When it comes to asking contractors to sound off about issues, we generally have focused their attention on commercial construction. This month, we found they had much to say about residential construction. In fact, they talked so much that only half-a-dozen contractors were interviewed. As with everything else, residential has its pros and cons, and one particular con (pun intended) that residential has inherited from commercial, generated the most excitement—contracts that could only possibly have been written either by some of the characters Alice met in Wonderland, or by any of the Marx Brothers in their more creative moments.
Heads I Win, Tails You Lose
The word “contract” comes originally from a Latin word with two meanings: “to draw together” and “a bargain.” These days, the factually insane contracts seen in commercial projects are now appearing with a vengeance in the residential market, too. They are a real bargain for general contractors and a real dog for contractors. They don’t particularly draw the two parties together anymore.
“There used to be a difference between commercial and residential contracts,” explains a Colorado contractor, “but over the last decade we have seen the risk-transfer issues in residential that the purchasing agents and lawyers who move from company to company, brought with them from commercial. Residential contracts used to be almost a handshake. With the larger companies you always had insurance issues, things like that, but there was no risk transfer. Now, 80 percent of our contracts include it. I saw a contract the other day that could have held my children responsible for things that happened on the job that I had no control over!”
Another contractor from Colorado agrees: “You’re responsible for virtually everyone on the job site, and the contractor is not even responsible for his own directives.” The working definition for somebody who is insane is “not responsible for his own actions.” What does that make GCs pushing off these contracts? And legislators, lawyers and judges who support these risk-transfer contracts?
“It’s become much worse in residential over the last five years,” continues the second Colorado man. “It’s in almost every contract we sign. If we don’t do something about it, they’ll just do whatever they want to the contracts.
“It’s easy to become a residential drywall contractor, particularly if you don’t have tremendous volumes of work. That’s the guy hurting the larger picture, because he’ll sign the contract figuring ‘nothing will happen to me, I’m small and I need the work.’ So we lose the business. We’ve proposed several bills in the legislature to eliminate these contracts, but it’s very difficult to push through because the GCs, home building associations, architects and owners all fight change—obviously, they prefer to see all the risk being transferred to someone else. We need to galvanize everyone into action, because this issue impacts everybody in residential and commercial. We need to educate people on what they’re signing and limit their exposure. We as an association need to fight these contract issues and change the laws.”
Meanwhile, what can we do about contracts on the table right now? The Colorado man suggests the following: “Many builders in our area have been bought up by big national builders, so you can’t negotiate anymore with the purchasing agent because decisions are out of his control. That’s how they’re getting around it. So we pick our battles. I’ve worked with some contractors for 15 years and it would be suicide to turn away from that work. Some contractors have taken this approach and almost put themselves out of business as a result. It makes more sense to get your contact to understand the problem. He can then take it to corporate so they understand the problems these new contracts are creating with his old relationships.
“I haven’t seen it happen yet, but I have been assured they will work very hard with corporate to make these contracts more subcontractor-friendly and fair. With a new contractor, I often don’t sign, which can limit our growth, but we’ve been able to increase growth with our current contractor base.”
“Rather than wasting my time when bidding,” adds the first Colorado contractor, “I ask to see the contract first, because often it includes requirements that will cost more money. We try to discuss the contracts personally and state what we can and cannot sign and why. Ten percent flat tell you if you do not sign as-is, they will find somebody else. Others are more open to change and willing to listen to reason, but I’m afraid the ratio will only worsen.”
Some contractors still find the handshake at play in residential, as an Idaho man makes clear: “Residential contracts tend to be more informal, which can be a source of frustration if you’re coming from commercial where you’re used to highly detailed specifications. It ends up with ‘Oh, I thought you were going to provide this!’”
A contractor from Illinois had the same experience: “The majority of my residential work is done without contracts because I work for repeat GCs. If there’s an independent homeowner, I have them sign my proposal, but we don’t draft [a formal contract].”
