 | In estimating, it is really difficult to get the customer and contractor on the same page, even with a set of plans. Let me start first off by saying some contractors do a terrible job communicating in general and this can be further complicated with poor paperwork and customer ignorance. This started as an internal memo to my estimating crew but ended up being something we hand out to all potential clients to help them understand the process. |
One of the biggest mistakes people make in this process is that they focus too much on price without taking into consideration quality and value. Asking what a bathroom costs is a lot like asking what a car cost. Sure you can buy a car for $5k, but there are a lot of risk factors, and you may not be getting the best value for your $5k. The same is true in construction; price shopping is NOT the best way to ensure good value, especially at the beginning.
This is a common mistake in hiring contractors. We call this Pre-Scope Negotiating (PSN).
In an effort to improve clarity in our estimates, we created a numbered system to show potential clients where they are on the scale, and how we can move along in the scale together. The scale is numbered 1-5 with 1 being very rough, and 5 being ready to bid and contract. This helps us improve communication with our clients in order to avoid some of the miscommunication pitfalls.
First, let’s define some terms:
Estimate:
This is where a contractor gives an estimate based on the information available. Some projects are much easier to estimate than others. The estimate may be signed and the work may begin, but the line items are not set in stone. Some things are unknown and may be firmed up as the project progresses. In the estimate, costs for some of these unforeseeable obstacles should be accounted for if they happen. In a Bid or Estimate changes can and often do occur. The myth that there is a not-to-exceed-no-change-order-contract that can be signed is prevalent, but legally it does not exist.
Bid:
There is a lot of confusion about bids. A bid can be made from a level 5 estimate, but not always. A bid is just that, the contractor offers a price to perform a project, as it pertains to the scope of work in the contract for a set price.
In order to have a bid, the scope must be clearly defined. For example, for a bid on painting the inside of a house – Does it include prep work? To what level is the prep work? Does it include filling holes, sanding wood, patching drywall, and priming wood? Does it include the base and trim? Does it include a prime coat, and a cover coat? What type of paint? What type of sheen? How many colors does it include? All of these questions would be answered clearly in a bid. Bids have A LOT of details; estimates do not.
Not-to-exceed-contracts:
Not to exceed contracts are a great way to make customers feel like they have some special contract that
will keep their costs from going up. Unfortunately, it is just a regular bid that sets a certain price for the work described in the contract. It may put the burden of fuel price fluctuations and materials cost increases on one party or another, but it does not mean the additional costs associated with when you find a T-Rex skeleton where your foundation is supposed to go, are squarely on the shoulders of the contractor.
The 1-5 Scale
This is a common mistake in hiring contractors. We call this Pre-Scope Negotiating (PSN).
In an effort to improve clarity in our estimates, we created a numbered system to show potential clients where they are on the scale, and how we can move along in the scale together. The scale is numbered 1-5 with 1 being very rough, and 5 being ready to bid and contract. This helps us improve communication with our clients in order to avoid some of the miscommunication pitfalls.
First, let’s define some terms:
Estimate:
This is where a contractor gives an estimate based on the information available. Some projects are much easier to estimate than others. The estimate may be signed and the work may begin, but the line items are not set in stone. Some things are unknown and may be firmed up as the project progresses. In the estimate, costs for some of these unforeseeable obstacles should be accounted for if they happen. In a Bid or Estimate changes can and often do occur. The myth that there is a not-to-exceed-no-change-order-contract that can be signed is prevalent, but legally it does not exist.
Bid:
There is a lot of confusion about bids. A bid can be made from a level 5 estimate, but not always. A bid is just that, the contractor offers a price to perform a project, as it pertains to the scope of work in the contract for a set price.
In order to have a bid, the scope must be clearly defined. For example, for a bid on painting the inside of a house – Does it include prep work? To what level is the prep work? Does it include filling holes, sanding wood, patching drywall, and priming wood? Does it include the base and trim? Does it include a prime coat, and a cover coat? What type of paint? What type of sheen? How many colors does it include? All of these questions would be answered clearly in a bid. Bids have A LOT of details; estimates do not.
Not-to-exceed-contracts:
Not to exceed contracts are a great way to make customers feel like they have some special contract that
will keep their costs from going up. Unfortunately, it is just a regular bid that sets a certain price for the work described in the contract. It may put the burden of fuel price fluctuations and materials cost increases on one party or another, but it does not mean the additional costs associated with when you find a T-Rex skeleton where your foundation is supposed to go, are squarely on the shoulders of the contractor.
