For over twenty years and in both boom times and bust times, I’ve debated the merits of the various contract structures with my colleagues. With few exceptions, I have not found a better method than competitive bidding.
Is my article title hyperbolic? Your answer depends on how combative you view the design-construction industry!
The process of design and construction has essentially just two different approaches, seemingly at odds with each other. This article will explain how both perspectives are dealing with the same problem, but from opposite ends. And I will clarify why Johnston’s method really is better.
Amy Johnston’s book, What Your Contractor Can’t Tell You, is quickly becoming a classic. Originally published ten years ago, it is balanced view of the subtleties in the home construction industry. Having been on both sides of construction contracts in commercial and residential projects, I recommend it as a good introduction.
I like to say that you don’t need an architect for a house if you know:
- Exactly what you want
- How it all goes together
- How to precisely explain it to a contractor
If these are true, you have effectively completed the design process and are ready to begin construction.
On the surface, some prospective new home buyers will feel pretty confident in what they are looking for. The difficulty begins in the next two steps. There it is discovered that the particular details for implementing their dream unravels. Without a lot of experience, it seems easy to believe in the contractor who constructs houses for a living. Surely he will be able to handle the problems. That’s perfectly true… as long as cost is no object.
Let me say that a different way. A good contractor can solve any problem if there are no restrictions on cost. You are free to make any change or delay in the process as long as you accept the expense of the adjustment.
Obviously, for most projects outside of an Apple store or a Gates house, an unlimited budget is a ridiculous notion. It is the management of finite financial resources that sets off the entire controversy.
Many an owner has had an expectation for some standard, feature, condition, or level of quality that differed from what the contractor built. If this item isn’t clearly documented in the agreement between the parties, there is no legal requirement that it be provided.
The ubiquitous change order is a legal device to change the scope, cost, or duration of a contract. For anything unspecified, a change order should always be provided for every adjustment. Tens or hundreds of items can be added to the initial cost. For change costs exceeding the funds approved by lenders, these must come directly out of the owner’s pocket.
But what about items that aren’t clear? Can there be a system for balancing the expectations of both sides to avoid these often contentious, sometimes litigious debates? By what standard can an owner establish expectations that are fairly measured by the contractor? Johnston explains:
[A good bid document set] gets the design team to define a tight scope of work in a timely fashion and you gain comfort with a fair price from a qualified contractor.
Architects create contract documents—drawings, specifications, general and procurement requirements—that form a legally binding agreement between an owner and a contractor. These very precisely define what the owner wants and what the contractor is to build.
Unfortunately, houses are the least sophisticated buildings that are constructed. As such, they are more prone to suffer from insufficient documentation than any other building type. Many commercial contractors avoid residential construction altogether because they don’t want to compete on such vague terms. Contrary to popular belief, most contractors really do want to perform at a very high level and give owners top quality construction. But without good definition, they risk a less reputable firm underbidding them by cutting corners where they wouldn’t. This problem is self perpetuating, so the better contractors avoid the work entirely. When they do take it, they are under constant pressure to find savings because they will have trimmed their profit margins unrealistically thin just to win the project.
The solution for both the owner’s concern for costs and the contractor’s avoidance of being unfairly undercut starts with acknowledging that homes are becoming more sophisticated. Not too long ago, owners had no expectation for high performing envelopes, mechanical systems, or finishes. Even today, what the US market considers good is far below average in Europe. I shudder every extreme temperature day at the miserable quality of our current home that we bought just ten years ago. And it was “custom” built in 1991.
A thorough design process followed by detailed contract documents define the work precisely and allow little “wiggle room” for those that would cut corners. In fact, architectural documents can be so complete that several quality contractors can price them project and come to the same conclusions about what exactly is legally obliged for the project. No guesswork and no concerns mean the mandated level of service and attention to quality can’t be undercut by anyone else with less ethical intentions.
Johnston says this about the documentation effort:
What makes it daunting is that this process requires you to get all your design work done up front, then get those designs into a bid package that any builder can understand.
Indeed, good builders don’t mind competing in fair circumstances. For example, I recently designed a sophisticated laboratory project with a budget of more than $6 million. Seven bidders participated. My 138 drawings and 1,338 pages of specifications were precise enough that the lowest three bidders were all within 0.3% of each other. Extrapolate that to a $630,000 house—only $1,700 difference between three contractors.
Bid pricing uniformity indicates a uniformity in the opinion on the scope of work. When the documents define all the components and conditions that an owner wants this carefully, there are few surprises during construction. There may still be some clever efforts to get around those stipulations, but the project scope is legally clear and objectively able to be defended against shenanigans.
I’m confident that bidding creates a total project savings, too. While the design effort is a little more involved, it pales in comparison to the savings obtained through a competitive bid. Add to that all the change costs avoided during construction. The additional spent on quality architectural documents so significantly offsets the potential costs of unknowns that nearly all experienced and sophisticated commercial owners use some form of competitive bid environment on their projects. Of course, contractors select their subcontractors the same way!
The downside? Careful design adds some time before construction can begin. For the rare fast track project, these cost savings are sacrificed for time and construction starts early. But for all other projects, savings are preferred through early design. Design in the middle of construction to close open issues certainly doesn’t pay as Johnston concludes:
However, whether through this contract structure or any other, you will have to address these issues at some point. It’s safer to make the decisions and face the budget realities at this early stage and with your wallet closed.
Figure it out before you start. Use high quality design and documentation of that design to resolve every aspect of the project before signing a construction contract. That’s what the pros do. You should be able to understand each component of your project and have concluded decisions, even down to color selections. Anything left undecided could be a potential change during construction.