10 things you should know before starting a construction project

Posted: November 22, 2014 in Business, Contracting

Depending on your lack of experience or wealth of it in the world of construction some of these things in this article may seem elementary or potentially life changing (a bit dramatic, right?). But I have so many friends who have after-the-fact informed me of problems they have had with construction projects (they didn’t talk to me first) that I decided to share some basic points that would be helpful for anyone launching into the world of construction. Make sure you read all 10 points!

1. There are types of contracts or forms of agreement

This issue of contracting takes more explanation than I can provide in this article. What you need to know is that contracting is a tangled web of legal terms that even lawyers struggle with. If you get 100 lawyers in a room and have them write a contract for your project you will get 100 different contracts. This is why you need a professional and lawyer to help guide you. But understand that there is no exact science to contracting. In general, law is more art than science. The key thing I want to point out to you is you should understand what you sign. If you don’t understand or if it doesn’t make sense to you then don’t sign it until you do.

On most commercial projects, the current AIA (American Institute of Architects, http://www.aia.org/contractdocs/) contract is used. But there are at least 35 different AIA template contracts for the relationship between the owner and the contractor. And there are a number of other companies and organizations that offer numerous templates for contracts. Then, each of the templates has to be tailored to the specific of the project and the relationship. The point is that the world of contracting is complicated and not for the uninitiated. The main thing I want to communicate here is that you don’t need to accept the contract offered by the contractor. Often, contractors will have a form of agreement (e.g., their proposal) that favors them. As an owner, you want a form of agreement that favors you or that is at least neutral in most respects.

Contracting is probably the one area where you should spend some money and hire a lawyer and a construction professional to consult with so you have the best chance of getting a good contract.

2. The lowest price is not always the best choice

The rule of thumb is to award the project to the lowest bidder but that may not be the best choice. If you have pre-qualified the contractors that are bidding (see the point below), there are other factors to consider. Find out if the contractor is busy (how many other jobs do you have?). If he is, your project may take longer. If you can talk to some former clients of the contractor, find out if the contractor has a good reputation for things like quality, cleanliness, paying his bills, and being on top of the job. Find out what projects the contractor has done and if he or she has experience with your specific type of project. Try to find out if the contractor is financially stable (this may be harder to find out). Too often contractors that are in trouble financially will hope that a new project will get them out of trouble but it usually means more problems for the new job. The point is, try to find out as much as you can about the contractor before you sign the contract.

I suggest that you have some criteria in mind before receiving bids in order to make your selection easier. For some owners, price is not the number one factor but some other factor is. If you establish what the key criteria is ahead of time it will make the selection process simpler and often the right choice is clear.

Regarding low bids, be warned that if a contractor’s price is a lot cheaper than the others, that is a big red flag. Contractors are usually pretty consistent in their pricing so if someone is close to 10% low there may be a problem with their bid. They may have missed some of the scope of work or they may have made a clerical error. If I get bids within 5% of each other I can feel confident that the pricing is good. In any case, it’s best to resolve the issues before you sign a contract in order to avoid conflict so ask the low bidder to review his price in light of the fact that he is way lower than the next bidder. The low bid number may be attractive but putting up with the conflicts and headaches from a non-performing contractor is not worth the difference in price.

3. You can check up on contractors

With the advent of Angie’s List, owners have a new resource for checking out contractors. But Angie’s List deals primarily with residential contractors and it by no means is the end-all solution for finding good contractors. The majority of contractors just don’t take the time to get on her list because they don’t need to. The best way to find a good contractor is by personal referral. If a friend or neighbor had a successful project, their recommendation should be huge for you. But the last thing you want to do is to go to the Yellow Pages and start calling contractors. If you have no resource for good contractors, start with Angie’s List.

The things I suggest for owners to do to check out a contractor is to start with the license board for your state. In California, you want to go to http://www.cslb.ca.gov/ and look up your contractor. By law, contractors are to make their license number known and it is supposed to appear on all proposals and bids. There are some things you can look out for on the CSLB website but I won’t take the time to expand on that here. Then, the Better Business Bureau (http://www.bbb.org/) can be a resource for complaints made against a company. Dunn & Bradstreet (http://www.dnb.com/) is a source for financial information. There are other free and paid services for researching companies so employing them depends on the level of research that you want to do. Just don’t depend on a handshake and a good story to pick a contractor. Spend some time on the Internet. Check the references carefully. I like to get the contact info for the owners of the past three projects because there is a good chance that one of them had issues and that’s what you want to know about. Keep in mind that having faced problems on a project does not mean the contractor is bad or good. If the contractor fixed the problem and took care of the customer then he or she may be a good contractor. What happened and how the contractor handled the situation is the real issue.

