Robert writes: I am planning to build a second home. The builder who I hired has refused to provide copies of his bids for the various parts of the building process. He claims it’s not normal business practice and he’s never done it before. However, he did provide a document titled “Scope of Work” in which he identified the costs for the various parts of the project. The scope of work and specifications are in many ways vague. I asked him if he added any overhead/profit to his bids, he said he added about 2%. This was news to me until he told me. Should a builder provide a copy of his bids upon request? Since he’s refused to provide them, is this a red flag for possible future problems? Should I hire a Project Manager to make sure the bids are reasonable, accurate and are not inflated? In the contract that the builder provided me, he set the draws at the start of work projects (not after completion). He also set the last draw at only 1% of the total building cost. Possibly more red flags?
Steve Bliss of BuildingAdvisor.com responds: It is not typical for a general contractor to share his subcontractor bids on this type of project (vs. a large commercial project built using AIA or similar contracts). A few residential contractors are very open about their real costs and real overhead and profit numbers, especially on cost-plus jobs. But in a competitive bidding situation, your real concern should be the final number and, of course, the scope of work and specs that tell you what you are getting for your money.
A vague scope of work and specifications are, in my opinion, red flags. Sadly, they are also very common — and also the source of many conflicts between owners and contractors. It’s possible that you will get everything you want and more, but it’s more likely that you will get less than you’re expecting. Without clear plans and specs, there’s no way to know. Looking at other jobs completed by the contractor (and asking if your job will be using the same materials and details) will give you some idea of what you will be getting, but you’re still taking a big chance.
Collecting draws at the beginning of work phases, rather than at their completion, can also be a red flag. This is also very common, but negotiable. All builders try to front-load their draw schedules to some extent, but you don’t want to pay for work not completed and materials not delivered. If things go badly during the project, you could be out a lot of money. If a bank is involved in the financing, they will help create a reasonable draw schedule.
I would suggest going through the estimate with the contractor and ask him to provide more detail where it is lacking. Ask him to put these additions to the specs in writing. If he won’t, I’d look elsewhere. Before your meeting, run through the BuildingAdvisor Estimating Worksheet to make sure that all the big items are included in the estimate. Also, if you think the draw schedule is unreasonable, ask for changes. A loan officer at your bank may be willing to review the payment schedule and offer suggestions.
One benefit of hiring an outside designer such as an architect is that they will typically provide detailed specs, and if you hire the architect (or non-architect building designer) to manage the project, they will make sure that the specs are followed and help manage the draw schedule, inspections, and other project management issues. This is an expensive way to go but may be worth it depending on the cost and complexity of your project.
Hiring a project manager is another way to go. However, on residential projects, the project manager typically acts like a general contractor but works for you for a fee. He gets bids from subs and oversees the work, but is answerable to you, the owner. Hiring a project manager to oversee a single general contractor probably won’t fly. Using a project manager instead of a general contractor may make sense (if you can find someone locally who works this way), but is not a panacea. You still need to trust that the project manager is doing his job, getting you the best subcontractor bids, and overseeing work quality.
Regarding the reported 2% markup for overhead and profit, this is much too low for any company to stay in business. It’s true that every contractor calculates these costs differently. For example, some contractor’s pay themselves a wage (direct cost) during a project; others take their money out of the overhead and profit component. Unless you have detailed information about how the contractor computes his cost, the actual percentages won’t really help you compare contractors.
The number that counts the most is the cost of a completed project. For new home project like this, I’d recommend getting three bids from qualified contractors before making your selection. In comparing costs, make sure that the three contractors are bidding on the same project with the same plans, specs, and allowances. Also, I’d recommend adding 5% to 10% to the final cost for changes, concealed conditions, and other costs that you failed to anticipate
At the end of the day, you need to work with someone whom you can trust to do good quality work, and someone you trust will work with you in good faith to resolve the small (and sometimes not so small) problems that occur during the course of any construction project of this scale. You should also have good, clear documents (plans, specs, contract) to fall back on if conflicts arise, but if you start out with mutual distrust and suspicion, it really doesn’t bode well.
A Few Questions: Who provided the plans? Did you get more than one bid (you definitely should)? Did you check this contractors references and look at other work they have completed?
Robert Responds: To answer your questions: The home is an Amwood home package (Janesville, WI). We picked a design from an Amwood brochure and the builder, or maybe better stated the “contractor” (separate from Amwood), is running the project by bidding out all the other parts of the building process except the materials that come with the Amwood package. He’s the general contractor for the project.
