The Design Builder's Blog

Guest Blogger: Doug Hanna is president of S&H Construction, Inc. located in Cambridge MA.  His firm specializes in residential and historic renovations, custom home building, renewable energy, landscaping and site work.  Doug was recognized as the 2013 “Remodeler of the Year” by the Builders & Remodelers Association of Greater Boston (BRAGB). 

Contemplating the Difference: Fixed Cost and Cost-Plus Contracts

As a general contractor, I often find myself involved in good – natured arguments with some of my fellow builders regarding the advantages and disadvantages of “fixed cost“ versus “cost plus/time and materials “ contracts. There are distinct arguments for each model, depending on the type of job, the type of structure, as well as the nature and level of completion of the plans and specifications. Having used the cost-plus/time and materials (CP/T+M) contract for the last thirty years, I am somewhat biased towards its benefits.

However, I understand the allure of a fixed-price contract for both the owner and the contractor.  Fixed cost is most appropriate with a very thorough, well-defined set of construction documents (plans and specifications) and even more so if those complete documents are produced for new construction. In a less well-defined job with plans in progress, or in an older home, cost-plus/time and materials may be more appropriate simply because there is too much that is unknown to be able to estimate with full certainty what it will take to perform the work.

On most projects of any size, no matter which contract is used, anywhere from 50 to 90 % of the work will usually be done on a fixed cost basis by subcontractors. CP/T+M jobs are generally “open book”, meaning that the owner has complete access to estimates, proposals and invoices for the entire project. Still, there can be a somewhat more open-ended aspect to CP/T+M contracts, and some people simply are not comfortable not knowing exactly what they are going to pay up front.

Risks and rewards for both options

There are more risks for a contractor operating under a fixed price contract, but there is also the possibility for more profit.  Fixed price contractors are more likely "bidding to the plans", meaning the bid is based strictly on the plans as they are, even if they are not fully developed. This is only natural. If contractors are only getting a fixed amount, they must base their estimate strictly on what the plans show. If you proceed with a project having only rough sketches or incomplete plans, it is very likely there will be changes (change orders). The more changes there are, the more things cost, with an attendant extension of schedule.

Again, if you have fully developed plans and specifications, and especially in new construction, where most factors are known and manageable, fixed price makes sense. With phased design, where plans are being developed on a fast track as construction proceeds, and especially in renovation work, it’s my opinion that CP/T+M is the better choice.

Try to become as educated as possible on the contract options available and get a good tight set of plans and specifications from your architect. Then do your homework when it comes to the contractors you invite to bid on your project. There are excellent contractors in both the fixed cost and the cost plus/ time and materials worlds. 

Seven Ways Contractors Can Get Paid Faster 

Wouldn’t it be great if you always had the ability to pay your bills on time? 

Even better if you could pay them early when a discount is offered for doing so?  

To improve cash flow at your construction business consider these seven strategies to help you collect project related payments from your customers much faster.

1. First, during the sales process, discuss upfront in a businesslike manner your desire to finance the project with their money.   Let them know your cost of doing business, and therefore the cost of their project, will be much higher if you have to finance the job using your business’ line of credit rather than their money to pay for their project as it progresses.  

2. When creating a project’s payment schedule use project milestones to determine when payments will become due.  If when doing your estimate you list your tasks and related costs for each task in critical path order, you can then add up the marked up cost of each milestone’s tasks to make sure the amount collected for each payment will adequately finance each phase of the project.   Then, add a little extra money to create a cushion of safety (front loading).

3. When writing up those payment schedules make payments due for example “When ready to start drywall” rather than “At start of drywall”.   This way you will have the money you need before you start a phase to pay for that phase.   By using this wording, if you are having problems, you can delay returning to the project if your customer doesn’t give you the money when it’s due.  Be sure to explain how this works to your customers while they are still prospects and before they sign your agreement!

4. Make it company policy (in your contract) and indicate in your payment schedule that the final payment is due at substantial completion.  This is the point at which the project can be used for its intended purpose.   So even if you are waiting on the customer to provide the kitchen cabinet door pulls as the last item to wrap things up, you can still call the project substantially complete, invoice your customer for the balance due and expect the final payment.

5. Also make it company policy that your contractor’s warranty starts at substantial completion of the project.  Clarify however that no warranty work will be completed until the final project balance has been paid in full.

6. Make sure you bill your clients as soon as the job is substantially complete.   Experienced contractors have learned that if you take two weeks to bill your customers; they will assume they have at least two more weeks to pay you.

