Real Estate Articles

Managing General Contractors

Written by Brent Pace for Gaebler Ventures

This article is to help entrepreneurs learn how to manage general contractors. Whether it's an office space build-out, or a special building project related to a new venture, dealing with general contractors effectively can make or break a company. Here we focus on four key actions that will help an entrepreneur hold their own when dealing with a contractor.

At some point in your career you will likely find yourself involved in a construction project.

Whether it's building out retail space for your new clothing line, building out office space to accommodate new growth, or building a plant to manufacture your proprietary technology - managing construction is necessary for any entrepreneur.

So what can you do to effectively manage a general contractor when you don't understand the construction process? Have no fear, there are four key actions you can focus on that will keep your contractor on his toes, and give you comfort that you will get your job completed in an economical fashion.

First, pick the right contractor for the job. Some general contractors are large and very expensive, and focus on jobs upward of $100 MM. Trying to hire one of these groups for a job that is less than a few million dollars is ridiculous. On the other hand, hiring a friend of a friend to build you a $20 MM office building probably doesn't make sense either. Do some research and find a reputable company that regularly builds project of the size and scope you are dealing with. And make sure you ask for references for projects completed in the past year.

In addition to the right size, you also want the right price. Select at least three contractors that fit your criteria and then ask them to bid the project. Do not tell any of the bidders who the other bidders are, but make sure they know that they are competing. This will help you get the best price on your job.

Second, use the right type of contract. There are three main types contractors use: lump sum, guaranteed maximum price, and cost plus. In lump sum, the contractor simply gives you a number and that is the budget. They manage the job, but make no guarantees about over runs. Guaranteed maximum price is like lump sum, but the number is firm with no over runs. You will pay a slight premium to get that guarantee, however. Finally, cost plus. Here a contractor agrees to simply build the project and you agree to a certain fee or return that the contractor gets depending on the cost. All things equal, the more complicated and risky your project is the more you may want to move toward a guaranteed maximum price. Cost plus is usually simple for small jobs that you figure out as you go.

Third, manage the change orders. Unless you have an air-tight guaranteed maximum price contract, you will likely experience change orders. When changes come up, a contractor will want you to sign off on a document that says you will pay them for the cost of the change plus a fee for managing the additional work. Be sure to negotiate how you will manage change orders up front! Some contractors will intentionally bid a job low to get the work and then plan on bumping up their bottom line through change orders. Talk about this BEFORE you select a general contractor through the bid process.

Fourth, hold your ground. Contractors can smell fear. It's amazing. They prey upon people who never leave the office and have never been on a jobsite. So don't let them push you around. Know your agreements, negotiate them, and hold the contractor to it. Follow these four points, and your next construction job will be a success.

Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.

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