In last week’s article I discussed Guaranteed Maximum Pricing (GMP) contracts and how the timing of your GMP can raise risks for all parties. At the end of the article I suggested that a best practice is to set the GMP after all trade procurement has been completed.
This week, I want to address a common concern that many Owners have with this approach.
For many Owner’s prior to committing to a contract it is often a necessary for them to requisition the funds necessary to do the work. This can be a condition of doing business for a corporation or for an Owner using a lending institution for financing. Under either one of these circumstances, waiting until after a contract has been signed to know the full cost can be problematic. For this reason, I often require the builder to submit a control estimate as part of their initial quote.
A control estimate is a non-binding estimate of construction costs which can be used not only to satisfy the Owner’s need for requisitioning funds, but also as a control over the builder during trade procurement.
Of course it goes without saying that the quality of the control estimate will be only as good as the quality of the drawings. Nonetheless, if you treat the solicitation of the control estimate with care, you should have a very good estimate to work with.
To help you solicit the control estimate so it is as valuable as a fixed price quote I recommend you follow these steps.
Number 1: Consider the scope of work.
Every good quote begins with a good scope of work. If you are considering the use of a Cost Plus solicitation, you are probably also soliciting the GC’s quote ahead of design completion. This means that your scope of work will invariably have gaps. This does not mean that you must accept these gaps. Use your most complete set of drawings as a starting point. Find where information is missing and provide the GC with a write up for those sections. Be sure to include information about the grade of materials you intend to be used and make sure to communicate any work constraints (see my article on rules for construction) that may impact labor costs.
Number 2: Use a third party Work Breakdown Structure (WBS).
A Work Breakdown Structure is a way of organizing a complex series of goods and services into a common standard. There are a few universally accepted and well-known WBS systems. The Construction Specifications Institute has MasterSpec Format. The MasterSpec Format is used widely around the world and it is hands down the most used system in North America. Another widely used system is Uniformat. Uniformat is less well known in the US, but may be more widely used in certain countries. Using a WBS to organize the way you solicit construction costs is essential for ensuring you have a common way to evaluate bids. This rule applies anytime you are soliciting construction costs as it is the only way to ensure your quotes are organized in a comparable manner. Pick which system you want to use and be clear in your solicitation as to how you want the control estimate to be organized.
Number 3: Provide your own bid form.
This recommendation is closely tied to using a WBS. Anytime you allow bidders to present their pricing in any format they want, you make more work for yourself on the back end. Make sure you provide the bidders with a form that is clear and concise and express clearly that you must have their quote on your bid form. Anything less than this and you are exposing yourself to receive quotes in odd and varied formats.
Number 4: Use alternates and allowances.
Once again recognizing that your scope is incomplete and that there may be many design decisions left to be made, be sure to utilize design alternates and allowances to cover these conditions. When you are soliciting construction costs ahead of a complete design you may have several design options you may be contemplating. Providing the GC with design alternates is a good way to address some of these options. It’s great to provide drawings to show design alternates, but if it’s not possible to offer a drawings, describe each alternate in writing. If any portion of the scope is completely wide open and undefined, make sure to ask the GC to establish an allowance. Allowances are lump sum dollar values that are allowed for a specific portion of the work. Make sure to provide the GC with a write-up that specifically describes what you expect to be included in each allowance.
Number 5: Require a list of assumptions.
Contractors routinely make assumptions about the work in order to develop their pricing. Make sure to ask the GC to provide a complete list of assumptions for each line item together with their estimate. This way when the time comes to substitute their estimated number with a trade contractor’s actual quote, you have a basis for evaluating the two values. You can also use these assumptions to evaluate the GC’s quotes and just how well they understood the scope of work.
Number 6: Regardless of all else, carry a 20% Owner’s contingency.
No matter how good and thorough, a control estimate is still only an estimate. You need to be very careful not to assume that the estimate will be what you will pay. The value of the estimate and the actual cost of work could vary greatly. For this reason, I always recommend every Owner to carry a minimum of 20% of Owner’s contingency. This contingency is yours and you need not share with anyone that you have this. When it comes time to set your GMP, you will need to allow the GC to carry some amount of contingency. That is HIS contingency and should be negotiated to be as tight as possible, but you need to also have your own.
Those are my top 6 recommendations for how to solicit a control estimate. Remember that a control estimate is not a binding contract value. This is used ahead of setting a GMP for the purposes of budgeting or estimating the work only. If you plan to use a control estimate be prepared for that value to be higher or lower. Regardless of how your GMP comes in, if you follow these steps, you will be better prepared when it does.
Have you used a control estimate? How much did the final number vary from the estimate? Tell me your stories.
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