Important Considerations for General Contractor Budgets and Contracts
Cost and Budget Analysis When Choosing a General Contractor
As an investor or developer in apartment properties, knowing how much the cost will be for your general contractor is essential to the selection process. Below, we’ve listed some of the most important factors to be considered. Generally speaking, costs can be split into two main varieties; hard costs, which directly involve materials and physical labor, and soft costs, which involve things such as design consultations and the permitting process. In addition to the soft costs mentioned above, pre-construction costs must also be accounted for, which can include other contractor costs, like budgeting, due diligence, meetings, and conducting a feasibility analysis.
- Flat fees vs. Percentage fees: There are two standard contractor fee structures; flat-fee pricing, or pricing based on a percentage of total costs, plus a smaller flat fee. With a flat fee structure, a client can expect greater certainty in regards to overall costs, however, contractors may be somewhat less transparent about how and when they spend their money. In contrast, cost-based pricing can lead to greater uncertainty, but a client can generally expect a greater degree of transparency from their GC.
- Choosing subcontractors: It’s important for contractors to get multiple bids from subcontractors, but this is particularly important in the case of cost-based agreements, as the client will be expected to pay directly for any increase in costs related to overpaid subcontractors. This is where choosing the right contractor is essential; an untrustworthy firm may choose higher-priced subcontractors in order to increase their percentage-based fee. While cost-based agreements generally permit owners to have a hand in choosing subcontractors, many clients will often defer to a contractor, especially if they don’t have significant experience with the commercial construction process.
- Financial strength: An underrated but HIGHLY important consideration is to make sure that any contractor a client chooses has the financial capacity to fully finish the project with a reasonable margin for safety. Clients may wish to see a contractor’s financial statements to ensure they have a net worth of at least the cost of construction (this may not apply to larger projects), as well as a sufficient degree of liquidity. A contractor should also be fully licensed, bonded, and insured.
- Project start and completion dates
- Basic budget, payment schedule and materials information
- Basic insurance and bond information
- How changes and change orders will be dealt with
- Liability of each party under various circumstances, including “Acts of God”
- Delegation of responsibilities for permits and site clean-up
What are the most important factors to consider when creating a budget for a general contractor project?
The most important factors to consider when creating a budget for a general contractor project are:
- Flat fees vs. percentage fees: There are two standard contractor fee structures; flat-fee pricing, or pricing based on a percentage of total costs, plus a smaller flat fee. With a flat fee structure, a client can expect greater certainty in regards to overall costs, however, contractors may be somewhat less transparent about how and when they spend their money. In contrast, cost-based pricing can lead to greater uncertainty, but a client can generally expect a greater degree of transparency from their GC.
- Choosing subcontractors: It’s important for contractors to get multiple bids from subcontractors, but this is particularly important in the case of cost-based agreements, as the client will be expected to pay directly for any increase in costs related to overpaid subcontractors. This is where choosing the right contractor is essential; an untrustworthy firm may choose higher-priced subcontractors in order to increase their percentage-based fee. While cost-based agreements generally permit owners to have a hand in choosing subcontractors, many clients will often defer to a contractor, especially if they don’t have significant experience with the commercial construction process.
- Financial strength: An underrated but HIGHLY important consideration is to make sure that any contractor a client chooses has the financial capacity to fully finish the project with a reasonable margin for safety. Clients may wish to see a contractor’s financial statements to ensure they have a net worth of at least the cost of construction (this may not apply to larger projects), as well as a sufficient degree of liquidity. A contractor should also be fully licensed, bonded, and insured.
What are the key elements of a general contractor contract?
The key elements of a general contractor contract include:
- Project start and completion dates
- Basic budget, payment schedule and materials information
- Basic insurance and bond information
- How changes and change orders will be dealt with
- Liability of each party under various circumstances, including “Acts of God”
- Delegation of responsibilities for permits and site clean-up
It is highly recommended that an experienced real estate lawyer draft and review a client/GC contract before it’s signed. To get an idea of what a commercial construction contract looks like, one can easily search for free templates, however, since each project is different, an attorney should always be involved in the contract creation and signing process.
What are the common pitfalls to avoid when negotiating a general contractor contract?
