Selecting a Contractor – A Quick Guide

Although the financial sector is often seen as mercenary, lenders place a lot of emphasis on the softer side of corporate relationships. Typically, the term ‘partnership’ will apply to whether there has been a historical relationship between the key parties (i.e. general contractor and developer) – do they have similar corporate values, financial strength and experience? The theory of balance is key in this area. An inexperienced developer needs an experienced general contractor, but an accomplished developer may be able to upskill a less experienced contractor without substantially increasing risk.

Or in the case of a direct appointment to a client, has that general contractor served similar clients for equivalent scopes of work? Do they have written letters of recommendation?  Where a history of working together can be evidenced, typically a lot of early issues can be avoided such as protracted commercial negotiations, misalignment of expectations and lack of trust. Collective success on prior work will count significantly more than separable experience, and so this should be conveyed. If you are the developer, this partnership concept could equally apply to the general contractor and their sub-contractors or design consultants.

“I have a good feeling about this contractor, and I believe they’ll do a great job for us”

He or she might, but then again, he or she might not. Leaving the success of your project to ‘the gods’ will inevitably leave you disappointed. Projects and people need to be driven to success. Construction should not be a gamble.

Remember, you are a customer buying a service.

The construction industry, like any other, has those who are keen to serve and provide a high-quality product, and a minority who appear preordained to disappoint. Hold people to their commitments – including yourself.

Just as general contractors place parameters on their price, you must place reasonable parameters on the performance of their work. Setting out start and completion dates and conditions such as removal of waste, car parking and reasonable working hours will avoid some of the most common issues which arise on domestic and commercial projects.

Taking a moment to step into the general contractor’s shoes is important to identify whether their planned approach is actually going to work. Aspects such as overly ambitious access assumptions or an inconsistent approach to tenant management can create pinch points and project stress. In order to avoid potential for delays and increased costs, it is important to ensure the construction methodology is consistent with the client’s expectations and constraints.

The key point of reviewing this aspect is to test the validity of assumptions and the level of risk associated with each. Often through engaging in this dialogue, a range of assumptions can actually be tested and verified before commencement to mitigate construction phase risk and potentially to identify opportunities to the benefit of all parties.

Cost is a tricky area to step into for many as the desire for ‘best price’ is often seen as conflicting with ‘least risk.’ However, there is a structured way in which a contractor’s price can be tested to achieve comfort prior to contract execution.

Typically, this involves undertaking an independent cost estimate (often termed a ‘pre-bid estimate’) to define, based on the scope, the market price to carry out the works – normally priced by a cost consultant.

This sets expectations upon which bid returns can be assessed. Typically, bid returns should fall within plus or minus five per cent of the pre-bid estimate (PBE). If costs are substantially lower and the PBE has been verified as accurate, it is a warning sign that the market price has been artificially reduced to win the work. If this is the case, it is prudent to retain the difference between the bid price and the PBE, as in most cases, the project costs will escalate (at least) to the PBE level.

From a due diligence point of view, a price which is in excess of the PBE will mean (based on the independent PBE) that the likelihood of contractor default on the project is somewhat reduced.

A complex and often subjective topic, schedule reviews can often be daunting and limited to a cursory look at total duration.  This can, however, neglect more important aspects such as what are the critical activities (meaning there is no flexibility as to when these can occur) on the project?  And, how easily will these be affected by external factors?

Typical issues with contractor’s schedules can also be that they are reverse engineered to a prescribed client time frame. This can mean that contractor simply ‘draw a pretty picture’ to suit the client’s need without applying the systematic and detailed approach to defining the logic, sequence and time frames associated with each task on the project. Seeing granularity in the schedule can be taken as a further validation of the construction methodology as this should be solidified by both the schedule and the cost.

If in doubt, consult a professional schedule reviewer. Technology today can allow schedule consultants to quickly provide a key health check of your contractor’s  schedule based on industry standards for logic, sequence and detail.