Sooner or later, any contractor-architect relationship risks
foundering on the shores of pricing. It's inevitable. What the
architect wants the project to cost and what the contractor
fears it will cost occasionally cannot be reconciled. This
quandary often ends with the architect concluding that the
contractor is just charging too much and deciding to put the
project out to bid (if it's not already out to bid).
But a contractor who charges more than someone else is not
necessarily charging too much. Given some of the entrenched
habits of our industry, it's at least as likely that the other
contractor is charging too little. Too little, that is, to be
able to do a good job with the task at hand. So, while
competitive bidding may weed out an overpriced contractor, its
downside as a process is that it may well reward someone who
has not allowed enough time in his or her bid to meet the
architect's or the client's expectations.
Architects who argue against a negotiated contract or
design-build usually do so under a conviction of duty, as
watchdogs of the project budget -- a critical responsibility
that architects absorb and that contractors often fail to
appreciate. But many architects are too limited in their
approach to this responsibility. Competitive bid is not the
only way, or even the best way, to go. In this column, I'll
make the case for some of the built-in cost controls of
design-build -- some of the ways design-build meets the strict
demands of budgetary responsibility.
First, primary cost control comes from the discipline required
to design to a budget. My design-build company's current
strategy is to do enough design work (anywhere from 8 to 40
hours, depending on the project) to be able to have some
tangible documentation on which to base a budget. This is
billable time, noted as a line item in the design budget that
accompanies our design contract.
This preliminary design time includes as-built documentation
and some schematic designs. The clients and architect meet and
put together components of the various schematic options. The
architect then does a hard-line drawing of the preferred floor
plan, thereby providing me with a reasonably clear description
of the scope. I can then compare that preliminary plan with
past job-cost data for similar, completed projects -- both in
the aggregate (this kitchen is a lot like the Adams kitchen or
the Cummings kitchen) and in its component parts (the plumbing
for this bathroom is similar to that for the Wilson project;
the tile is a lot like the tile in the Simmons bathroom). This
gives me a pretty solid starting budget, based on recent
real-world experience. I share this budget first with the
architect and then with the homeowner.
Reality check. The budget
determines subsequent design direction. If we're within 10% or
so of budget, we know we can proceed with some confidence. If
we're 20% or 30% over the initially targeted budget, we know we
have to lop something off. In my experience, reconsidering
finishes (plastic laminate instead of granite, vinyl instead of
ceramic) gives us about 10% play in a project budget, but if we
need to cut more than 10%, we have to look at taking whole
rooms or other chunks out of the program requirements (cancel
that third-floor bathroom; hold off on the deck; finish the
basement next year).
This first budget reality check is often the low point in the
relationship. I prepare clients for this up front when I
describe the process, saying, "The first serious budget meeting
after the schematic phase has been completed will be the
hardest." As a remodeler and custom builder, my single most
important task is managing client expectations. If they're
expecting it to be a hard conversation and it turns out to be
good news -- "Yes! We're within 10% of target!" -- they're
thrilled. If it's bad news -- "We need to pull the master suite
out of the scope to meet target" -- they're prepared for it.
They may not be happy, but they're not surprised, and if
they're not surprised, they're probably not going to fire you
on the spot -- which is a move they will be considering (ask me
how I know) if you have not prepared them for the potential
awkwardness of this first serious budget meeting.
Open numbers. The level of budget detail I present at
this meeting depends on the needs of the clients. Some people
want to see a line-item breakdown. I usually show these as
ranges, with the high end 10% to 20% more than the low end.
Some are content to hear the information and discuss it more
abstractly. I don't give more information than is asked for
(implicitly or explicitly). If someone asks for detail, it's a
good idea to ask them how they want it presented (by room, by
phase, by option, by whatever) rather than to assume you know.
In design-build, always be open with your numbers -- never
wriggle on that.
I show my overhead and profit. There are many ways to account
for these; I place most of the burden on my labor costs and
show a lower across-the-board markup. It's a totally legitimate
bookkeeping practice and one that helps play to expectations.
Splitting overhead and profit into two line items makes them
both easier to sell.
In addition to guiding design direction, the initial budget
serves a couple of other roles. It gives clients some guidance
as they shop for products; for instance, they know they have
$25,000 for cabinets and $10,000 for appliances. It also serves
as a benchmark for subsequent budget meetings.
My cost database includes typical ratios, established over
time. I know, for instance, that in about 80% of the kitchens
we've done, electrical costs average 8% to 12% of the total
production budget. Plumbing and heating costs run 9% to 11%
including fixtures. Cabinets and countertops have a much wider
swing -- 10% to 30%. Flooring runs 3% to 5%. These ratios hold
true largely independent of subcontractor.
So, as I do my budget comparisons over the course of the
design process, I'm performing thorough value engineering: If
the electrical for this kitchen is coming in at 15% of the
production budget -- $5,000 over the initial budget of $10,000
-- we take a hard look at that component. Did we over design
the lighting? Did the client fall in love with some
particularly expensive alabaster fixtures? Do we have the wrong
electrician looking at the job? (We try to be three deep in
each subtrade to provide a built-in, ongoing reality check for
various subcontract costs.)
Once we've identified the likely reason we're over budget, we
can respond appropriately. We can get another electrician to
look at the plans; we can simplify the electrical design; we
can simplify the design for another phase of the project to
make up the difference (specify copper baseboard instead of
radiant floor heat, for instance); or the homeowner can agree
to fund the extra costs.
In it for the long haul. On
occasion I have taken some of the extra costs out of my own
overhead. Of course, I don't like doing that, but if I've given
misleading budget numbers and the client has paid for design
time based on my mistake, I need to be accountable. However, I
make sure the financial punishment fits the crime, and I also
try to use the experience to get it right the next time (a
process that has taken me two decades and still counting).
This, of course, is a level of accountability that a low-bid
contractor will never be able to offer without going out of
Proactive advantages. The
value engineering we provide is an essential, continuing
component of the design process. What the client sees (we hope)
is steady, seamless progress toward the targeted construction
start, not a wild scramble to get a project under control after
the bids have come in, with the baby due in three months, the
short-term rental already started, and the bidding contractors
quickly losing interest once they've seen the difference
between expectations and reality.
Paying close and obvious attention to costs in this fashion
and making a sincere effort at value engineering are the only
ways to gain and maintain pricing credibility with an architect
or with a client and must be the basis for any design-build
Added value. This process
also benefits our clients in a perhaps unexpected way. It
forces them to think hard about their priorities throughout the
design process, rather than wait to the end when the bids have
come in. We give them the detailed information they need to
choose whether to go with plastic laminate and stay within the
budget, or go with granite and add an extra $20 or $30 a month
in debt payments over the next 20 years. To choose -- before
they've spent $5,000 for a detailed design -- whether that
master suite is worth dipping even further into their home
equity for. To think about whether the $5,000 saved by
installing electrical baseboard instead of hydronic baseboard
is worth the additional $200 a year in operating costs.
Because we do this kind of cost evaluation during the design
process, our change orders have dropped as a percent of total
revenues, from the teens to single digits (from averages around
15% over the years, to current averages of less than 3%). This
has translated to improved schedule control, higher crew
morale, and greater client satisfaction. It's also compelling
proof of a return on the clients' investment of 10% to 12% in
up-front design costs. And a strong argument that, when
thoughtfully done, design-build offers a superior model of
Paul Eldrenkampowns Byggmeister, a design-build
remodeling company in Newton, Mass.