Business Articles - Legal and Insurance

Customers are tired of being "ripped off" by contractors that bid jobs low, and then present high priced additional work orders. The additional work orders are priced above the normal markup and the customer ends up paying more for the job than the highest original bid they had. This is one of the practices that gives contractors a bad name.

It happens frequently in the commercial construction arena. As a result, architects, designers, and owners are starting to demand Guaranteed Price Contracts. If you do commercial work you may have run into this already. Those that haven't should educate themselves on these contracts.

Let's define terms. A bid, a lump sum contract or a fixed price contract states that the contractor will build the job for a specific amount of money, with language that limits liability on such things as underground obstacles, dry rot, building, electrical or mechanical code violations, undefined plans, etc. These issues can result in a price change.

A Guaranteed Price Contract says that no matter what price the contractor submits, he guarantees the price. There are only two ways the price can be changed. If the owner wants to make a change after the contract has been signed or if allowance amounts are more or less than the allowance allotted in the contract.

The Guaranteed Price Contract submitted by the contractor states that the contract amount is guaranteed to be the sum and substance of his "bid". He will build the entire job for the price quoted with no requests for additional monies. The contractor must work with the architect or designer to be sure that they have everything specified, correct and complete. If something turns up in the middle of the job that isn't right, the contractor eats it. That is what a Guaranteed Price Contract is all about.

Let's take a closer look at how you can use this approach to sell your services for residential new homes or remodeling work. These jobs guarantee you a profit if you do them right.

First thing is to make sure you are thorough in your customer interviews and qualification, estimating, contract writing, and setting up and running the job. You will need checklists, such as:

- Information needed from the owner: budget, selections, time schedule, etc.
- Information needed on the plans: dimensions, schedules, cross-sections, elevations and specification sheets.
- Information needed for the job estimate: who does what to arrive at an accurate estimated job cost.
- Background information: a list of all subs, suppliers, and previous customers of the architect or designer to check quality of previous plans they have drawn.
- And most important, make a list of everything that you can think of that may be a problem on the job.

It is critical that you make sure every detail is complete and accounted for before you sign the contract. Many contractors, architects and designers go into a job with loose ends and plan to resolve those issues when they get to them. WRONG. All issues must be resolved before the contract is signed on a Guaranteed Price Contract.

If your appraisal shows that the job is workable, you need a team approach to the estimating process. There is no room for errors, oops or "I forgots". Your estimate must be right. A smart contractor will get a neutral third party to review his/her estimate to be sure that nothing is forgotten. Review again Michael's Cardinal Rule # 4 (posted on our website).

You should have a list of showrooms complete with the name and phone number of your showroom contact. The customer can visit these showrooms and make selections. Because you need to be accurate, the customer needs to see and touch the selections they will make. A showroom is the best place to do this.

Your markup on these jobs should be higher than normal. You have increased risk on a Guaranteed Price Contract. If you miss something or underestimate a task, it comes out of your pocket, and you do not have the opportunity to ask for more money. My recommendation is that if you are using a markup of 1.22 for new homes, you should raise it to 1.24 or 1.25. If you are using a markup of 1.55 on remodeling, then a 1.6 is about right. Specialty contractors, raise your markup about the same as the remodelers.

There are other issues in putting a Guaranteed Price Contract together.

Without a good referral from previous clients, these jobs may be harder to sell. Your customers may be skeptical. They don't get involved in construction contracts often, and they are concerned you will cheat or take advantage of them. They may also balk at the language that you will need in your contract (discussed below). However, if you do a good job with your sales approach, they will see the advantage.

What is the advantage? For the customer, it is the promise of no surprises. The customer knows exactly what the job will cost them. You can't cheat or take advantage of them by asking for more money during the job.

For you, your jobs are almost assured of running smoother and being completed faster. You will have less customer contact and interference. That also applies to the architect or designer. Since your jobs will be completed faster, you will be paid sooner and you are assured a profit on every job you do if you estimate and run them properly.

What is the downside? You have to work harder to put the job together. No guessing. One of the biggest problems will be getting the customer pinned down on everything they think they want or need. Saying they want no surprises is easy. Being willing to help you put the package together is another. The customer must be willing to make decisions to get realistic allowances for all selections.

Your estimate must be right on the button. Follow my sixth Cardinal Rule: You shall get written quotes on all items that exceed $300.00 on your estimate. You also have to stay on top of production. There will be no room for poor scheduling and delays here. If you make a mistake on these contracts, big or small, you eat it.

If everything is done correctly, you sign the contract, do the job, get paid and everyone is happy. Right? Not so fast pilgrim. We have a couple of quid pro quos to discuss, and here is where you may get customer objections.

Your contract language should include the following:

If I, the contractor, am going to give you (the owner) a Guaranteed Price Contract, then you are going to agree that if you want to change anything, you will pay a change order fee of $xxx and my lump sum price for the change. Job changes, price changes.

The owner, architect or designer agree that I will set the job schedule and they will assist me to make sure that it happens including any selections or other decisions required. Job schedule must be a top priority for all those involved.

The owner, architect or designer agree that they are not going to talk to any of my crew or subs for any reason. All communication is to be done directly to me (contractor) or my job superintendent.

The owner agrees to the payment schedule without exception and guarantees that payments will be on time every time. If they are not, they will pay a penalty for being late. If I don't get paid, I will shut the job down. And there will be no retention of payments for any reason.

A Guaranteed Price Contract may be a good way to go if you follow some basic rules for this type of contracting. If you do, you will make a good profit on every job. Violate the rules however, and you will pay dearly.

Michael Stone has more than three decades of experience in the building and remodeling industry. He can be reached by e-mail at michael@markupandprofit.com, by phone at 1-888-944-0044, or on the web at www.markupandprofit.com.