To G.C. or not to G.C.
As design stage neared completion, it was time to turn my attention toward the construction stage of the project. My architects at Build LLC specialize in what is called “Design/Build”, which is exactly as it sounds: designing the house and then building the house. Design/Build proponents will tell you this is the most efficient and cost-effective way to build a new house because it centers all responsibility in one place and eliminates many arguments, inefficiencies, and other overhead associated with using a separate traditional architect and general contractor. Both traditional architects and general contractors, however, will tell you that this back-and-forth between architects and contractors is what gets you the best quality house possible. Their argument is that the architect keeps the G.C. honest and the G.C. keeps the architect honest… all on your behalf. For instance, if an architect specifies a certain material and the G.C. tries to sub in something inferior, the architect will point it out and make sure it is remedied. Conversely, if an architect specs a material that is 5x as expensive as something just as good, the G.C. will alert you to this and ask if you’d like to use the more cost-effective stuff.
Both arguments make sense to me and I’m sure there is merit to each. Addtionally, I can see either situation working out very well or very poorly. A great Design/Build firm will provide a great all-around experience without the need for checks and balances whereas a crappy one will deliver you a poorly designed poorly constructed house. Conversely, a good architect/G.C. combo will give you a great finished product with minimal friction, but if either the architect or G.C. is a weak link, the entire project can turn out poorly.
One thing that doesn’t seem debatable, however, is price. The Design/Build process would seem to produce a less expensive experience in most cases, but as my attorney pointed out to me, it also involves more risk. The reason for this is that in a typical Design/Build arrangement, you never sign a G.C. contract at all. Instead, you sign what is called a C.M. (construction management) contract. This type of contract essentially just specifies the fee you’ll be paying your construction manager and the fact that they will be “advising” you throughout the process. Now… “advising” includes a lot of the things a G.C. would do like coordinating subcontractors, getting bids, supervising the site, etc but the two key things it doesn’t provide are blanket liability for the project or cost guarantees.
Liability
In a G.C. contract, if something bad happens during construction, the G.C. is ultimately responsible for it. If it’s a problem caused by a subcontractor (more common than not), the G.C. will attempt to assign blame and remediation to that subcontractor, but in the event it cannot be assigned for some reason, the G.C. assumes it. This is a valuable service, in my opinion. It’s nice to know that no matter what happens on site, you’ll never even have to hear about it.
In a C.M. contract, the construction manager will also attempt to assign blame and remediation to subcontractors when appropriate, but if that fails, it’s on you, the client. One of the reasons it’s cheaper to use a C.M. than a G.C. is that the liability insurance isn’t there, but the downside is more risk for you so you need to get cool with that if you’re going the C.M. route.
Cost Guarantees
There are three ways a G.C. can bid your project: Fixed bid, cost plus, and cost plus with gmax. Fixed bid is just as it sounds: a G.C. tells you he or she will build your house for X dollars and that is exactly the amount you pay. If it’s tougher to build than expected, the G.C.’s margins suffer and if it’s easier, their margins increase. A cost plus contract basically says you will pay whatever the house ends up costing to build, in time and materials, plus a fixed fee to your G.C. (either a flat fee or a percentage of the cost of construction). A cost plus with gmax is the same as a cost plus except the G.C. gives you a maximum amount you will be on the hook for no matter what happens.
While the certainty of a fixed bid contract seems nice, I have two problems with it. Firstly, since the G.C. needs to make sure the project is profitable for them, they are highly incented to pad the number, almost guaranteeing you are paying more than you should, unless things go terribly wrong… at which point they eat it and aren’t going to be happy anyway. Secondly, change orders inevitably come up and I imagine this can cause arguments between clients and G.C.s as to whether or not the fixed bid should be affected by the change.
The cost plus method seems the riskiest but also has the potential to save you a lot of money if things go well. The cost plus with gmax improves this option by at least giving you a ceiling you know you’ll never go over. Although again, fighting over changes can surely result in disputes here.
My situation
Anyway, my attorney advised me to look into going the G.C. route because he feels more comfortable with the liability protection they provide. Although I had planned on using Build for both designing and building, I agreed with my attorney’s concerns and met with a couple of reputable G.C.s in Seattle to see what they could do for me.
It is important to note that I did not talk to any one-man shops or otherwise unestablished firms. I’m sure I could have gotten plenty of low-ball, unrealistic bids if I did. Instead, I picked one G.C. based on what I knew about their reputation and another G.C. based on some great work I had seen from them. My experience speaking with each firm was different.