7. In your contract, and on your invoices, let customers know when interest charges will start on late payments.  If for example they have a 30 day grace period to make payment on a final invoice, and they make their payment late, will the interest due start at the 30 day mark, or start back on the original date of the invoice?   If interest will start at the date of invoicing customers will be more likely to pay within the 30 days grace period.  Again, be sure to explain how this works to your customers while they are still prospects and before they sign your agreement!

Being proactive will help contractors collect project payments on time

For some business owners dealing with and or talking about money with clients and prospects is scary.   When I discuss this subject with them many tell me they don’t want to alienate their customers. This certainly can be a valid concern.  However, if you discuss your policies related to making progress and final payments before you let them sign your contract, and you do it in a professional manner and tone, most good customers will toe the line.  There is definitely a difference between being aggressive versus being firm and sincere with purpose.  After all, the best results for the contractor as well as the homeowner come when there is a mutually beneficial relationship.

Tips For Reducing And Controlling The Effects Of Construction Allowances

If you are building custom homes or doing high end remodeling it is your responsibility to help prospects and clients understand what their project will really cost. Don’t give or let your customers use inadequate budget allowances.

Isn’t it easier for a customer to accept a credit rather than an additional cost?  

Think about it. If a prospect or client has selected a granite counter, how often will that same client choose a $5.00/ft tile backsplash? Why not set the allowances for items not yet selected to a cost consistent with what other clients have spent in the past on similar projects? Applying this strategy will help protect your margin, and could actually increase your margin, assuming that you only credit back any difference in your direct cost.

One sure way to protect your mark-up is to eliminate allowances. However, depending upon the project or client, eliminating all allowances may not always be possible. But, reducing the number of allowances may be.  

Here are some ways contractors can improve results when working with allowances

• Try to get your clients to make their selections during the design phase.
• Identify what selections must be made and provide the clients with a list. 
• To help them complete the list make showroom and or vendor suggestions. 
• To motivate them to get the list done establish the date(s) by which they must complete the list and advise you of their choices.

To start or not to start, that is the question…

Persuade the client that it is in their best interest that you not schedule the start of their project until you know the availability or lead-time of all required products. You can even blame it on company policy. “Based on past experiences, our own and those reported by other contractors and homeowners, we have made it our company policy not to start any project unless we are sure we can complete the project on time, as agreed, with the least amount of disruption for our customers.”

Make that list and work it!

When you assemble the list of allowance items include the related dollar value included for each item and a total cost allowance value for all of the items to be selected. Make sure you include a column where the client can write in their actual selections.  Then, add one more column to the list where the clients will fill out the actual cost of their individual selections and can tally up the total for comparison to your list and total cost. If you’re comfortable doing so, this is the place to include what mark-up will be added on any additional cost over the allowance total.

Many builders and remodelers report that creating and using a list often times provides the client with a sort of psychological goal of not exceeding the total allowance. Assuming you have established realistic allowances, clients will usually try to avoid any additional costs and or mark-up cost; spending more on one item only if they can save on another. 

All Plans and Specifications Will Be For The Exclusive Use Of …

Do you give your plans and specifications away to prospects for free, or do you only leave plans and specifications with paying customers? 

Remember, people who want stuff for free hang around with other people who want stuff for free.  How you decide to answer this question will have a long term effect on your business and future referrals. 

If you choose to not leave your proposal with prospects unless they commit to your company, this policy should be discussed with your prospects during the initial sales call.  By doing so it will not become a surprise to them when you come back to present your proposal. 

You are presenting, not emailing proposals, right?

Sample text

Here is some sample language you can consider using inside the remodeling proposals you create for prospects.  This information is for your reference only.  Be sure you have it reviewed by your own legal council before using it.

This proposal and any related plans and specifications shall be for the exclusive use of; and will remain the property of “Construction Company” until a Construction Contract agreement for the proposed work is reached between both parties.  The acceptance of this agreement will require the owners’ signature(s) and payment in full of the specified deposit.   If this proposal is not accepted at the time of presentation, owner(s) are welcome to view all plans and specifications at the contractor’s office at a mutually agreeable time.

This language is best used at the beginning of your proposal

Include your policy in beginning of your proposal so you can remind your prospect about your policy very early during the proposal presentation meeting.  If they have a problem with your policy you can discuss their concerns and both of you can decide whether it makes sense to continue and present/discuss the rest of the proposal. 

