Negotiating with a Contractor
Written December 18, 2010 by Hendricks Architecture: Tom Russell, Architect LEED AP • Filed Under Contractors
Negotiating with a contractor often gives owners the best value for their money. Working with a proven and reliable contractor leads to less headaches, the quality is known up front, and the building team (including the owner, architect, general contractor and subcontractors), is on the same page. A negotiated fee can be a higher cost up front, but the end cost can be lower than in a competitive bid as there are typically less change orders and the project is built faster with smoother project administration. A successful negotiation is a win-win for both parties.
Building a new home or doing a major remodel involves a lot of decisions. One of the most difficult choices is selecting a contractor to do the work. Choosing the right contractor for the job is extremely important, and several things need to be considered before committing to signing a contract for one of the biggest investments many of us will ever make.
A Home Under Construction with a Contractor Selected by Negotiation
Building a new home can take from a few months to years, and during this time you (and/or your architect) will be working closely with whoever is doing the construction. Reputation, references and examples of past work should be carefully researched for all potential contractors. Chemistry is an important aspect of a successful owner/contractor relationship as well, and should be considered during the selection process. It is a good idea to talk to past clients (and your architect) and learn about their experience working with the builder on a long term project.
The method you use to choose a contractor should be based at least in part on what your priorities are. Competitive bidding is one method that is used for selecting contractors, and is often a good choice if low cost is your top priority. It is a time honored way of selecting contractors, and works well in many situations. One downside to bidding is that the low bidder isn’t always the best choice, and choosing based solely on price often leads to disappointing results.
Some of our clients choose to select a contractor based on their qualifications and reputation, and then negotiate with them to determine a fair price for the project. When quality of work and service are the highest priorities, this can be a better method than competitive bidding. If you choose an honest contractor that has experience building the type of home you want and has established a reputation for delivering high quality work at a fair price, you will likely be getting the best value for your dollar. As architects, one of the services we offer is helping you choose a quality contractor that is a good fit for your project.
Another Home under Construction with a Negotiated Fee
If possible, it is a good idea to have a contractor selected before the design has been completed. It is often helpful to have input from the contractor during the design process, and they can provide construction advice and periodic cost estimates that help to stay within a budget. Contractors typically aren’t getting paid for this, so it is only fair to be sure you are going to hire them before asking too much.
Arriving at a contract price is often a give and take process. Most contractors prefer to work on a cost plus percentage basis, which means that you will be reimbursing them for their cost for materials, labor, permitting fees, subcontractor fees, and any other cost directly related to the project. In addition to this, they charge a percentage on top of the direct costs which covers their overhead and profit (O&P). While the direct costs are usually not subject to negotiation, the overhead and profit percentage varies. Typical O&P percentages these days are 8% to 15%, with 15% being reserved for the very best builders. In some of the busier resort areas 20% is not uncommon, though they’d better be elite contractors with high quality and service.
In negotiations with the contractor, there is usually some latitude in what percentage they charge, and in what portion of the work should be subject to overhead and profit charges. Depending on how busy they are, and how the market is at the time, the contractor may be willing to negotiate on their overall O&P charges. Unless it is negotiated and contracted otherwise, most contractors will add the O&P to all portions of the work, since as a general contractor they are responsible for coordination of all the trades and for making sure the final product is correct.
It is a good idea to ask a contractor how they select their subcontractors. Most established contractors have a group of regular subcontractors they use, and sometimes this can lead to non competitive pricing by the subs, since they know they will get the job. A good contractor will keep his subs honest by getting bids from competing subs, or by knowing what things cost and refusing to pay escalated prices. Make sure your contractor is working in your best interest and getting the best value for your dollar.
Another cost item that you will want to know is what rates the contractor pays his help. Most contractors have employees that are paid hourly and billed at some multiplier of their wage to cover insurances, taxes, etc. If you are on a cost plus percentage contract, you will want to make sure the contractor is paying his workers a fair price for their experience level and compared to the prevailing wages in the area.
An Architect can offer you help in deciding which method of selecting a contractor will be a best fit for your project, its budget, and your goals. We keep up to date on what things cost and what the contractors are charging for their services. We can suggest quality contractors that will be appropriate for your project, and help you negotiate with them to arrive at a contract price that is fair to everyone.
Tom Russell, LEED AP and John Hendricks, AIA Architect
Hendricks Architecture; mountain architects located in Sandpoint, Idaho. Visit our portfolio for examples of some of our recently completed custom projects. Feel free to Subscribe to Hendricks Architecture’s Blog.
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