When I called the first firm and inquired about them building my house, I ended up spending an hour or so on the phone with one of the principals and we got along great. He was a very knowledgeable guy and explained to me in great detail the benefits of going the G.C. route and what his firm offered. By the end of the phone call, I told him I’d love an estimate at which point he asked me to send the plans over. I emailed the plans over a day or so later and his response surprised me a little. He essentially said that the plans were “so complete” that it would actually make the project harder to estimate. I guess Build does such a thorough job spec’ing everything out that it requires more of a G.C.’s time to examine than if it were just a sketch. Given this, he asked me if a quick ballpark bid would suffice for now and if the fit felt right, they would do a deep dive. Absolutely I said, not wanting to waste anyone’s time. Two full weeks later, I got a bid from them and it was shocking. They submitted a “low end” (best case) number and a “high end” (worst case) number.
The low-end number was 86% higher for the total project cost than Build’s! And the high-end number was 155% higher!
I’m not just saying their fee was higher. The entire project, if contracted through them, would cost between 86% and 155% more. I’m not sure any amount of liability protection is worth that. It’s simply an obscene amount of money. So what accounted for all of the extra costs? A lot of stuff, including a higher fee and a bucket called “General Conditions” that essentially includes a construction management fee on top of the standard G.C. fee. This G.C. pitches their “fee” as being 12%, but it’s really a bullshit number. If you add in the fee they charge for their project manager and superintendent, it’s more like 20%. This is fairly standard practice, so I’m not implying any dishonesty here. I’m just saying, when you’re pricing a project, you need to really dig into the numbers and find out what you’re paying for. As a point of comparison, Build’s proposed C.M. fee would be a flat charge and it would amount to approximately 11% of the cost of construction, pre-tax, pre-contingency.
With this sort of cost differential, there is no way I could ever justify using this G.C. With no hard feelings of course, I sent an email to the principal informing them how much higher their bid was and that as a result, I could not justify a relationship with them. That’s when things started to get a little weird. The principal asked me to keep their bid confidential, and I told him that I planned on talking about the bid on my blog but that of course I wasn’t planning on mentioning his firm’s name because I’m not trying to make anyone look bad. I thought that would be the end of the discussion but he then felt the need to clarify that he wasn’t afraid of looking bad but rather that he doesn’t want his competitors learning about the way his firm bids and that “ethically” he would never ask for information on his competitors either.
What?
I asked him what could possibly be unethical about inquiring about your competitors and why was he so concerned with obscuring his business practices? I told him that one of the things that attracted me to Build in the first place was their transparency, honesty, and desire to remove the mystery from the profession. He told me his was decidedly unimpressed with that and wished me good luck on my project. Very strange… and very much NOT a good fit for me, obviously.
The second G.C. firm I met with was a smaller shop (about 40 people) whose work had impressed me and seemed to build a lot of great modern homes in the Seattle area. The firm is Dyna Contracting and I’m mentioning their name because they’re just as open about their practices as Build and they said they didn’t mind being mentioned even though I didn’t end up moving forward with them. In other words, they are my type of guys.
My initial meeting with Dyna went great and when I walked out — without even seeing an estimate yet — I knew this was a firm I would be happy to work with. They are into modern architecture, their overhead is smaller than some of the bigger firms, and they strike me as the type of people that are more interested in working on cool projects and providing value than capturing every potential dollar that could hit the top line. They also seem like great “value engineers”, meaning they are vigilant about looking for cost savings wherever possible in order to reduce your projects costs and thus make you a happier client.
While the first G.C. firm took two full weeks to get me a rough estimate that went into no detail, Dyna produced a detailed breakdown of every single cost anticipated in the project, right down to the door hardware and cabinet pulls. There were pages and pages of details about everything, including an entire section on “qualifications” spelling out things like “existing downspout locations assumed to be adequate”. Like the first G.C., they commented on the completeness of Build’s drawings and even said they were among the most complete they’d ever seen. Go Andrew!
What Dyna produced exceeded my expectations as far as completeness goes, and it took them only a few days to turn around. Amazing.
At the end of the day, however, it’s the bottom line that matters most, and I had to stack Dyna’s numbers up against Build’s. Dyna came in a very respectable and reasonable 16% higher, while of course being much lower than the other G.C. Most of the additional cost was in a higher fee and once again a higher “General Conditions” bucket that included a separate project management fee. Again, this appears typical in the industry so it’s not a big deal, but you just have to add it to the equation.