By not leaving your proposal behind you are protecting your business as well as your prospect

The information you include in your proposal comes from your many years of experience and education.  For this you deserve to be compensated.   Also, because you and your team have expereince working together, I would suggest your proposal probably contains a level of detail adequate for you and your team to build from.  But, your proposal may not have adequate detail for others to build from.  If you allow other contractors to work from your proposal they and the home owner may be making assumptions about what is or should be included to do the job correctly and to building code or safety requirements.  By allowing such things to happen you may be putting other contractors, the home owners and or the success of the project at risk. 

How much risk are you willing to accept to sell a deal?

I also suggest you consider the possible liability you take on by creating specifications and or project plans and leaving them with a prospect that does not do business with you. By doing so you may have put yourself into a position where the prospect or another contractor actually works from them.  If they have challenges when building the project and decide those challenges were caused by your plans and or specs, they may have legal rights to sue you.  Regardless of whether you feel you are innocent or guilty, you will need to cover your own legal expenses if you get to court and most likely will not be able to re-coup your legal costs even if you are found innocent.  If you are found guilty you may even be required to pay the legal expenses incurred by the person suing you.

If you decide to take this risk, I highly recommend you obtain Errors and Omissions Insurance Coverage or Professional Design Liability Coverage.

Some big picture thoughts for remodelers to chew on before they decide:

• I suggest you are in the business of selling remodeling, not designs.  Can you earn a living selling designs?
• Avoid being used as an unpaid consultant.  How does that feel when it happens?
• Don’t let your proposals, specifications and plans facilitate the ability for some guy named “Bubba” to get the job rather than you.
• Not every lead you get should or will be YOUR customer.
• If you work for the wrong customers, they will be referring you to people just like them!

Help Understanding and Complying With Home Improvement Contractor Laws

Many remodeling contractors may be operating their businesses illegally without even knowing it.  In addition to construction supervisor licensing, most states now have some type of licensing or registration requirements for contractors who offer and or perform home improvement work.  Home improvement contractor licensing and regulations govern how contractors conduct business, not how they build or renovate at the job site.  Fines and penalties for lack of compliance can be substantial, including losing your right to conduct business.  The specific details of home improvement contractor laws and regulations are different from state to state, so it’s a good idea to make sure you’re aware of and understand requirements where you work. 

What states have Home Improvement Contractor Licensing requirements?

Click here for an interactive map where you can find out.  You or your remodeling customers can also use the map to check to see if a specific contractor is licensed.

Currently there are about 26,000 Registered Home Improvement Contractors in Massachusetts.

Recently the Massachusetts Office of Consumer Affairs and Business Regulation ("OCABR") released a series of five short videos to help Massachusetts home improvement contractors become aware of and learn how to comply with the Massachusetts Home Improvement Contractor Registration law.  The videos are well done and are targeted to help Massachusetts contractors, but a lot of the information shared in the videos could also be very helpful for contractors doing businesses in other states as well.  Each video covers a topic that is regulated in some way or another by any state's home improvement regulations.

At about 17 minutes of total time, it’s worth your time to watch all five videos even if your business is not in Massachusetts.  

The first 45 seconds of each video is an introduction and is just about the same, so after watching the first video in full you can probably skip ahead in the other four.

Basic Rules for Home Improvement Contractors:

Video #1:  Registration

Video #2: Contract Content & Payment Terms

Video #3: Advertising & Estimating

Video #4: Performance of the Contract

Video #5: Arbitration & Enforcement

In addition to being an industry representative in the videos, I was also pleased to be able to offer input on the script.  Before, during and after the filming I worked closely with Steven J. Zuilkowski, Hearing Officer for the Office of Consumer Affairs & Business Regulation.  During the filming I also worked with Jacqueline F. Chandler, HIC Program Coordinator.  Both demonstrated they were genuinely interested in helping contractors comply with the regulations and were seeking input to help ensure the videos served the intended purpose.  Recently Steve shared with me that the OCABR now also has a blog were he has written several posts for contractors regarding help interpreting the HIC regulations, check it out here.

I want to thank Barbara Anthony, Undersecretary of the Office of Consumer Affairs and Business Regulation and the OCABR for doing these videos to help contractors.  It was an honor for me to be asked to participate in the project and I had some fun too!

A Simple Strategy For Payment Schedules That Create And Protect Cash Flow

Contractors are forever complaining that they don’t have adequate cash flow when producing projects.  More times than not they blame this on their customers, citing that the customer is holding back or delaying progress payments.   If a contractor keeps working without getting paid he or she has no one to blame but themselves.

Consider these questions. 

Will Delta Airlines let you pay after you land?  Will Dell Computer let you pay for a custom computer after it’s built?   Of course they won’t!  So why do contractors find themselves financing projects for their customers and then end up waiting and even begging for their money?