One thing that concerned me about him is the permit fees. My wife and I spent a few thousand dollars (paid for them directly) on these fees and to our surprise, the contractor did not include them in the cost to build the house. I don’t understand why you wouldn’t include them? The true cost to build is now much higher than what he stated it would be.
Since this is an Amwood package, not many builders deal with them. I did get an estimate from another reputable builder (for a custom home about the same size) and he was significantly higher.
I did check his references and the BBB and did not find any complaints.
Regarding the proposal he gave us, it only has two allowances written in. Everything else is a set cost. He said he does not like working with allowances. A set fee allows him to lock in a price for us (or so he says) — unless we want to change something, or if there is an unforeseen situation. He wrote in the contract that we would be responsible for any extra expense if the foundation footings require additional excavation. I don’t like an open door like that. It almost seems like he knows it will cost more.
In his proposal, he wrote in his profit as 10% of the cost to build the house. However, until I questioned him about wanting to see the bids and then asking him if any overhead was factored into them, then told me they’re marked up approximately 2%.
Steve, do you have any other comments, recommendations based on this additional information?
I’ll take your advice about asking him for a more detailed scope of work/specifications.
Steve Bliss of BuildingAdvisor.com responds: Sounds like you’re dealing with both a manufactured home business and an independent contractor. Manufactured home companies are typically modular, Panelized, or pre-cut or some combination of the three. Modular companies sell the home in two or more large “modules” that are shipped on flatbed trucks and connected on site to provide a more-or-less complete home. Panelized are shipped as big chunks of wall, and sometimes floor, sections and roof trusses. Pre-cuts are essentially a big pile of pre-cut lumber that all fits together on site with minimal cutting. (There are also mobile homes – sometimes called HUD-code homes – that roll to your site on axles.)
Most manufactured home companies rely on independent contractors to do site work, install the foundation, assemble their homes on site, connect the utilities, and add the finishing touches like carpeting, cabinets, etc. Many have a list of “preferred” or “approved” contractors who have experience with their products and whose work quality is up to their standards. They want the project to go well as a good job and satisfied makes them look good. How complete a package you are buying varies a great deal from on manufacturer to another. For example, some modular homes come with carpeting, interior paint, wall paper, and plumbing fixtures already installed. Some of the pre-cut and Panelized homes come with none of that. None generally include land, site work, foundation, utility connections, permits, and fees.
So the advertised price from house package manufacturer is usually far below what you will pay for a completed home. Pay special attention to permits and fees imposed by the town or state for everything from curb cuts to tree clearing to utility hookups. Pay special attention to impact fees (sometimes called “development fees,” “capital recovery fees,” “mitigation fees,” and “facility fees,” among other things. In addition to hook-up fees. Make sure you get a handle on utility hook-up costs including trenching and running pipes or wires from the nearest line to your house, which can be considerable for long runs.
First call the town building and zoning department, tell them that you are planning to build a manufactured home, and ask what fees and permits you will need pay for. Then discuss with the manufacturer exactly what he includes and excludes from their package price. Ask the utility companies about their hook up costs, including any fees, trenching, meters, etc., and ask what additional plumbing or electrical work you will need to complete the connection to the home. Then run though the whole list with your contractor to make sure that all development costs are accounted for by the house manufacturer, contractor, or yourself, I’d suggest reading the section on Budgeting for Site Development before proceeding.
Also, you can use my Estimating Worksheet as a checklist to make sure that you are aware of all costs and whether they are covered by the materials supplier, contractor, or yourself. Download the Estimating Worksheet .doc file for a printable list.
Since you are dealing with two companies – one supplying the materials and one assembling them – the chances for having costs fall through the cracks are greater. However, even when dealing with a single company, the tendency is to try to keep the bid price low by leaving out a lot of the development costs and by speccing low-cost materials, cabinets, appliances, and fixtures (that you probably will want to upgrade). Often the low bidder does not end up being the lowest cost contractor for this reason. There are many ways to submit a low-ball bid and then make up the difference with changes, add-ons, upgrades, etc. As I mentioned earlier, nearly every project ends up costing more than anticipated by the homeowner, but you should try to anticipate as many costs as possible by nailing down clear plans and specs beforehand.
All the more reason to work with a reputable company who will do good quality work and be honest with you about the actual costs and what is included and excluded in their estimates. The best contractors with be clear with you about what their price “excludes” as well and “includes.” Whichever way you go, make sure you visit some other projects done by the home manufacturer and contractor you are considering and talk to references.