The decision
At the end of the day, my decision came down to whether or not liability protection was worth an extra 16% to me. Since neither Build’s nor Dyna’s estimates were fixed cost, I risked going over on either number, but I assigned a high honesty score to each, so I assumed an equal chance of overage with either route. This point should not be underestimated. An estimate is just an estimate and if you don’t trust the estimator, the estimate isn’t worth much. Through my many months of working with Build, they’ve done nothing but increase my trust in them and when I called their references to ask how well they stay on budget, they got glowing reviews. Although I hadn’t had any experience working with Dyna yet, they just felt very honest to me (and I tested them a bit) and I’m sure if I called their past clients, that hunch would be validated as well.
In the end, my decision was to stick with Build, mainly because they have given me no reason not to. I realize not hiring a traditional G.C. is a bit of a leap of faith, but the past several months have given me the faith I need to take that leap, and hopefully save some moey in the process. I am convinced that the Design/Build process Build goes through indeed saves money and produces great results. I accept that if my project goes off the rails in a way their projects never have in the past, I am a bit more exposed than I would be under a normal G.C. relationship, but at the same time, I’ve heard of plenty traditional architect/G.C. relationships that get out of hand as well.
In the end, you need to trust the people who have given you reason to trust them, and Build has given me that in spades over the last year. That said, if you’re looking for a great G.C. in the Seattle area, I would start your quest with Dyna… and of course if you’re looking for a Design/Build firm to design, build, or remodel something, you know how I feel about Build.
Endnotes
- Wow, 2400 words. That was a long post.
- We may end up using Dyna as a vendor for some major elements of the project, including plumbing, electrical, and other things.
- Big ups to both G.C. firms for not low-balling and not responding to my declining of their services by lowering their own bids to unrealistic levels.
- My sample size of G.C.s was very small. I do not mean this as any sort of referendum on G.C.s as a whole, although as mentioned above, I do believe that the Design/Build process — although requiring more risk — generally results in lower costs in the end. We’ll see if this proves true. This is just the sort of thing this blog is for!
Costs accrued during this stage:
| Construction management services | $95,000.00 |
| Legal fees to examine construction management contract | $416.00 |
| Printing/Reprographic fees | $1,188.00 |
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Great post! I can’t believe the first G.C. had such a weird reaction to your declining / sharing you were posting on a blog.
Now that most of the details are worked out – including financing – when does the project look estimated to be complete?
Mike,
Exceptionally well done. We always appreciate the kudos you give and the acknowledgement of our efforts.
And, I would like to underscore our appreciation to Dyna- you guys obviously have a great company and we believe that your involvement/ feedback will only benefit the finished project. Though our systems vary, we’re always glad to find like-minded folks who share our commitment and passion. Looking forward to more interacting in the future.
Mike, great post. This was tremendously educational.
Kevin (and the rest of the Build gang), what are the reasons for design/architecture/build firms not to offer fixed cost-style contracts? Risk mitigation factors in, I’m sure (tough especially for small companies, I imagine); and I guess the AIA doesn’t welcome design+build with wide-open arms anyhow?
The legal ins and outs aside, this underscores a very fundamental divide between the two approaches of completing projects: All-encompassing full-service by one firm in-house, or individually contracting out through different specialists. Apologies for the length of this post in advance.
This subject comes up quite often in political consulting–my field of profession for the last decade–and shares a number of commonalities. Some campaign managers prefer one approach, others steadfastly insist on the other. Here’s how it breaks down:
Contracting through specialists
This is common practice by 98% of campaigns. Under the direction of the campaign manager (or in extreme cases, the candidate himself), individual vendors are brought on board: A firm to design your logo/identity/branding, another to build your website, another to prepare and design your print and miscellaneous collaterals (pins, bumper stickers, yard signs, etc.) plus additional costs involving print and mailing houses, radio spot producers, television commercial production, ad spot buyers for both mediums, videographer/photographer for your campaign, the list goes on depending on the range and scope of the campaign.
The Good: Like going with G.C., the sell is that by farming out all the various projects, everyone will competitively fight for their piece and keep everyone else honest. And with the flexibility to choose consultants and firms for each task, you can maximize the talent under your control, while corralling costs by encouraging competitive bids.