Protect your cash flow before you sell the job!

On February 26^th, as part of a six workshop program, I’ll be leading a strategic estimating and proposal creation workshop for contractors titled: “Know What You’re Selling Before You Sell It!”   One of the topics I’ll be covering in that workshop is how to write a project payment schedule that creates and protects cash flow.  I’ll also be explaining how that same payment schedule, if explain correctly to a prospect, will help a contractor sell the job.

Below is a brief summary of how to do it and what I will be sharing more about with the attendees.   The attendees will then be encouraged to try the strategy when estimating and selling their next project.  They can then come to the free lunch and learn session scheduled before each next workshop for help with any questions or challenges they experience implementing the new strategy.

10 Steps to create and protect cash flow:

1. Estimate all tasks in critical path order (same order you would actually build the project)
2. Group tasks to establish easily definable (for the contractor and the property owner) project and payment milestones
3. Add up all direct costs the business will incur between milestones and include overhead and profit
4. Establish payment amounts based on the total cost of the milestone (Including overhead and profit) plus add some money to each to maintain frontloading for safety (you’ll make up for the frontloading when establishing the final payment)
5. Word payment schedules so each payment will be due prior to the start of each milestone
6. Collect the money needed to finance all of a milestone’s tasks before you start it (don’t be Wimpy on this!)
7. Get a significant amount of the outstanding balance at the second to last payment
8. Make sure the project cannot be used for its intended purpose until after the second to last payment is received.
9. Make the final payment due on “Substantial Completion”
10. Make sure the final payment is far less than your expected net profit but a comfortable amount for your prospect

General Contracting Starts With a Good Construction Contract

Guest Blogger: Diane Menke, VP/Operations Manager of Myers Constructs, Inc.  Diane Menke (left) and Tamara Myers (right) are the co-owners and principals of Myers Constructs, Inc., an award-winning design to build firm serving the greater Philadelphia region. A certified Women Business Enterprise, Myers Constructs is also a member of the U.S. Green Building Council, NARI, and NKBA.

General Contracting Starts With a Good Construction Contract

Over the years, I have heard from many contractors — some of them with very big companies — about how they handle drafting their business contracts. Many times, these documents consist of a collection of "stuff some guys I know have in their contracts" cobbled together. It doesn't even occur to these business owners that laws vary by state, or that they might need an expert to customize contracts to fit their own business's unique needs. By not having a professional create legal documents that fit a clear sales procedure and overall company goals, they are putting their company at serious risk. I know because we learned the hard way, too. 

When we first started our business, we used "homemade" and very simple carbon copy contracts that Tamara put together over the many years she was a carpenter working for herself.  Basically, it stated: "Seller will do X for Buyer for $Y." Like most carpenters and trades people, Tamara loved working with her hands and helping people. Carpentry was a joyous creative outlet for her. At that time, if a customer didn't pay, Tamara would "make nice" in order to "keep the peace and her good name" and move on to the next project. Lucky for Tamara, most of her customers were good people, the projects were small, and she probably didn't lose as much as she could have. 

What motivated us

In 1998, we incorporated as Myers Constructs, Inc., because we had taken on a huge and complicated renovations project. We knew we needed serious business structures in place to protect us, so in 2001 we asked Dana Priesing, an attorney who is now our office manager, to read our contracts to look for problems. (She had us sign a contract before she did so!) Dana interviewed Tamara to better understand how she sells, and how our customers buy, and then gave us a few recommendations right off the bat:

1. Don't give away design work. That was a huge lost income stream. It drained endless hours of Tamara's time, and sometimes we didn't even get the project. Dana advised us to bill for it, and she created a contract just for design work. We can now use the same contract if a customer with an architect needs consulting work during the design phase. 
2. Our income streams should be separated out, and clear and simple contracts should be created for each one. We now have one for fixed price contracts and one for time and materials contracts, which are typically smaller, simpler projects.
3. Don't use "softening statements" EVER in contracts. By softening the rules, boundaries and regulations of our agreements, and by being vague about price, payment schedules, and customer expectations, we had unintentionally created confusion. Our customers didn't know what we needed from them in order to do a good job, so Dana created a contract for us that clearly and separately identifies buyer's and seller's responsibilities, rights, and remedies.

 Protecting our investments

Our company supports a lot of people. We have invested decades into it, and we are depending on it to help us retire. It deserves great contracts to protect those objectives. And great contracts mean we can sleep soundly at night because we know we are doing what we agreed to do at the right price, and we are protected against any possible issues that may arise.

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