As you consider embarking on a building or remodeling project, some details are important to understand up front. The purpose of this article is to provide a basic understanding of the process we follow at JB Construction, and to clearly explain how different types of Construction Contracts work.
At JB Construction, we offer two different approaches to the design and building process: Design-Build and Design-Bid-Build. We invite you to choose the approach that best fits your philosophy and finances.
The design-build concept has been around for years, and its advantage is that the Designer, Contractor and Client work as a team from the very beginning. Ideas are presented and analyzed on a “real time” basis thus taking into account all the elements of the project so there will be no surprises during the build phase. This process is a win-win situation for both the client and the contractor.
The Design/Build process begins with an initial meeting to discuss the ideas and dreams of the client, and to establish a comfortable working relationship between contractor and client. In this meeting important considerations such as budget and timelines will also be discussed.
In order to move into the design phase of the project, a financial commitment is made by the client in the form of a Design Agreement.
The design phase begins with preliminary or conceptual architectural design drawings being produced, with different scenarios presented in order to arrive at an approved design, which then can be priced on a preliminary basis. If there is a preliminary decision is to proceed, detailed construction drawings are developed with a specification list, and both the drawings and specifications are approved by the client before a final project bid is developed.
This design-build process is completely transparent and all parties work on a cooperative basis at all times. Ideas are exchanged freely and are evaluated on a practical and financial basis.
The Design/Build method is the fastest way to complete your project.
The Design-Bid-Build approach calls for a set of plans and specifications drawn out by an architect or designer. This set of specifications is where every detail of the building project is defined and itemized. With this approach, the client will make decisions about almost every detail of the design and building process before bids are solicited. The client will then solicit and compare bids from multiple contractors.
Design-Bid-Build is the preferred approach for clients who are most concerned with keeping costs as low as possible and less concerned with details and quality. In a Design-Bid-Build project, once a contract is signed the client has minimal input with regard to adjusting project details and time frames. Changes (change orders) can be made later in the project cycle; however, they may be much more costly for the client.
Understanding Various Types of Construction Contracts
Fixed Price Contract
This is also known as a “guaranteed” or “hard” bid. A contractor receives a set of plans and specifications and bids the job according to those documents. The bid has a larger “contingency” (a specified amount, built into the bid, to cover cost overages caused by a number of factors), so that the contractor is protected from losing money on the project. If the contingency is not used, the contractor gets to keep it as extra profit.
Cost Plus (with a fixed fee) Contract
With this type of contract, the client pays the contractor for Time and Materials plus a fee, and pays for these costs at regular intervals throughout the duration of the project. Cost Plus contracts include direct (billed) fees for all materials, subcontractors, and any other direct costs associated with the project including labor rates (as described in the contract), as well as an additional fee (a percentage which includes overhead indirect job costs and profit) for the contractor. This type of contract is less costly up front than the Fixed Price Contract or the Not to Exceed Contract; because it does not include an amount for contingency (unforeseen overage costs). With this kind of contract, any and all cost overages are the responsibility of the client. This type of contract is done on an “open book” basis: all costs are detailed, disclosed and billed on a monthly basis throughout the duration of the project.
Cost Plus (with a ‘Not to Exceed’ clause) Contract
This is a variation of the Cost Plus (fixed fee) Contract, whereby a contingency amount is determined, and defines the minimum and maximum contract price. The final contract price depends upon how much of the contingency is used during construction. The contingency is usually 5 – 15% of the project costs. For example, if the project cost is determined to be $100,000 a contingency may be set at $10,000, and the Contract would be written as a minimum of $100,000 and maximum of $110,000. In this type of contract, change orders are addressed separately.
Our Philosophy, in a nutshell
At JB Construction Services, we approach all types of contracts very conservatively, because we want to produce a quality project and avoid surprising a client with additional costs later on in the project. Depending on the complexity of the job and the client’s level of desire to “be flexible” with certain design details and specifications, we will suggest an appropriate type of contract. Our approach is about being honest about all costs, up front, so that our clients can be comfortable with the design and build process… at every step of the way.
I look forward to discussing the details of your project.