The Bad: It never, ever works that way. Here’s what really ends up happening: Your campaign manager picks all their friends they’ve worked with in the past, fielding a range of costs that are generally 15 to 30% higher than they should be, upon which a 15% consulting fee is placed by the campaign manager himself, raising actual costs per vendor nearly 50%. If any subcontracting is involved–such as if the web firm brings on a graphic designer–the costs jump by another 15 to 30% for that individual service. In the end, you end up with a fairly accurate 80 to 150% jump in actual costs, not unlike the first firm you discussed your terms with. You’re also the sucker that pays for all the kickbacks back and forth between the firms keeping each other in business.
You also have to worry about the person calling the shots getting out of control. I’ve seen some pretty astonishing examples of this, namely:
1. I was contracted by a project in 2007 to do a $2,000 conversion from a static site to WordPress backend. The reported “cost” on the FEC reports showed a website project in excess of $250,000. No lie. The person who hired me walked away with $248,000 in pure profit, but the organization–having trusted this person–also trusted them to accurately assess costs. Not all clients are this stupid, right?
2. In 2008 I produced a series of direct mail pieces and tabloid-format newspapers for a VERY prominent conservative organization based in Colorado for a modest but complete fee. The previous executive director who had been fired for unrelated issues had estimated the costs in excess of $300,000, essentially intending to contract someone for a similar fee to mine, while paying off his own house in the process. The board of this very prominent organization, despite their bureaucratic bean-counting tendencies, was fully prepared to spend that much.
I won’t say that going with specialists is a bad route, so long as you’re willing to fan lots of money out to lots of different people to make them your friends. But if you hire someone whose job is to get your cheeseburger from McDonalds, your fries from Wendy’s, your drink from Sonic and your ice cream from Dairy Queen, you can bet the total meal cost is probably going to eat a $20 bill, rather than the 8 bucks it’d probably be to get a Big Bacon Classic meal with an iced tea and a frosty yourself. This whole broken, unaccountable system is what leads to…
In-house full-service firms
In-house guys provide it all. In campaigns it means they whip up solid logos, design and deploy the websites, design all print and materials (in addition to all post-production work, since they usually have fantastic relationships with the print house and know how to prepare templates with minimal prep required), record radio ads with a Shure and Soundtrack Pro, film television ads with a Sony HD handicam and Final Cut Pro, make the spot buys themselves, and send out at least one person in an already-existing position (likely a field director or driver) to also handle a camera on the campaign trail.
The good: Your costs are miniscule and your logistic efficiency multiplies tenfold. Remember, in the process of all this, your logo guy isn’t having to shoot his work to all other parties, there aren’t six different people involved in the production of a direct mail piece, and so on, and so forth. Everyone’s in the same office sharing resources. The candidate also benefits from a more direct, intimate working relationship at all stages of production, better articulating his goals and message, as opposed to a fragmented hailstorm of consultants who all report in occasionally.
The bad: In-house guys may not necessarily be quite as talented as specialists, nor may they cover quite as many options. With a good in-house firm, you can bet the farm on a solid 85% effective rate to going full-scale, at a fraction of the cost. There’s a few benefits you won’t have, but going from 85 to 100 is not a linear graph, it’s where the curvature leaps considerably.
In the end, campaigns can be won and projects more thoroughly completed because quality control is suddenly a hell of a lot cheaper, you can afford to do more than you originally budgeted, and you’re having a great time working with a firm that’s taking a direct interest in your well-being. If the need to sub-contract a few services out arises, proceed with caution and make sure your primary firm involves them in the process as organically as possible.
The bottom line: People you know and trust running in-house shops are making their money by providing a wide array of services at far lower margins than their counterparts, most likely because they detest people who arbitrarily inflate the cost in order to snag a few suckers who didn’t do their homework. More likely too, is your in-house guys know the business a lot better too. From the sounds of it, you’ve made a great decision for the time being.
Great comment Devon. It should be noted that Build isn’t actually building the house themselves with in-house talent, with the exception of the cabinetry and a few other things. They are directing subcontractors just as a G.C. would. The difference, however, is that when I pay for, say, framing, I am not paying Build. I am paying the framing subcontractor directly. This only adds to the transparency. There are no markups, kickbacks, or anything else that would increase the cost of the work being done.
