Construction Management - OPTION

Owner Assist Remodeling’s Construction Management Services Include These Job Responsibilities & Tasks

During the Job Costing Phase, the Construction Manager Has a Responsibility To:
  • Suggest licensed and insured trade contractors that are a fit for your specific type of project, considering availability, expertise at their trade, reliability, cost, and quality, of workmanship

  • Suggest product and material

  • At Owner Assist Remodeling will make suggestions of trade contractors and suppliers, but a homeowner can do some of the work themselves or use someone they know and trust

  • Schedule job walks with the bids to obtain bids and discuss their work

  • Answer homeowners’ questions as they work up their bids

  • Review their bids and assemble a complete budget

  • Present the bids and budget to the homeowner, answer questions and suggest possible ways to improve the results or reduce costs

 
From Job Start to Completion
  • Prepare a written schedule for the work

  • Plan for dust and surface protection

  • Plan for secure access to the work area

  • Prepare material lists

  • Order products and materials for delivery at the proper time

  • Schedule the work for smooth flow

  • Ongoing job checking for

  • Quality of workmanship

  • Best methods and procedures

  • Readiness for the next trade

  • Building code requirements

  • Maintain clear communications throughout the project, schedule client meetings

  • Schedule inspections

  • Assist with problem-solving and conflict resolution

  • Walk the job to create a punch list for the trades

Having a professional construction manager on your side to represent you throughout the construction project can turn dread into peace of mind.

The Advantages of a Cost Plus Contract

A cost-plus contract offers more flexibility when trying to complete a project and contractors get more incentives to minimize costs or bonus money for assuming extra risk, depending on the specifics of the agreement, according to the U.S. Integrated Acquisition Environment.

Benefits to Owner

 

Using a cost-plus contract tends to result in better quality projects because contractors do not have to skimp on materials and labor. Also, they can bank on guaranteed reimbursement and bonus fees for prepaying expenses. This type of agreement may reduce the chances of project over bidding because the contractor does not need to pad fixed expenses to avoid going over budget.

Considerations

 

Cost-plus contracts contain certain clauses, such as the maximum cost guarantee and the savings clause, that alter their advantages. The maximum cost clause reduces risk to the business because the contractor must determine if he can work within that agreed-upon sum and pay for any possible overages. The savings clause gives the contractor a percentage of the amount of money under the maximum cost -- giving the incentive to work the project as efficiently as possible.

WHAT’S WRONG WITH COST-PLUS CONTRACTS?

The issues listed below are just a few of the problems inherent with cost-plus contracts.

  1. The contractor has little to no incentive to keep costs low. The higher the “COST” the more money the contractor makes. This is a conflict of interest.
    WE HAVE A MAXIMUM COST GUARANTEE

  2. Although the contract may be cost-plus, the owner still requests an estimate for the cost of the project in order to award the project. When this estimate is exceeded, then the owner will demand to know why. The most honest answer is that the contractor was just guessing at the estimate because he either A) didn’t have all the information or B) didn’t know how to develop a fixed price. But remember, this is cost-plus. The owner agrees to pay the costs, whatever the costs may be, and the fee associated with the work.
     

  3. Most cost-plus contracts stipulate that only project-related costs will be paid by the owner. Overhead expenses for the overall business are not allowed. But how is the contractor supposed to run the business of contracting if the owner is not willing to pay for the very expenses that allow the contractor to stay in business? Answer: he has to pad the COST numbers (usually labor) to make up for the difference in the allowed PLUS portion of the contract.

  4. The “PLUS” part of a cost-plus project can be difficult to negotiate because the terms of the plus may mean different things to different people. Is it a fixed fee, a percentage of the costs, is the plus percentage the markup up or the margin, what is the industry standard, what is enough?

  5. A cost-plus contract shifts the risks from the contractor to the owner. Typically, the owner is not a construction professional and may not understand the risks involved. When these risks surface in the form of line items in the budget being exceeded, then the owner will refer back to the estimated budget. The owner will want to know why the estimate was exceeded. The answer is: it was just an estimate, not a quote. The owner agreed to pay the actual costs, not the estimated price.

  6. The least expensive way to determine the cost or price of a construction project is before the work begins. Construction projects don’t get cheaper as time goes on. They only get more expensive.

  7. The contractor must have the administrative systems in place to track every cost for the project and the ability to report these costs in an organized and timely manner in order to receive payment. But the cost of these administrative systems (tracking software, accounting systems, administrative personnel, office supplies, etc) are not considered direct project costs and cannot be billed to the owner. If these expenses are not recovered, then the contractor will be losing money.

  8. Owners expect your “plus” to be limited to a 10% to 20% markup. These markups yield 9% to 16.7% margins, respectively. Few contractors can sustain a profitable business at these margins. If your construction business needs a 35% markup on your costs in order to make a sustainable profit and, you are only allowed a 20% markup, then you have to shift 15% of your expenses into your cost numbers. If you don’t, then you’ll be out of business. If you do, then you aren’t really charging the owner the actual costs of the project.

  9. Mistakes happen on every project. Who pays for those mistakes? The owner doesn’t want to because it’s not the owner’s fault. But mistakes and rework are just part of the costs. In a cost-plus contract the owner agrees to pay the costs. Try explaining that to the owner before the work begins, and see how she likes that.

  10. There is no industry standard structure for a cost-plus contract. This leads to confusion about the terms of the contract and the methods of execution.

WHEN SHOULD YOU USE A COST-PLUS CONTRACT?

A cost-plus contract is a difficult way to produce a construction project on time and on budget because the factors that lead to determining the schedule and budget are not known.

Contractors that successfully use cost-plus contracts have the following systems and procedures in place prior to executing the contract:

  1. A field production job costing system that tracks every penny and hour spent on the project including all direct and indirect costs.

  2. A project management system (person or team of people) that manage and coordinate the flow of information between the field and the office.

  3. An administrative team that tracks, audits, and prepares all financial reports including invoices, budget updates, payroll, and payables.

  4. An RFP (Request for Proposal) procedure for the solicitation of bids from subcontractors that is strictly followed and tracked.

  5. An RFI (Request for Information) procedure to communicate with the owner and/or architect as changes and additional information arise.

  6. A fully executable construction contract with terms and conditions defined.

  7. A communication system that the contractor follows to keep the owner up to date with the production, payment, and schedule updates.

  8. The contractor has deep pockets. The contractor is usually financing the job because he will have to incur the costs before he can bill for them. Are these financing costs included in the budget? Even if you get a deposit prior to beginning, eventually the cost of the work in-place exceeds the income for the project. The contractor will be financing the job.

If the contractor is prepared to do all of these things, then the contractor has a better chance of having a successful cost-plus contract.

Cost-plus contracts are not easier than fixed-price contracts.

They are both difficult, but a fixed price contract is simple. “Pay this price for this scope of work.”

I am not saying that you should never use a cost-plus contract. I am saying that cost-plus contracts are not simple contracts to execute.

2020

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