4. You are not required to pay a deposit up front

By law you are only required to pay for work that is completed. Contractors are supposed to either have credit accounts or be able to pay for their costs as they go and get “reimbursed” through the next draw payment. If your contractor asks for a deposit up front, that is a red flag. I lean towards a “no deposit” rule just to be safe. The problem is that if you give someone money up front they are less likely to want to give your project good service. Money is your biggest motivator so you want to keep them “lean and mean”. But if a contractor requests a deposit it doesn’t mean that he’s a crook. Some small contractors or those new in the business may not have the resources to get materials and equipment without some help from you. An example is cabinetry in a kitchen remodel project. The cabinetmaker will often require a deposit for purchasing the materials so the general contractor [GC] will request a deposit from you. In this example, one way you can protect yourself is to give the GC a two party check that has the name of the GC AND the name of the cabinetmaker on the “pay to” line. That way the GC cannot cash the check himself but he can sign it and turn it over to the cabinetmaker. When the check clears you can double check to see what account the check actually went into and know where the money went.

Note: An important part of selecting a contractor and having a successful project is to express your expectations up front. In the case of a deposit, let the bidding contractor know that you do not expect to give him a deposit (if this is your choice). He may decline to bid or he may ask for a concession on the point of deposits. You can work out the details but the important thing is to communicate and understand each other so there’s no conflict later on.

5. You are liable for all labor and materials on your property

During a project, workers wander through and vehicles come and go. It’s hard to keep track of who is doing what unless you sit there all day. The thing you need to know is that as the property owner, you are personally responsible for paying for all of those workers, all the materials and the equipment. The way it works is you pay the GC, he pays the subcontractors and vendors and they pay their workers and their invoices. The GC will also pay his own workers and invoices. The question is how do you know that all the bills down the stream are being paid properly? How do you protect yourself from claims from persons or companies that should have been paid but weren’t?

Luckily, the contract code addresses this issue but you need to know that laws are intended primarily to protect the workers and companies and make sure they get paid. Property owners are especially vulnerable but if you understand the system you can use it to protect yourself. Here is a synopsis of how it works.

  1. Preliminary notices are to be sent out from persons or companies providing labor, materials or equipment to your project. These are only notices but it lets you know who has a potential claim so you can make sure they get paid.
    Note: Workers do not have to file preliminary notices. They can file “mechanics liens” if they don’t get paid without you getting any notice.
  2. Contractors, subcontractors, vendors and suppliers are to provide conditional releases letting the GC know what they are entitled to be paid for the billing period. It is important for you to get copies of all the releases so you can compare the payable amounts to the amount the GC is billing for. If you question the veracity of the release or you want to make sure that the GC pays the potential claimant, you can use the two party check strategy.
  3. Following payment, the contractors, subcontractors, vendors and suppliers are to provide unconditional releases stating that they have received the amount stipulated and they release the property owner from a potential claim in the amount of the payment. This is your security against claims as long as:
    1. You get releases from every potential claimant and
    2. The releases are legitimate and accurate (this is a whole other lesson).

Understanding the lien laws for your state and then instituting good practices to track payments and releases is paramount in order to help protect you from a claim of non-payment. It cannot be stressed too highly that having a good GC that you trust is the beginning point but you must have a good system in place to help protect you against claims.

6. Don’t agree to anything you don’t understand or that isn’t clear

This may seem obvious but you would be surprised how many disagreements arise because two parties had a completely different understanding. As noted above, contract terms are mostly legal jargon but the terms should be understood before you sign it. Don’t pass the terms off as the fine print like the back of the hospital admission form. Read it and understand it. Feel free to ask questions and discuss the terms. Remember, everything should be negotiable. A couple of other rules:

  1. Do everything in writing as much as possible even if it’s just a text or an email.
  2. Be specific and clear. Don’t just say “go ahead and do it”. For example, say “ go ahead and move the 10’ of framed wall over 6” to the north including moving the electrical”.
  3. Get advice from a lawyer or a construction professional about things you don’t understand. A good contractor will not have an issue with you consulting with someone.
  4. Even if you trust the contractor, document the project with pictures and notes.

There’s an old saying that “good fences make good neighbors”. Drawing good lines, making things clear and documenting things is part of a good business relationship and a good contractor should not be offended by those practices.

7. You need a good architect

Another obvious point I know. But you may not know that there are a lot of architects out there and some are better for your project than others. Much like finding a good GC, start with personal recommendations. The things to look out for in selecting an architect are:

  1. Experience with the same type of project as yours,
  2. Experience getting plans approved and permitted in you jurisdiction, and
  3. The number of change orders and “requests for information” on previous projects even if they were different than yours.

The architect is usually the party who hires the other disciplines but depending on the project you may elect to hire some of the design consultants separately. If there is a building or structure, the architect typically hires the other disciplines of structural, mechanical, plumbing and electrical to do that portion of the design. This is important because you want the architect to be responsible for the correctness of the work done under him or her. But you may employ other disciplines directly such as civil engineering, soils engineering and landscape design. This again is an area that a construction professional can help guide you.

