diminished slightly, the beneficial gain is realized through the team striving to achieve mutually accepted project goals in which all parties have contributed value input. Projects performed under these terms are often times more collaborative, resulting in greater overall satisfaction with the value and quality of the end product. Much of the project’s success stems from the early involvement of the entire team; providing preconstruction budgeting and scheduling in order to determine project feasibility, to establish economic parameters, and to gain preliminary “buy-in” from ancillary departments. The process of negotiating terms typically reduces the overall project schedule from concept to completion, in large part by avoiding the re-design, value engineering, and re-bid phases common to the design/bid/build delivery process.  For instance, the level of finish is agreed upon early in the design phase, and the pricing impact is provided by the Contractor on the spot, thereby avoiding the eventual sticker shock that might occur once the design documents are bid out in a design/bid/build scenario. The Owner obtains a higher level of confidence of maintaining the project goals by virtue of the team being committed with valuable input throughout the process.

The circle of trust required between the contract owner or its representatives, such as the project manager or construction manager (the “Owner”), the architect, design and engineering team (the “Architect”), and the general contractor (the “Contractor”) is a circle in which all parties will rely up the others to deliver with integrity in accordance with the negotiated terms and contract language.  For instance, the Architect will design the vision that is conveyed by the Owner, and the Contractor will act on behalf of the Owner to build the vision of the Owner in collaboration with the Architect, while achieving the best value possible as the Owner’s advocate; and, the Owner will pay for all services in accordance with the negotiated terms. If all parties play nicely together, the process leads to repeat business and extended relationships.

When the Owner does not have preexisting relationships with companies that have a proven ability to perform, it will qualify a list of architects and contractors via a request for qualifications (RFQ) process; followed by a request for proposal (RFP) to those that best qualify. As the proposals are short-listed, a selected subset of candidates are typically interviewed by the Owner to determine which company understands the project, has the chemistry to collaborate with the team, is able to display competency throughout the proposed team, and offers the best solutions and strategy. The chosen Architect and Contractor will enter into a contract with the Owner based upon negotiated terms.

The Owner should view the GC & Fee proposals with a critical eye, understanding that having a team with maximum focus, responsiveness and overall understanding of the project, the budget and the schedule, may be more important than the initial “lowest” fee. When evaluating the Contractor’s proposed financial terms, it’s important to understand if the contractor is truly able to manage and deliver the project in accordance with the proposed general conditions. The general conditions are the contractor’s direct costs associated with managing the project (including preconstruction expenses). If the contractor is afforded the opportunity to cover its true costs of AIA accepted general conditions, to receive a fee for overhead and profit to manage and warrant the craftsmanship throughout the process; then, the contractor should excercise its fiduciary role as the Owner’s advocate in maximizing project value and return on investment. It’s not uncommon for Owners to eliminate the low and the high numbers, acknowledging that projects that are under priced most often end up under resourced. Experience shows that it’s usually the candidates in the middle of the pack that best understand the project, yet are still hungry enough to be competitive.

This summary is just scratching the surface when it comes to understanding the overall costs of general conditions for any given project. I’m happy to be more specific with answers to any comments.

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