The 1-5 Scale
Level 1:
This is an early stage rough quote. Customers may have a general idea of what they want, but there are no plans with measurements or drawings yet.
The contractor should compare projects of similar types from past experience to come up with a rough range of prices. For example, a room addition of 500 SF and a remodel of 400 SF could be estimated as follows: New construction 500 SF @ $250-350 per SF, and remodel of 400 SF @ $100-250 per SF = total range of $165k-275k.This is a good start because it lets the homeowner know where the construction budget may end up.
Level 1 Characteristics:
- No plans.
- Scope of work not clearly defined.
- Budget not established.
- Contractor uses perception of project scope to project costs.
- Very broad general cost estimate.
Level 2:
Customer has designated a design team for larger jobs and should have wrangled in the scope from level 1. A floor plan is generally issued with notes. The floor plan will be the basis for the cost estimate, and the first step toward a contract.
Level 2 Characteristics:
Customer has designated a design team for larger jobs and should have wrangled in the scope from level 1. A floor plan is generally issued with notes. The floor plan will be the basis for the cost estimate, and the first step toward a contract.
Level 2 Characteristics:
- Rough plans if any.
- Square footage of new work determined.
- Scope of work more defined. The desired end result may be clear, but the means to get there maybe not. For example: we want a 400 SF master bedroom addition, and a bathroom of 100 SF, but we do not know our finishes, the engineering, type of windows, flooring etc.
- Contract uses square foot general costs to estimate budget.
- Broad general cost estimate.
Level 3:
Level 3 is where it starts to get real. There are many major areas that can take a project from $100k to 150k+ even though the project description remains the same. Finishes are a prime area for cost increases but can be controlled through design. The other 3 areas that are very inconsistent and highly variable are site work, structural concrete, and framing, which are under the discretion of the engineers hired by the architect.
Level 3 estimates should have some structural details, but do not expect down to the nail, exact cost breakdowns at this point. There is no guarantee that the structural plans won’t change. Level 3 is where you want to be when deciding your budget. Know that you are going to have wide variances in a few key areas, but you can get to a number that is fairly accurate.
Level 3 Characteristics:
Level 3 is where it starts to get real. There are many major areas that can take a project from $100k to 150k+ even though the project description remains the same. Finishes are a prime area for cost increases but can be controlled through design. The other 3 areas that are very inconsistent and highly variable are site work, structural concrete, and framing, which are under the discretion of the engineers hired by the architect.
Level 3 estimates should have some structural details, but do not expect down to the nail, exact cost breakdowns at this point. There is no guarantee that the structural plans won’t change. Level 3 is where you want to be when deciding your budget. Know that you are going to have wide variances in a few key areas, but you can get to a number that is fairly accurate.
Level 3 Characteristics:
- Plans with details and some engineering.
- Plans have been approved by customer and submitted to the city.
- Scope of work is defined. The finishes may not be set but the brands and styles for doors and windows should be set, and most finishes are clear.
- Contractor should have a clear scope of work and have list of things included, as well as excluded for the customer to account for. That way the customer can establish a clearer budget.
- Field should be narrowed to 1-2 contractors at this stage. Most contractors will not put in the time to get to level 4 without at least a verbal award of the contract.
- Hourly wages for different contractor subcategories should be disclosed. For example, plumbers $95, electricians $75, Tile setting $65 etc. So that everyone knows what is an acceptable rate when changes arise. This can also help a customer to gauge just how expensive one contractor is to another. Do not mistake cost for value as some at $95 are worth more than others at $85, but it is a good gauge nonetheless.
- There may be a fee on the part of the contractor to help define the scope.
Level 4:
Level 4 is possible when the city has requested all the major changes for the proposed project, and the plans have been modified, received by the contractor, and re-submitted to the city. If the project does not need a permit, then the scope would be set by the end of this round and on to level 5. Now the plans should contain the correct engineering, site work, and framing notes, all that’s needed is to get the final stamped set of plans approved by the city. There still may be some changes coming down the pipe, but not many.
Any additional inspections, lab fees, etc. should be the responsibility of the owner. If there are fewer inspections, then the customer should not be charged and will receive a credit. The customer should expect to pay for this detail service or to award the contract before getting to this stage. If not, they are most likely at level 3 and do not know it.
Level 4 Characteristics:
Level 4 is possible when the city has requested all the major changes for the proposed project, and the plans have been modified, received by the contractor, and re-submitted to the city. If the project does not need a permit, then the scope would be set by the end of this round and on to level 5. Now the plans should contain the correct engineering, site work, and framing notes, all that’s needed is to get the final stamped set of plans approved by the city. There still may be some changes coming down the pipe, but not many.