When negotiating a general contractor contract, there are a few common pitfalls to avoid. First, it is important to make sure that the contract covers all relevant aspects of the contractor’s work, as well as contingency clauses that cover unexpected events, such as accidents or potential financial issues. It is also important to make sure that the contract includes project start and completion dates, basic budget, payment schedule and materials information, basic insurance and bond information, how changes and change orders will be dealt with, liability of each party under various circumstances, including “Acts of God”, and delegation of responsibilities for permits and site clean-up. Additionally, it is important to make sure that the contractor has the financial capacity to fully finish the project with a reasonable margin for safety, and that they are fully licensed, bonded, and insured. Finally, it is important to make sure that the contractor is getting multiple bids from subcontractors, and that the client is aware of any increase in costs related to overpaid subcontractors.
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What are the best strategies for managing a general contractor project budget?
The best strategies for managing a general contractor project budget include:
- Flat fees vs. percentage fees: There are two standard contractor fee structures; flat-fee pricing, or pricing based on a percentage of total costs, plus a smaller flat fee. With a flat fee structure, a client can expect greater certainty in regards to overall costs, however, contractors may be somewhat less transparent about how and when they spend their money. In contrast, cost-based pricing can lead to greater uncertainty, but a client can generally expect a greater degree of transparency from their GC. Source
- Choosing subcontractors: It’s important for contractors to get multiple bids from subcontractors, but this is particularly important in the case of cost-based agreements, as the client will be expected to pay directly for any increase in costs related to overpaid subcontractors. This is where choosing the right contractor is essential; an untrustworthy firm may choose higher-priced subcontractors in order to increase their percentage-based fee. While cost-based agreements generally permit owners to have a hand in choosing subcontractors, many clients will often defer to a contractor, especially if they don’t have significant experience with the commercial construction process. Source
- Financial strength: An underrated but HIGHLY important consideration is to make sure that any contractor a client chooses has the financial capacity to fully finish the project with a reasonable margin for safety. Clients may wish to see a contractor’s financial statements to ensure they have a net worth of at least the cost of construction (this may not apply to larger projects), as well as a sufficient degree of liquidity. A contractor should also be fully licensed, bonded, and insured. Source
- Project start and completion dates: A contract should include project start and completion dates, basic budget, payment schedule and materials information, basic insurance and bond information, how changes and change orders will be dealt with, liability of each party under various circumstances, including “Acts of God”, and delegation of responsibilities for permits and site clean-up. Source
It’s also important to keep in mind that clients will generally pay a general contractor in a series of predetermined disbursements, to be issued on a monthly basis, or on an incremental basis, as the various stages of the project are completed.
What are the most important legal considerations for general contractor contracts?
The most important legal considerations for general contractor contracts include:
- Project start and completion dates
- Basic budget, payment schedule and materials information
- Basic insurance and bond information
- How changes and change orders will be dealt with
- Liability of each party under various circumstances, including “Acts of God”
- Delegation of responsibilities for permits and site clean-up
It is highly recommended that an experienced real estate lawyer draft and review a client/GC contract before it’s signed. To get an idea of what a commercial construction contract looks like, one can easily search for free templates, however, since each project is different, an attorney should always be involved in the contract creation and signing process.
Source: Important Considerations for General Contractor Budgets and Contracts and Selecting a General Contractor for a Multifamily Construction Project
It’s important to keep in mind that clients will generally pay a general contractor in a series of predetermined disbursements, to be issued on a monthly basis, or on an incremental basis, as the various stages of the project are completed.
Understanding Contracts When Choosing a General Contractor
Like any other important financial transaction, closing a deal with a general contractor requires a contract, often referred to as a construction contract agreement. Savvy investors and developers will want to make sure that this document covers all relevant aspects of a contractor’s work, as well as contingency clauses that cover unexpected events, such as accidents or potential financial issues. Due to the sheer importance of the terms of these contracts, it is HIGHLY recommended that an experienced real estate lawyer draft and review a client/GC contract before it’s signed. In general, the contract should include:
To get an idea of what a commercial construction contract looks like, one can easily search for free templates, however, since each project is different, an attorney should always be involved in the contract creation and signing process.