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For years I heard and even preached that you could not define the “cost” of construction because it is a shell game. Have you ever heard someone say, “We will build for 0% profit if you let us define cost”? I actually used to believe that…but not any more. While I still believe that much of what many general contractor do is a shell game, there is a way to define cost…and know what a project costs and how much a construction professional is truly earning from that project.
There are actually only 5 primary areas of a construction project (not including the cost for the design professionals, and soft costs)…each with their own cost basis.
1. General Conditions – (Also referred to as “General Requirements” by the The Construction Specifications Institute…these are the people who set certain industry accepted standards…they are smart folks). These are items such as the field supervision, project management, job trailer, insurance, temporary facilities (port-a-jon), etc. This is an area that many construction professionals get a little crazy. I have seen some pretty wild things listed in this section…but the following is a list of items that I have found to be pretty well accepted:
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As a benchmark, the General Conditions should represent about 5-12% of the total project cost. The larger the project, the lower the percentage cost…and so on. On average….you need to budget about 10% as a good rule of thumb. Keep in mind, most of these items are real costs to the project and not the construction team padding their pockets…unless you see general conditions in the 15-20% range…then you would have reason to be concerned.
2. Labor and material necessary to perform the work of the project – This is real simple….what does it cost to hire the trade contractors and purchase the material to build the project. In an open book format this should be pretty cut and dry as the church participates in the selection of the trade contractor, review of bids and invoicing. Complete transparency. Keep in mind that these costs represent the lions share of the total project cost. If you are looking to reduce the cost of your project, this is the area to focus….not fees or general conditions.
3. Performance (Surety) Bonds – A surety bond is issued by an insurance company to guarantee satisfactory completion or performance of a project or or a segment of a project by a contractor. In short, this is an insurance policy that an owner or lender can require of contractor(s). The cost of the bond is a direct cost to the project, so the requirement of the bonds need to be evaluated carefully as it will increase the total cost. Bonds are not a panacea…nor will it guarantee you that there will be funds available to complete your project. It is an insurance policy…and when was the last time you saw an insurance company rushing to pay a claim???? HMMMM. Also keep in mind that bonds can be placed on the general contractor….but if the church is really looking for “protection” (and you want to spend 1-2% in additional cost), then obtaining bonds on the major trade contractors is a much better route as they are the ones performing the actual “work”.
The costs of the bonds will range in the 1-3% range depending on the sub-trade and financial condition of the contractors involved. If it is higher than 3%, then the contractor may have some issues that need to be explored.
4. Profit and overhead – What is the construction professional’s fee for general overhead and profit (this is not General Conditions)? This is sometimes 2 line items…and other times it is a single line item. I have written about this before in a previous blog and the fact still remains that there is a needed balance between fees that are reasonable….and yet not too low or too high. There is not an “industry standard” fee…nor should there be as different companies provide varying levels of service and expertise. The size of the project will have a bearing on the fee (the smaller the project the higher the fee…usually). But regardless of the fee…you should know what it is…see it…have it be transparent and then do not begrudge the team for earning that fee.
5. Contingency – This is the “what if” fund…EVERY project should have at least one contingency fund. I recommend 2 contingency funds be established during the pre-Construction phase of the project. The first should be for “design and construction” related items and this should carry on through the entire project. The second is for inflation and escalating prices that could impact a project before you break ground. This contingency can diminish the closer you get to groundbreaking…and then can be eliminated once the project is off and running. The contingency can also be either in the contract with the construction professional or outside the contract (or both), depending on the structure of the contract. Regardless…it needs to be transparent, and this needs to be a 2 way street.
So…in conclusion…and some of you may think I am being overly simplistic, the bottom line is to be transparent in all of the above and work in a collaborative environment with the betterment of the project being the primary goal and objective for everyone involved. Without these attributes, the project is subject to challenges.
Transparency + Collaboration + Mutual Respect + The Right Team = Successful Project
