Contracts & Pricing
Contracts: Base Contracts and Change Orders
Execution of BC (Base Contracts) and CO (Change Orders) are the two most common ways construction companies are paid. A BC will be drafted up, revised sometimes multiple times to fine tune the smallest of details, then signed by the client and construction company. Next with smiles all around and excitement in the air - the workers begin on the scheduled start date and start building according to the blueprints. This first day of construction may very well be the last day of construction where the project went according to plan based on the BC and the blueprints. During a renovation a worker may pull off a section of drywall in the room being renovated and discover: mold, or a concealed electrical junction box, or no insulation on an exterior wall, or undersized structural framing. Now what?! Well for one thing, now the construction company you've days earlier signed a contract with is going to become a significant part in whether your project is a pleasant experience yielding professional results. Let's hope for your sake you picked a great construction company - because otherwise you're going to wish you had! The BC and COs are simply administrative tools that help keep any project on course on the smooth sailing days, and help bring any project back on course when storms come out of nowhere. BCs are never the issue, but COs can become misunderstood all too quickly. So let's look at the two ways a CO can arise and how they will be treated both in terms of implementation and then pricing.
Contracts: Clients' initiated COs
Invariably unforeseen COs will pop up during every construction project, and this is normal, and unavoidable (especially in renovations vs. new constructions as the above example illustrates). A CO may be a client request to upgrade or downgrade materials such as hardwood flooring or stone countertops because of taste or availability of supplier's inventory, change kitchen cabinetry layout to improve functionality, or change wall paint color. Sometimes, for example, changes as minor as changing certain paint colors may be no change in terms of 'materials' costs. However, in terms of 'labour' costs ALL and ANY changes incur new costs in planning time by a Project Manager and/or Site Supervisor and/or worker to now come up with 'Plan B', 'Plan C', etc.. We assume our clients wouldn't want to work for free at their jobs, and likewise we don't ask our management team or workers to work for free if a client changes their mind after signing a contract they liked the day they voluntarily signed it. Our goal is to make our clients happy... not ecstatically happy because we're doing work for free on their COs. CO's are priced to recapture direct job costs, overheads, and provide for a reasonable profit margin at the end of a hard day's work. Another point that should be included herein: COs tend to be cumulative by nature, so naturally they will extend the ETC (Estimated Time of Completion).
Contracts: Project Partners' initiated COs
In addition to client requested COs, there are also COs that come at the recommendation (or insistence) from "project partners": engineers, architects, city inspectors, sub-trades, suppliers, banks, insurance companies, or the construction company itself. If all these professionals had 20/20 hindsight - COs would not exist because they would have been incorporated into the original BC. We hold a simplistic view on ALL COs (initiated by the client and/or by project partners): the CO isn't adding safety/value/equity into the worker's or project partner's own house - its adding safety/value/equity into the client's house. Which is why the CO is billed to the client - not the client billing (back charging) the worker or project partner or construction company for not detecting the need to raise the CO item during the BC phase. If this rational seems irrational, perhaps another construction company may be a more suitable match. This is why it's so important for clients to choose their construction companies wisely, set aside a contingency fund of approximately 15%+ of the BC for COs, and then as we like to joke around: don't change your mind because it's already going to be expensive after all these professionals have changed their minds! When we look at a project broken down into its smaller components of BC and COs it becomes obvious that while construction can be complicated, expensive, and take a long time - treating each other the way we would want others to treat us is as old as time, and mutually beneficial in getting a job done right the first time. The healthy working relationship between clients and construction companies is as important as the project itself, as evidenced by the inverse that broken construction relationships break construction projects. Not all construction companies operate by these values, so 'let the buyer beware'.
Construction companies use one of two pricing methods, or both. Blackstone uses both:
- Fixed Bid: typically used when variables in the scope of work are known, such as in new construction. Fixed Bid places construction pricing variance and risk on the construction company vs. the client. As such Fixed Bids are marked up higher than Cost Plus for the construction company to be able to absorb unforeseen pricing variance and risk.
- Cost Plus (aka time & materials plus mark up): typically used when variables in the scope of work are unknown, such as in renovations. Cost Plus places construction pricing variance and risk on the client vs. the construction company. As such Cost Plus bids are not marked up as high as Fixed Bid because the construction company will not absorb the unforeseen pricing variance and risk - the client will.
Which pricing method is best? Which pricing method is best for your project? Which pricing method is best for you as a client? All things being equal, for renovations, a Cost Plus bid will be lower than a Fixed Bid; while for new construction, a Cost Plus bid will be higher than a Fixed Bid.
- GC (General Contracting) non-physical construction work beyond the one hour complimentary consultation is offered at $125/hour.
- Cost Plus bids include a 10% overhead, and a 10% profit margin applied on all services and materials sold to clients.
- Fixed Bids are estimated on the same format and pricing as Cost Plus bids, include a 10% overhead, and a 10% profit margin applied on all services and materials sold to clients. And then are marked up to a safety margin that assures the construction company can absorb unforeseen job costs pricing variance and risk. Each project and client are different and pricing variance and risks per job are different - so the safety margin varies from job to job to offset this pricing variance and risk. This safety margin is not disclosed to the client.
- GST is extra.
- Balance due upon generation of invoice.
- All materials remain the property and chattel of Blackstone Renovations Inc. until paid in full.
- Any payment not paid in full when due shall bear interest at 2% per month, 26.8% per annum, and this rate will apply to both pre and post judgement balances.
- Customer agrees not to have any other development work contracted until all work described in the signed contract is complete and all related invoices have been paid in full.