Construction Consulting Agreement
I read Dennis Dixon’s article on personal service contracts (“Getting Paid for Preconstruction Advice,” Business, 10/12) with a lot of interest. I have been using a similar vehicle, which I call a construction consulting agreement (CCA), for at least 25 years, with great success. In fact, of the 70-plus estates we have built in Silicon Valley, almost all have been initiated with a CCA. Here are the highlights of our agreement:
- Instead of charging by the hour, we charge a percentage, which is almost always 1.0 percent of the final budget on which the construction contract is based.
- We sometimes charge a deposit of $1,000, but lately I have been waiving this, and because there is no cash outlay, clients seem more willing to sign.
- We bill 50 percent of the amount due at completion of preliminary budget submittal, and the balance at final budget submittal.
- The entire amount is offset against our builder’s fee if we are chosen to build the project.
This agreement is usually agreed to when the architect is hired, although we have begun the process at all stages of design. Many times the client comes to us first, and we help our clients find an architect that fits them. Then a team is formed consisting of the owner, the architect, and us. We attend all design meetings and offer value engineering and construction advice as the plans are developed and drawn. While this is a lot of hours, it gives us the opportunity to get to know the client really well, and it allows trust to be built between the team members.
Best case for us is we get hired to build the house at the end of the design process (in which case our CCA fees are applied to the deposit). This is what happens about 95 percent of the time. Sometimes the clients are on the fence about our final budget — but knowing they will have to write us a check anyway, even if they don’t hire us to build the home, often nudges them toward selecting us.
Worst case is we do not get hired and the client writes us a check for 0.5 percent of the budget, after already having paid us 0.5 percent for the preliminary budget. We had clients write us checks a few years ago for $24,675 when they hired another builder after being in design for about a year. While it did not feel good to lose the job, we did get paid well for our time.
Though I have greatly refined this process over the years, the original idea was not mine. It came from an article I read decades ago that turned into a book written by David Gerstel called Running a Successful Construction Company. In it, he proposed the concept of “price planning,” which is what our approach is based on.
It works really well for us. We are a $12 million-a-year luxury home builder (for owners only), and this is the backbone of our sales process.
Paul Conrado, President
Conrado Home Builders