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Randy Thompson: Budget vs. Spend—Four Key Strategies

Here are four proven strategies to help ensure you get the best, most aggressive pricing for your construction projects.
Randy Thompson
Randy Thompson

Giza, Egypt: 2959 BC. Imhotep stomps his sandaled foot, throws his roll of papyrus construction drawings across the table at the Pharaoh’s damnable project manager. “I simply will not work with you any longer! You clearly cannot possibly understand my design intent, you small-minded, leather-handed, son-of-a-sun-burned-stone-carver!”

“Oh, I understand your design intent perfectly,” the project manager says, ignoring the insult he has heard his whole career. “The problem is, I cannot get even one more teeny-tiny little coin out of the treasury. There is simply no more silver to weigh on this.”

The genius, albeit temperamental, architect flicks away a pesky fly with his ox tail fan, the handle wrapped in tanned crocodile hide, then plants his hands on his hips and says, “Fine then, Project Manager.” He means this as a slur, then adds, “I expect you to tell Khufu that your budget is ruining the integrity of my King’s Chamber design.”

But the project manager is not fazed. “Very well, and I will be happy to tell Khufu that your design is ruining the integrity of the great Pharaoh’s budget.”

As a modern version of the humble project manager depicted above, I have been in plenty of similar conversations myself. Often, these conversation start well before eventual clients decide to hire me in the first place. That is, it’s not uncommon for someone to ask during an interview, “What strategies do you have, or what tools do you use, to keep project costs under control?”

There are many, some simple and tactical, others complex and strategic. Below, you will find a few techniques I use to make sure my clients get their money’s worth.

1. Design to budget. I recently met with a design team who complained to my client that my budget was ruining their design intent. As I explained—not to Khufu but to my client—the construction drawings prepared by his design team, while lovely, were for $85-per-foot space and not for the $65-per-foot space his budget allowed for. Why would a design firm do such a thing, willingly develop construction documents that are over budget?

Some cynics suggest it’s done because if the drawings are over budget and the client objects, the design team gets to redo them again. And that’s a change order. And change orders mean more fees. But I am no cynic; instead, I am a practical-ist. For this reason, as part of designer RFPs I include language that says if the drawings come back over budget, the design team will rework their drawings, at no cost, until they meet the client’s budget. Problem solved.

2. Watch the schedule. When general contractors price their services, their fees to staff the job, to deal with temporary site conditions, to manage the movement of materials to and from the site, etc. fall into what are commonly called “general conditions.” For those elements of general conditions that relate to labor (project managers, site supervisors, pre-construction services, estimators, etc.), these include the costs of salaries, insurance, and so on. The longer a project runs, the more general conditions you pay.

To illustrate the impact of this, I went through a recent procurement exercise where we were looking to hire a GC for a $100 million build-to-suit. The client told them to expect the project to run 28 months. This way, all were bidding to the same job schedule. But then after we had the bids, we asked a second round of questions including: “Based on what you now know about the project, if you were to build a comfortable schedule for this assignment, how many months would you advise it will take?” One came back with a 19 month schedule. Given their general conditions were $350,000 a month, shaving 9 months off the schedule meant their fees dropped by $3.15 million. (Note: Past history is no guarantee of future performance, your mileage may vary, offer not valid in Cuba. All that said, you want a project schedule as short as reasonably possible, because the contractor’s time is your money.)

3. Embrace BIM. Imhotep could never imagine a tool that allows contractors to build an entire pyramid in virtual, 3-D space. Building Information Modeling does just that. The benefit: conflicts between plumbing chases, risers, duct work, electrical closets, vertical and horizontal penetrations, after-life preparation chambers, etc., can all be detected, diagnosed, and fixed before the first hammer gets swung. The benefit to you: conflicts are found in BIM and field-generated change orders are avoided.

4. Beware the contingency fee (especially the hidden ones). Generally, subcontractors include contingency fees in their proposals. Why? So when someone screws up, when a drawing does not quite match field conditions, etc., the GC can have a talk with their sub that goes something like this:

GC: “I hear we’re six Framiss straps short.”

Sub: “That’s right, boss. I counted them on the drawings three times. They show only 10 but we need 16.”

GC: “So how much are Framiss straps these days anyway?”

Sub: “This particular strap is top-end, kind of pricy. If it were me, I would have specified something different, but you know how this designer is; only the best. So six more is gonna run around $1,400, boss.”

GC, after a meaningful pause: “Tell you what, I have another job coming right behind this one. If you take care of the $1,400 now, I’ll take care of you on the next one.”

Sub: “You got it, boss.”

So, why would a sub agree to cover the costs of what is clearly an oversight on the drawings? Because he has a hidden, just-in-case contingency fee he can draw upon to make small mistakes go away. And that keeps his boss, the GC, happy. Another benefit: the client doesn’t get hit with a change order fee to cover the missing Framiss straps. But think about it for a minute. Let’s say your entire pool of subs (painters, framers, carpet guys, cleaners, plumbers, electricians) totals $30 million. If each of these trades have a hidden 10 percent fee, then your project is actually expected to cost $27 million, but collectively, your subs have piled on another $3 million in contingency fees.

So what happens if those just-in-case dollars are not needed? Do you get them back? Uh … no. Therefore, when I hire a GC, I tell them I want their subs to price without any contingency fees whatsoever. I will then add a line item to the master budget called “Contingency.” And if we later determine drawings are missing Framiss straps, subs will come to me with this news and I can hold the right team accountable.

As I said at the start, there are many ways to help ensure you get the best, most aggressive pricing for your construction projects. But if you are mindful these four strategies, you will be ahead of the game.

Randy Thompson is senior managing director and U.S. head of corporate project management at Cushman & Wakefield. Contact him at [email protected].