Any additional inspections, lab fees, etc. should be the responsibility of the owner. If there are fewer inspections, then the customer should not be charged and will receive a credit. The customer should expect to pay for this detail service or to award the contract before getting to this stage. If not, they are most likely at level 3 and do not know it.
Level 4 Characteristics:
- The contract has already been awarded to a contractor.
- Plans with full details and engineering have been submitted to the city, after city feedback, the plans have been changed and resubmitted.
- The changes the city is requesting from this point on are minuscule.
- Finishes are clearly defined, or for those that are not, a cost placeholder is made until that can be determined. For example, the customer knows that they want hard wood in the dining room, but don’t know which one. The estimate should show how many square feet are included, how much for labor and rough materials, and how much for the product.
- Doors and windows have been decided and there is a door and window order ready to be executed as soon as the framing is underway.
- The customer should have a clear list of things they will need to provide for the job.
- A system should be set in place for changes and to resolve conflicts.
- Expectations should be established for payments and invoices, and the times associated with each.
- A timeline should be established pending final plans.
- Estimates are now backed up with site visits from key subcontractors and the Project Manager.
Level 5:
Hallelujah! The plans have been approved, stamped, paid for by the homeowner, and delivered to the contractor. This set of plans should be copied and distributed to all subcontractors, to the end of establishing the certainty of level 5 from estimate to a Bid.
Level 5 is possible only by a lot of work in Level 4. If all has been done correctly, then Level 5 is really just making sure that the small changes made after the final submittal to the city are “small.”
The contractor should start to finalize the sub contracts for the first key phases of the work. The subcontractors should review the stamped set to see if there is anything that prevents them from performing the work for their estimate as bid in Level 4. There will be some cost variation here. The longer it took for the plans at the city the greater the chance of changes in costs.
Level 5 work is detailed and can take weeks or months, as this time it’s for real and the contracts are enforceable. I have seen major changes inserted at the last moment by plan checkers and architects who do not call this out when handing over the plans that have been approved. And understand, plans can and will have mistakes.
Level 5 Characteristics:
Hallelujah! The plans have been approved, stamped, paid for by the homeowner, and delivered to the contractor. This set of plans should be copied and distributed to all subcontractors, to the end of establishing the certainty of level 5 from estimate to a Bid.
Level 5 is possible only by a lot of work in Level 4. If all has been done correctly, then Level 5 is really just making sure that the small changes made after the final submittal to the city are “small.”
The contractor should start to finalize the sub contracts for the first key phases of the work. The subcontractors should review the stamped set to see if there is anything that prevents them from performing the work for their estimate as bid in Level 4. There will be some cost variation here. The longer it took for the plans at the city the greater the chance of changes in costs.
Level 5 work is detailed and can take weeks or months, as this time it’s for real and the contracts are enforceable. I have seen major changes inserted at the last moment by plan checkers and architects who do not call this out when handing over the plans that have been approved. And understand, plans can and will have mistakes.
Level 5 Characteristics:
- Plans have been approved, stamped, and permits pulled.
- The rough build team has been chosen and contracts are being made to start work, finishes should happen later after rough inspection.
- The timeline is more defined with help of subcontractors doing the work.
- Payment schedule has been established.
- Work hours have been established.
- Changes from level 4 are outlined; possible changes are priced if it is a known quantity.
- Contract is signed.
- Work begins.
Now understand that not all projects are the same, but some sort of uniformity in this process exists with all build teams. At the early stages, customers should be looking for the right fit with the people they will be working with for months or even years. Personality is important, but professionalism more so. Know that you cannot predict all possible outcomes. You may have the right raft, gear, map, and safety features, even the right team in the raft with you, but you can NEVER think of all possible outcomes, so compatibility is key between homeowner, architect, engineer, general contractor, and the subcontractors.
Nothing will ever go 100% as expected, but if a team has good communication the outcomes are much more predictable, and the process less burdensome. Perhaps the most important thing to remember is to look for value, not price. Some contractors know that a cheap price makes them look better than high “estimating” contractors. But in the end, it is the value that matters. And it’s important to become educated enough to judge that value is key for all project owners – reading this was a start.
Nothing will ever go 100% as expected, but if a team has good communication the outcomes are much more predictable, and the process less burdensome. Perhaps the most important thing to remember is to look for value, not price. Some contractors know that a cheap price makes them look better than high “estimating” contractors. But in the end, it is the value that matters. And it’s important to become educated enough to judge that value is key for all project owners – reading this was a start.