Recruiting a Builder Through Negotiation of a Custom Home Contract Provides Better Outcomes for Architects and Clients
A measure of home builder confidence rose in October 2105, to the highest level since the end of the housing boom. The National Association of Home Builders/Wells Fargo housing market index rose 3 points to 64, the highest level since the same month in 2005. Custom home builders’ confidence is in line with the rest of the housing market.
While the growth in custom home building continues to ascend, its has generated an untold number of horror stories. For clients, a successful custom home project is not just the deliverable of a breathtaking residence. It is the experience the clients have of the entire home design and building process. In the custom home market, the successful project is more than just a function of the low bid. It is a subtle balance of cost, schedule, personality, teamwork, quality, dependability and service.
The most common project delivery method is Design-Bid-Build. Once an architect’s construction drawings are completed, most projects are given to general contractors for bidding. Architects will typically solicit three or four bids from a pool of builders – “in their stable” – that they know, are likely to mesh well with the client and are the most capable for the project.
Interestingly, this very popular form of builder acquisition almost immediately pits the builder against the client. From the outset, the low bidder is trying to ensure that they protect their bottom line instead of the client’s. Any ambiguity in the construction drawings or later stage design enhancements can become a source of conflict and cost. Bottom line, this method of builder sourcing generates a collision of interests. In a great situation, the friction is low. In a poor situation, the friction can be catastrophic.
Design-Bid-Build is not the only methodology for sourcing builders to successfully construct a custom home. An increasingly popular builder-sourcing model is negotiation. In this case, the builder will provide “open book,” cost-plus, fixed-fee pricing for the project. This arrangement aligns the goals of the builder, architect and client. In almost every case, the negotiated contract model saves time and money.
Following are ten architect and client benefits derived from using the negotiated builder-sourcing model:
Choice – When clients and architects elect to negotiate a custom home project they are more likely to choose a builder based on their qualifications and competitiveness, instead of relying strictly on price. In addition to choosing the firm they work with, clients have the right to interview and meet the people from each firm who will work on their project. This is very important because while the strength of the organization is of value, in this business, it’s the people and their knowledge, experience, skills and commitment to serve the client that makes the difference.
Partnership – In a negotiated custom home delivery, the builder is part of the client’s team and will always look for ways to add value to the project. Clients avoid charges for change orders, receive the full benefit of supplier buyouts the builders may achieve that reduce costs and have the surety that the builder’s interests are perfectly aligned with those of the architect and client.
Increased Transparency – Negotiated delivery is built on the premise of a trust-based relationship between the client and the project team. Clients get to see exactly how their money is spent. Not just a high-level recap, but detailed cost transactions showing where their money is going. Possibly more important than tracking expenses during construction is transparency in the preconstruction phase, which enables clients to see and decide where builders are going to spend their money before construction begins.
Cost Savings – Managing the client’s project budget begins when critical design decisions are being made. By negotiating with the builder, they are part of the team much earlier in the design process. Doing so allows them to maximize value by providing cost input into design decisions. It also allows the builder to capitalize on the early purchasing of any necessary major equipment by locking in lower prices. Additionally, under a negotiated delivery format, any savings are returned to the client based on contract negotiations. This is different from hard-bid projects where the builder retains 100% of any savings.
Shorter Schedules – Managing another major element of a client’s project, the schedule, also begins early during the design phase. Including a builder in these preliminary steps enables them to fast track a client’s project and start construction sooner in the home building process than would be possible in a bid situation. Using a negotiated delivery format gives the project team more time to plan for construction operations, analyze the most efficient means and methods and identify any potential disruptions to their operations and plan for them accordingly.
Higher Quality – Another significant advantage of having the builder as part of the team very early in the process is that quality control efforts can begin as early as the design phase. Clients benefit when their builder provides input into the best possible means, methods and materials for life-cycle costs.
Fewer Changes – The easiest way to minimize changes during the build period is to involve the construction team early in the design phase and prevent unneeded changes before construction even begins. Under a negotiated delivery system, the builder can provide invaluable preconstruction services that include reviewing drawings for potential errors ahead of time, thereby reducing the number of changes. Fewer changes mean significant savings on any project. In contrast, with the bid model, clients run a higher risk of changes during construction, which impair progress and incur additional time and money.
Better Information – The collaborative process of negotiating allows clients to be much more informed about their custom home construction project than if they went with the traditional hard bid method. With negotiated delivery, clients get to be engaged from the very beginning, telling team members what they value most on their project. Clients get more information about how their money is being spent and the value they are receiving.
Competitive Pricing – Perhaps the largest misconception of custom home building is that by negotiating their project with a builder, a client is choosing the costlier alternative. In fact, the only thing clients are negotiating is the builder’s fees, which are minimal relative to the overall cost of any custom home project. With a negotiated approach, clients gain the ability to negotiate fair terms for these fees. Another misconception is that those fees are not included in a builder’s cost under the bid paradigm, which is untrue. In either builder sourcing method, the builder’s fees are included in the initial pricing and all subcontractor and supplier work is procured competitively. The advantage of the negotiated approach is that the builder is able to manage risk on the client’s behalf by prequalifying subcontractors and suppliers before accepting bids. Clients get the best of both worlds; competitive pricing, and minimizing risk to their bottom line.
Value – Everyone has his or her own unique criteria for value. When a client negotiates their project, they gain the ability to tell the construction team what is most valuable to them from the first day. This empowers the entire custom home construction team to provide clients with the most value on their project from start to finish; and that is priceless.
As with any home building project, it is better if all team members’ best interests are completely aligned. Additionally, the earlier in the design process the client, architect and builder are working together, the better the overall result. Architects should strongly encourage their clients to use the negotiated builder-sourcing model for their next custom home project.
Luke Gladis is the Managing Director of Ironstar Building Company (www.ironstar.net) – the design-driven, elite home developer. It works exclusively with premiere residential architects to build breathtaking homes for its clients and its own speculative real estate projects. Mr. Gladis is responsible for daily operations, execution and successful delivery of all Ironstar custom home projects. Prior to joining Ironstar, he spent the previous ten years managing construction of some of the most exquisite fine homes in the New York City metropolitan region, with project budgets averaging more than $10 million.