Mike, really appreciate the post (sometimes more is, well…more..). Going the architect and separate contractor route the estimating process has taught me that more or less costs are very similar in terms of labor and materials for our project the real place for savings is looking between the lines of estimates at the cost of the G.C. services. All the way down to line items such as site security, project management, supervision, etc. There can be staggering differences between contractor / GC of tens of thousands of dollars. Obviously the contractor / GS has to walk away with some cash in their pocket especially during these economic times but as the owner/client you wonder how much is necessary versus how much is just really unnecessary padding. At the end of the day it comes down to trust and reputation. The hope of course is that people and the companies they represent have faith and confidence in their craft that no matter the price they will go above and beyond the call of duty to make the best house and stand behind their work. That may be naive in this day and age but deep down I think we all want to believe liability aside that this is the case.
Thanks again for sharing your experience.
Great post. As a happy client of Build, I think you are making a good decision. Your attention to detail far surpasses my own, so I think you are unlikely to go way over budget on the construction costs; especially with Build’s shared emphasis on keeping costs down (via good design and planning). I would also complement their ability to pound on the subs to get the work done right and on budget.
It is great that you have weighed your options and decided to continue on the path that makes the most sense financially, integrity of design and timeframe wise.
A great historical time to build and I look forward to seeing something great happen! Thank you for blogging about your experience and decisions.
It’s always best to build and know your expectations are going to be met. I have watched your tumblr site evolve into what I consider expectations. Having this knowledge, your C.M. decision has established your understanding of risk.
I feel that the your getting the education, expectation and financial impact that may arise well laid out. Another consideration, I feel, is that BUILD is feeding families that they know and care about and at the end of the day this is incredible!
Thank you for building during these times, I hope that I can see this home! Appreciate the transparency, willingness to go the distance and passion to build!
Can’t wait to see the house (online), keep up the great work and inspiration! It’s wonderful to know and trust those working for you.
Architecture and Building is a passion and finding comfort with both is great! Your evaluation of cost scenarios is awesome and establishes both can exist. We fall into the category of building, and don’t have the degrees; however, the passion for building remains the same.
If it’s worth doing, it’s worth doing right! We love building the inspiration and making an experience fun, establishing expectations is great. I feel your experience will be wonderful. It’s not about discounting he/she said about costs/design, it’s about doing it, and being apart of something! We love building and knowing that at the end of the day, it’s about relationship’s, and knowing you have made something a difference.
As a builder, I love how much you shared, it’s about doing something that is the expectation of all involved. You hired a design/build firm. Your decision to design/build is awesome!… Builder’s do offer experience, products and timelines which is our mark in a passionate industry of quality! Thank you for learning the world, via a website! Cannot wait to see the experience unfold! Relationship cannot break, unless we have a rusty chain. You have shared your decision.
We love to build, and share this passion of building like you are doing!
I do hope to see your home in magazines, websites and potentially personally?
Robin,
Thanks for the question. Ultimately, we place our owners/ clients at the top of the accountability chain for their budget and schedule. All projects have continuous opportunities for cost savings (and of course, cost increases) and we like to provide that type of information to our client on a weekly (daily) basis. As much as we pride ourselves on providing complete documents and a solid process/ system for building, things change both due to desires of the our clients and the inherent complexity of custom construction. We provide a pre-construction budget that can, following our advice, be delivered upon. Period. We keep the budget in the estimate phase to allow for us to have a series of victories (beating our targets) and deal with the 100’s of little contingencies.
We obtain nearly all fixed (and competitive) bids for any package of work that can be defined clearly. We tend to eliminate or deal with less certain parts of work which tend to drive up costs (uncertainty = extra $$). For example, we obtain framing bids for the major part of the structure, and may choose to hold out some portion of component blocking, or additional shimming (or whatever) so that the framing contractor isn’t scared into over-inflating his bid. We can then have a little bucket of funds in a line item to get that other work completed when its clearer (and less concerning) to the people performing that work.
I think its key in this discussion to underscore that our fee for the project is fixed- that is, an exact dollar amount. We don’t tie our fee to a percentage of the cost of construction- this typical part of the GC structure has always escaped our simple minds: I could never look somebody in the eye and honestly say that I’m going to do all I can to REDUCE costs for you, if my fee (and how much I make on the project) are directly proportionate to the total of the costs (costs rise, what I make rises?!). Again, my mind works simply so I’m assuming that others have resolved this for themselves to operate under that structure.
traditionally, architects were the g.c.’s (or rather, the builders)
I can vouch for Dyna. They did a significant remodel on my house and I was very happy with the transparency, professionalism and results of Ren and his team (with shout outs to Andy and Chris!)
If anyone is in need of a General Contractor, Dyna should be on your short list.