Barry Schmidt, Schmidt ConstructionWhen hiring a construction company there are generally two types of companies discussed, the general contractor and construction manager. These descriptions, GC and CM, describe the basic contract arrangement and all construction companies will provide both CM and GC services. So how are these contract approaches different and which type is better? Which type should you use for your project?
Both arrangements result in the same service. The construction company will divide your design drawings into the various trades, bid and award the trade subcontracts and manage the construction work. The General Contractor will provide this service for a fixed lump sum amount “guaranteed” for the construction scope shown on the drawings. The construction manager will perform the same service however they’ll perform it on a fee or “cost plus” basis, whatever the trade costs turn out to be, plus a fee for the construction manager, with clearly no guarantee on the pricing.
It’s better to use a GC when you have a fully complete set of drawings with a very high certainty of no future changes. This enables you to bid hard to three, five or even seven GCs to find the best qualified price with maximum leverage. More bidders equal more leverage to negotiate, and it’s best to negotiate hard to get the lowest starting point for the construction costs. The tradeoff for starting at the lowest possible cost is that more time must be taken up front to completely develop the design documents before the general contract can be let. Any holes in the scope of work shown on the drawings, or changes made later by you, will result in extremely costly change orders. That said the lowest starting price should translate to the lowest final cost, even as change orders are inevitable.
It’s better to use a CM when you have an incomplete set of drawings, or foreknowledge of future changes. In that case you can “fast track” the schedule, retaining the CM for a fee and bidding each trade separately and transparently, allowing the fully designed aspects of the building to commence at the earliest possible date. This is common practice for example when the foundation and structural design is complete, but the aesthetics and infrastructure are still being developed. The tradeoff for speed here is cost, as there certainly will be coordination issues as the earlier part of the design will need to modified to accommodate the future design decisions. This is an unavoidable inevitability despite any assurances you receive to the contrary. Also bidding trade by trade, instead of a singular competitive GC bid, will most definitely yield a higher final cost as competitive bid pressures will not be on the CM.
Either way using a GC or CM is no panacea. With GCs, if there are changes to the drawings made by you or due to design and construction errors, omissions and unknown conditions, or even if there are no changes at all, there will be contract change orders and with no competitive bid pressure you will pay a premium, way more than one hundred cents on the dollar. With a CM there is no inherent contractual incentive to control costs at all, whether working for a flat fee or on a percentage of cost basis, as the fee is either independent of or directly proportional to the final construction cost.
There is a hybrid type of contract called “Guaranteed Maximum Price” or GMP, which attempts to combine the more favorable aspects of GC and CM, but also combines their pitfalls. There are other approaches such as dividing the project into individual sub-projects, based on scheduling needs and known unknowns, but creating those contracts requires the supervision of a sophisticated scope definer and negotiator. For simplicity I won’t delve deeper into these arrangements here.
The bottom line is that no matter what approach you take you need to have expert supervision over the design, contracting and construction process. The procurement process for the construction contract will have a tremendous impact on your final cost and of course on your rate of return. Many promises will be made upfront by both designers and contractors, which after the complexities of real world conditions and business relationships will not stand up at the end of the day. The construction process is inherently risky, be sure you to take nothing for granted and know that you have somebody capable watching out for your interests.
Barry Schmidt is the president of Schmidt Construction Consulting, New York, N.Y.
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