From Safety to Schedules
Apart from contracts, how does residential stack up against commercial? “Many residential contractors don’t pay much attention to safety and OSHA,” says a Colorado contractor. “They think they’re under OSHA’s radar and don’t want to spend $300 on safety rails. Nobody is immune to OSHA, and certainly nobody is immune to having an accident.
“One of my competitors had a fellow involved in a scaffolding accident and his employee is now a quadriplegic. On another job, they did not have proper base plates on the scaffolding, so a scaffold leg went through the floor, resulting in a fatality. We hear every day about someone who wasn’t on a guarded stairway and fell down, breaking an ankle or a leg. That’s why we insist on spending the money to meet the codes and, quite honestly, that has cost us business.”
A Floridian contractor, echoed by the Idaho man, reminds us of one well-known distinction for home construction: “The class-action lawsuits regarding EIFS and mold mean many insurance companies won’t insure us, which is one reason we do little residential now.”
For an Illinois contractor, “Residential is easier and more profitable because you’re on and off site much faster, so you have much less exposure, especially as crew sizes are smaller, presenting less opportunities for injuries and lawsuits. And generally you collect your money much faster. The downside is when a homeowner or builder is on site, generating change orders. Additionally, we tend to have tightly moving schedules, the previous subs are not always complete with their work. Lastly, the multiple conditions of the cathedral ceilings mean a lot of handwork for the tapers.”
One Colorado contractor thinks “deadlines are stiffer in residential” while the other thinks “We have very tight schedules in residential but not as tight as commercial, where evenings and weekends are scheduled, too. We occasionally need to work Saturdays to catch up on the schedule. GCs may tell you how many days you have to complete the work, but seldom do I see penalty clauses in relation to schedules. Another great advantage we have in the residential market is we are generally the only ones working at that time. You don’t have trim, carpenter, electrician, HVAC guys, etc. in there at the same time interrupting your flow, like they do in commercial. That makes it tougher for them to adhere to schedules.”
Agreeing with this stance is the contractor from Idaho: “Commercial has greater strain from deadlines outlined in the contract with damages for not completing within schedule. In residential, they might get mad but they don’t have the contractual obligation.”
The Illinois contractor ties the different ideas together when he says, “Deadlines have all been ‘tomorrow’ in both residential and commercial for the last decade, but the pace has become so extreme because owners are trying to reduce the exposure of their money that nobody takes it seriously anymore. We give it our every effort, but when every single job has a critical move-in date and is behind schedule, it’s just another day.”
Eagle-Eyed Owners
Two contractors state that many residential contractors are unqualified, lack experience and don’t have proper insurance—compared to the licensing requirements, experience and training level of commercial building employees. This lack of skills may apply to tract projects, but according to the Idaho man, “Higher-end residential owners tend to demand quality work and are more challenging to satisfy. Large-scale commercial projects involve quantity of product being installed, reducing the level of scrutiny. You have to make sure your pricing structure reflects this, and count on slower production rates.”
“Homeowners are generally more difficult to deal with, especially on the higher-end houses, because they are usually building their first or second house and have many wonderful-in-their-mind ideas, as well as unrealistic expectations of how things work—meaning you have to guide them through it,” continues the Colorado contractor. “Typically, commercial jobs are smooth finish. On residential, you work with a lot of different textures. Interior designers are often involved. It takes time, public relations work and mommy-cuddling to move them all through the process and make sure everybody is on the same page.”
Adds his colleague, “More homeowners these days are more educated on what they’re buying, and they’re also very skeptical—they’ll really question you about what you’re doing in their house, whether they are being cheated. We have homeowner or customer advocates here now with watchdog programs for people to call in their problems with contractors or automobile mechanics, etc. They’re pretty tough customers these days. Quality of work, being dependable, being on time—these are the main complaints.”
So what about callbacks? According to all contractors surveyed, they run higher in residential. Why? “After the final inspection is done in commercial,” according to the Idaho contractor, “you’re done because the people using the facility don’t really care if there is a problem with the texture on the wall. A homeowner sees the problem every day and has ownership and wants to see it fixed. Cookie-cutter housing in some big subdivision or tract, on the other hand, where workers are generally not as well trained and paid on a piecework basis that rewards speed rather than quality, means lower quality expectations than in a museum or airport.”