The architect’s responsibility typically ends with the permitting of the project unless there are issues with his design. He has to follow up if there are questions or conflicts in his plans. But changes to design or the project are typically an add-service for him and will cost you. Then, administrating the contract can be the architect’s responsibility (such as is the case when using an AIA contract) but most owners elect to hire construction professional such as a Construction Manager [CM] to handle the contract administration. The latter is considered the best scenario in my opinion since the construction professional will typically have larger base of experience dealing with the problems that come up on projects. Also, a CM will tend to represent the owner’s interests better than the architect.

8. You need to know what you want before you start

It may seem slightly offensive for me to say it but owners rarely know exactly what they want. This is partly the case because plans are two-dimensional and in black and white so the owners can’t envision what the project will look like until it’s built. After the walls are framed, you get a sense of the size of rooms and whether things will fit or not so that is often when the owner wants to make changes. I advise owners that changes are bad or at least they can lead to problems and cost overruns that you want to avoid. Owners need to spend the time and the money up front to avoid making changes during construction. Think of it this way – changes are the result of a mistake so steps should be taken to avoid the mistakes. Here are some pointers:

  1. Hire a good architect that understands what you want.
  2. Go and look at other projects and get an idea of what you want your project to look like when it’s done (pictures really help!).
  3. Especially pay attention to finishes and features – carpet, tile, paint, base, fixtures, etc. It is often a good idea to hire an interior decorator to help take your sense of style and color and select the things you will be happy with.
  4. Spend the money and consult with a construction professional regarding constructability, issues in the plans, etc. Often, catching the problems before they are built is well worth the fee.

One of the most important things you can do as an owner to make your project go smoothly and stay on budget is to know what you want before you start and make sure it gets incorporated into the plans and specifications. Do the work up front to keep from having to make changes during construction and you will be much happier with the outcome.

9. You can make the timeframe for construction part of the contract including penalties for missing deadlines

Okay, I’ll go ahead and say it. Construction always takes longer than it should. Some GC’s may want to argue about that but historically projects take longer than planned for one reason or another and I’m talking about the whole process from initiating the design to turning over the keys. So, you need to know that you can make the timeframe for the work part of the contract. Most contracts have start and end dates but you can also include milestones. I suggest using milestones because it’s difficult to know if a project is behind schedule during construction if the only target date is the completion. Milestone dates give you a measurement of the progress during the project so you can adjust things or try to motivate the contractor or designer to keep the project on schedule. All these things can be stipulated in the contract.

Then you can add penalty clauses to the contract. This is usually done with a liquidated damages clause. That simply means that if certain milestones or a completion date are not met that you as the owner suffer financial damages that you intend to liquidate by getting money from the contractor. The basis for liquidated damages should be real meaning that you can’t be unreasonable in your claim and it should be connected to something financial. For example, if you are building a new business location, you would be paying rent on the old location until you move. The move-out date is dependent on the completion of the new project so you tie the cost of the lease of the old place to the construction contract through liquidated damages starting on a stipulated date. This is usually done on a per day basis (e.g., $100 per day until complete).

The problem with penalties for failing to meet deadlines is a lot of contractors will shy away from those projects making it hard to find contractors to even bid on the project. You will also find that contractors inflate their bids when there are liquidated damages involved so your pricing will not be as good. But if timing is an important matter you should consider adding penalties for not meeting deadlines. If you elect to include penalties, you should get legal counsel as to the right way to do this in the contract.

10. You should hire a construction professional to guide you though the process

It’s probably obvious by now that this article was intended to make it clear that navigating the treacherous waters of the construction process is not for the faint of heart. You really should not attempt it without the help of a construction professional. The GC may offer that he or she is that professional and there is no need for bringing in a consultant but that is tantamount to the fox watching the henhouse in my opinion. The owner’s interests are best represented by someone employed separately from the other parties.

As an example, I offer my services on an hourly basis so an client can use me for whatever services he or she wants for the project. Sometimes it’s simply reviewing the contract. Sometimes it’s budget review or constructability review. But more often than not, the owner elects to have me handle the project for them as the owner’s representative. In any case, do yourself a favor and consult with a professional. You will not regret it and most likely you will save time and money by doing so. As an additional point I would offer that by hiring a Construction Manager to oversee the project on your behalf, you will not have the stress and pressure of dealing with all the problems and issues of the construction process. It’s not a guarantee that the project will be super smooth but you can be assured that it will be a much better experience for you. But don’t trust me. Ask your friend that just had their house remodeled if they had to do it again would they hire a construction professional to handle their project for them or not. More often than not, they will tell you emphatically they would and that you definitely should!

If I can be of assistance or answer any questions about the construction process, please feel free to contact me at service@raconsulting.cc. Good luck with your project!

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