How To Find Big Savings In Construction Projects

Knowing what to expect – including the places costs typically “hide” – provides an edge for efficiently managing the construction process. Step one A well-defined interview process will assist you in selecting the best construction manager (CM) for the job. Be thorough; replacing the CM once the job has begun is costly and raises serious…

Knowing what to expect – including the places costs typically “hide” – provides an edge for efficiently managing the construction process.

Step one
A well-defined interview process will assist you in selecting the best construction manager (CM) for the job. Be thorough; replacing the CM once the job has begun is costly and raises serious questions of liability.

For renovation work, invite only CMs with relevant related experience. Interview previous clients to determine the CM's ability to handle change orders, unforeseen elements and client decisions.

Insist that the project executive, project manager and project superintendent assigned to the job be present at the interview. (The executive representatives the company, the manager sees the owner's money and the superintendent is the on-site contact.) Closely observable the interaction between these people. A successful project can hinge on the working relationship between them.

Require all interviewing CMs to submit a detailed account of what they heard and agreed to at the interview. This important document will reflect the CM's understanding of your conditions and form the basis for contract negotiations. This document will also serve to suppress potential disputes arising from construction contract issues.

Where costs hide

The construction contract between the owner and CM is a legally binding contract but its terms are not universal. The owner should negotiate the specifics of the contract requirements and the particular needs of the project.

The more knowledgeable the owner – often represented by the facility executive – is about the nature of the terms of the contract, the greater the awareness of the potential for hidden costs. Uninformed owners can unwittingly agree to pay more money for a longer period of time than necessary.

Demonstrate your understanding of the construction process by first knowing the unit prices and labor costs of every item you agree to purchase and negotiating the following standard construction contract line items.

• General Conditions. General Conditions should only be those non-construction costs that are necessary to get the job done and are directly applicable to the project. All general conditions should be a line item amount agreed to and guaranteed before the start of construction. Typical components of general conditions include funds for a site office, on-site project administration labor and necessary office equipment. Do not accept an amount that is expressed as a percentage of the cost.

Substantial savings can be realized by asking the right questions about general conditions. For example, question the site office requirements presented by the CM, including how much new equipment is necessary. Who should assume the cost of purchasing and installing the computer equipment and software the CM lists as a site office requirement?

• Overhead. Overhead is the CM's cost of doing business. Should the owner be liable for that cost? An argument can be made that the owner only need pay for costs directly applicable to this specific project, and not for costs the CM incurs on other jobs. This line item in particular is often the subject of legal disputes. Do not be afraid to eliminate elements of cost contained in this category and, again, do not accept an amount that is expressed as a percentage of the work.

• Hourly Wages. Agree to pay only the wages for work on your project. The actual hourly wages, taxes and benefits (not a multiple of these) are the owner's responsibility. Time off and educational seminars are not. Avoid a situation where you are asked to pay wages for a general superintendent or any other part-time supervisor personnel.

• Construction Fees. To determine a fair construction fee, negotiate a percentage based only on the cost of the work. Be careful of the language of the contract. All fees are a direct percentage of the cost of the work, before the contingency and general conditions are added. A fair 4 percent construction fee could be 4.5 percent if taken as a percentage of a cumulative total. On multi-million dollar jobs, this can represent a substantial amount of money.

Insist that the fee be converted from a percentage to a fixed amount before construction starts. Once construction starts and the potential for change orders (that can increase the cost of the work) exists, the fee will continue to rise without limit. Do not allow the construction budget to be compromised in this way.

• Contingency Fee. Most CMs require that a contingency fee be built into the guaranteed maximum price. The only responsible way to manage the necessary contingency fee is to insure that it be jointly controlled by the owner and the CM. Neither the design nor the construction process is a perfect science; CMs will insist that they need to “manage their risk” with the contingency fee. Maintaining some control over the allocation of funds will enable the owner to best justify the expenses.

When negotiating the contract, the owner must “buy the schedule” with the cost of construction and guard against it slipping. Extending the construction phase is a costly decision.

Agree on the completion date of the project and insure that a penalty be levied if the project is delayed. Do not agree, however, to a bonus if the project is finished before the scheduled delivery date. The CM might deserve a bonus for early delivery if extraordinary problems were overcome, but does not necessarily deserve bonus dollars for performing the job you hired them to do.

Change orders and substitutions

In negotiating the change order procedure in the construction contract, the owner should demand a “no work stoppage” clause. Too much time can be wasted if work ceases in anticipation of a general agreement of change order amounts and schedule implications.

When presented with a change order, the architect should consider both the money and time the CM is looking to add to the job. Each is open for discussion. Do not wonder why construction is not finished and then discover the architect has authorized an additional week of accumulated change orders.

While the CM should aggressively pursue reasonable substitutions on your behalf, be sure you or your architect knows the cost of the originally specified product and the cost of the alternative. The construction contract should state clearly that cost savings realized by the substitution for a specified product to go directly to the owner. Here, too, substantial savings can be realized.

As your architect's last element of control over the quality of the project, the punch list must be a thorough process. Accompany the architect to look at the job. Try to anticipate any problems that may arise once the space is occupied. If a fault is discovered after the owner has released the CM, the issue will be more difficult, time consuming, and expensive to remedy.

Secrets of a successful renovation

To successfully manage a renovation process while the facility remains in operation, consider the following ways to minimize cost and disruption:

• What you see is not what you get. In most cases, the older the building you are occupying and renovating, the greater the potential discrepancy between the budgeted and actual costs of the renovation. Work with an architect and a CM who have enough renovation experience to expect potential unforeseen elements (electrical, mechanical, environmental and code compliance) and to quantify the cost of the work before the construction contract is signed.

• Designing a “swing space.” If your project requires renovating existing spaces while you are occupying them, provide a “swing space” for temporary use by each displaced department as its permanent space is modified. To determine the order in which the areas are renovated, consult with department managers and the CM to minimize the disruption to company productivity and maximize the efficiency of the renovating and moving processes.

• Building a “smart” addition. If your renovation includes building an addition onto the space you are occupying, minimize traffic, dust and noise by building as much of the addition as possible before breaking through through to connect with the existing spaces.

• Establishing a presence. As the facility manager, your knowledge of the facility and daily operations makes your presence in the process invaluable. Attend weekly construction meetings and address issues before they become magnified and more costly. Often, because of your vast knowledge of the building and its systems, you will understand the issues and can offer a workable solution more than the construction team.

Opening the lines of communication

Precise communication with all of the individuals involved in the process, especially the clients you service and the employees who must be accommodated, is essential. One extreme case – the renovation of a hospital emergency room – demanded the cooperation of the local police, ambulance services, and other area hospitals to reroute and accept patients.

Common scenarios involve detecting staff of an activity or a move (start date, duration, specifics), discussing the arrangement for temporary facilities, ensuring safety and security, and providing additional signals to redirect visitors. The more accurate the construction schedule and the more open the lines of communication, the more efficient and less expensive the process.

Weekly progress coordination meetings should be attended by building administrators, maintenance and engineering staffs, and each subcontractor to review progress. Detailed meeting minutes should be distributed both internally and to the appropriate regulatory officials. These minutes will be the core documentation vehicle for the project.

Not every owner or facility manager has the time, interest or expertise to devote to project management.

The owner can still protect his or her interests by hiring an advocate to coordinate and oversee the construction process. As the owner's representative, this individual defines the development process, negotiates project contracts, schedules and monitors all stages of the construction process, and coordinates communication between participants.

The fee for this service can be offset by substantive savings in construction costs. Many clients hire these experts to “fix” a project that is already in trouble, but an advocate is most valuable if consulted from the start.