“Callbacks are more frequent in residential,” says the Illinois contractor, “because it’s all framed out of wood. We have a lot of new-growth wood being used to frame houses and so we see a lot of shrinkage. Because the homeowners are inside that house all that time, they see every square inch of the wall and ceiling, so there is a lot more potential for callbacks. Commercial owners generally don’t occupy the space, and tenants don’t view the walls and ceilings as critically as homeowners.”
Adding to the list of reasons for callbacks, the Colorado contractors say, “The other subs who come in behind us beat up our work. The trimmers on the commercial jobs rarely beat the heck out of my walls, but in residential, they do. I attribute it to the tight scheduling and because most of my houses are wood-based—whereas commercial often just rolls on the plastic stuff. For a typical 200-sheet house, we’ll spend a day touching it up compared to an hour in an office building.”
“The real challenge for us is maintaining quality of workmanship using the piecework mentality that predominates in residential. People at home are there long enough to notice imperfections being highlighted by different lighting conditions. Yet when you go into their house to repair, the kids are drawing on the walls and the corners are banged up—and you wonder how the callback problem could bother them. I go into a lot of commercial buildings and wonder how they could have gotten away with some things. Commercial owners are more interested in getting their business running than handling a joint showing in the ceiling.”
What About Architects?
So how does residential compare when it comes to dealing with architects? Once again, a Colorado man puts it best: “Residential is usually less about design and more about texture and designer issues that are subjective. On commercial jobs, architects are more interested in the overall building than details like texture. But I’ve had a one owner say, ‘This wall looks happy, but that wall looks angry.’ Many times you show them a picture or send them a 4-foot square sample and they think that’s what they want, but when they see the entire living room, they change their mind. So I always insist the owner and/or architect meet us on the job the day that we start the decorating process and then approve a room when done. I listen and visit with them, and the more I interact with them, the more they start to soften. We fix what they want fixed and hope the list becomes smaller the more you are with them.”
“Architects for the commercial work are more articulate and definitely have more details in their drawings,” adds a Floridian. The Idaho man corroborates this idea with this thought: “Residential architects tend to be more informal, which can lead to conflict for those of us who come from the commercial world. If we don’t see it clearly defined on the plans or specs, we’re likely to think they didn’t want it, whereas the architect will say, ‘Well, you should have known I wanted that.’”
Perhaps expressing the same idea with less subtlety, the Illinois contractor reports: “We have no interaction of any kind with the architects in residential. The guys in the construction field don’t like architects. They tend not to be detailed enough and are ‘airy-fairy.’”
Bidding and Big GCs
How is the bidding process different for commercial versus residential jobs?
“Bidding is no different between commercial and large residential builders,” says a Colorado contractor. “We have a relationship with some of the smaller guys, though, in which they ask us to pick up a set of prints and give them a price. It’s understood that we’ll do the job as long as we don’t get crazy on the bid.”
Adds his colleague, “While commercial bidding involves strict deadlines and the selection generally of the lowest bidder, the residential-side bid deadline is more flexible and the deal negotiated: After the bid is in, we make an appointment to negotiate the price to sign the job. It’s a small affair without corporate-speak where you get to justify why you are worth more money: ‘The other guy is a trunk-slammer … I actually have foremen that run the jobs, and I have a warranty department, and yes, all these systems cost money.’ Some guys sell you out for $50 a house because that’s a lot of money when multiplied by 300 houses. That’s why building relationships is really important; he’ll side with the person he knows, is comfortable with and trusts. That’s what I like more about residential.”
He has words, however, for “the big national builders who are buying many of the middle-size and smaller builders and converting them to their way of thinking. Then you see the quality of construction drop, payment paperwork become insane and the insurance and risk transfer turn into a nightmare. Our trade is turning into a bureaucracy. Drywall, when it’s done right on these nice custom-homes, is an art form requiring skill.
“Large, publicly traded companies have turned it into a commodity with one drywaller as good as another, and the dollar is king. They will say, ‘It’s a 300-sheet house, you only need 10 days to do it.’ They don’t know what it takes. They have too many people employed between the project managers and the superintendent without a function—assistants, expeditors, assistant purchasing agents—who have to look like they’re doing something and so involve themselves in areas they know nothing about, whether it’s pricing, scheduling or whatever. I don’t think there is a viable training program in these organizations, and it just creates confusion. There’s nothing like working for a guy who’s been in the business for 30 years and has built thousands of houses and knows them from the ground up.”
Competition and Profit Margins
Which brings us to the subject of competition, and again, we turn to the Colorado duo for some spirited input: “Historically, margins have always been better for commercial, but that’s changing. Competition is fierce out here right now. On commercial, established, licensed and insured companies try for the most part to run a legal business and do their job right. The same exist in residential, but we also have 30 percent of contractors working out of their garage or pickup truck—they don’t pay workmen’s comp or taxes and don’t provide the benefits we carry as legitimate subcontractors. So, they can effectively beat our bid by 20 to 30 percent and still make money.”
“Residential in our area is as tough as commercial—contractors are cutting each others’ throats. Also, more and more residential and commercial companies are starting to classify their employees as subcontractors to avoid matching their taxes or paying workmen’s comp. Many of their employees are not filing their taxes as illegal aliens. We have an all-employee company, and competing against these people is very hard. I’ve talked to trimmers, plumbers and electricians at [our local chapter of the American Subcontractors Association], and they’re fighting the same issue. It’s been murder to involve the government because if it costs anything to investigate these people, they are not apt to do it because of budget cuts. Years ago, the industry switched to subcontractors and we lost a lot of really good mechanics because most people don’t want to be a sub. They want health insurance, vacations, their taxes taken care of, etc.”
But all the contractors talked on this issue. Consider the Floridian: “With our overheads, we do little residential because we just can’t compete in the market—comp-exempt and illegals, etc. Some commercial GCs use illegals, but most of the time, commercial is a level playing field. There’s no point in turning in these people, because no action will be taken.”
“Competition is pretty brutal in both residential and commercial,” states the Idaho contractor, “with pricing in our region competitive to the point of being ridiculous, despite residential being busy. Add this to material costs continuing to rise—steel, gyp board, wood and so on—and the pricing for the end user in the marketplace is not reflecting those rising costs, which puts the squeeze on our margins and labor costs even more.”
“Residential is harder to get because of the intense competition from not only non-union but union contractors who are willing to work for very low profit margins,” states the Illinois contractor. “We walk away from those bids. We’ve been very fortunate in that we have been able to niche-market ourselves to the contractors who are willing to pay for our quality and our service. We’re 40 percent in residential, high end, and make double the profits that we see on commercial. Tract housing profit margins are about the same as commercial with 5 to 8 percent markups.”
Finally, a word of advice from the Idaho man: “We prefer that residential folks stay in that work and those who do commercial stay in their world, because they are significantly different. I think it is in everyone’s best interest for the two to mind their own specialty and not mix the two because neither tend to be very good at the other. When residential guys try to price commercial work using the same unit pricing structure and the level of risk, the level of quality expectation, everything is so much higher than they realize. They don’t recognize that and often get burned. When commercial guys go into residential, they have no chance of being competitive because they’re thinking in terms of commercial pricing, which is totally different, and so they generally tend not to be awarded the job.”
Perhaps the biggest plus about residential, and one that perhaps offsets the difficulties covered above to some degree, is that demand for home construction has been rolling along at a high roar for a while (“absolutely exploding” in the words of the Illinois contractor), and all the contractors interviewed are upbeat about the future (as long as interest rates don’t rise too fast and there is no major terrorist activity in the country).
About the Author
Steven Ferry is a free-lance writer based in Clearwater, Fla.
