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Making the Jump from Residential to Commercial Construction

Residential builders, whether general contractors or subcontractors, make scores of decisions every day, choices affecting labor, material, methods, personnel and more. Ultimately, it’s these decisions that spell the difference between success and failure because they affect virtually every aspect of the building project including project schedule, quality, cost, client relations and even employee morale. You would think that would be enough, but unfortunately the job doesn’t end there. You, as a contractor, are a businessman—like it or not—and a businessman without vision is asking for rough times at some point in the future and, in the back of your mind, you know too that it’s time to address your bigger picture. But where do you begin? Well, what about the decision on whether or not to expand your residential operations into commercial construction venues?




Commercial Construction: The Right Path?


It’s a thorny decision. This kind of move is highly individual and unique to your company’s circumstances. In addition, market competition, available assets for growth, technical expertise and even your own appetite for risk are all factors that can sway the argument one way or the other. There’s much to consider. You may even come to the conclusion that your business is better off remaining exclusively residential. And that’s OK; at least you performed the exercise. But given today’s economy—and the seemingly unrelenting influx of competition from all corners—you may decide that commercial construction just may offer the right amount of additional cash flow, profit, security and long-term growth needed to hedge your bet for the future.




Reality & Roadblocks


But to the uninitiated, the commercial construction process can appear puzzling—even intimidating. Suddenly there are architects, engineers, liquidated damages, bonds, pre-qualification and more with which to contend. Also, there are myriad new codes, regulations and architectural protocols to navigate. Are you up to the challenge? What can you do to hedge your bet? Well, it’s OK to be careful. It’s a big decision, and you’ve learned through past misadventures that even “good” ideas have to be tethered with cautious optimism and executed only after you’ve done everything in your power to limit the variables and unknowns. And that’s where I come in.




I made the move myself from residential to commercial construction many years back, and have been immersed in the commercial environment ever since. The transition wasn’t easy, and I stumbled more than once. I believe I can help by relating what I learned along the way, both the good and the bad. My hope is to protect you from making the same mistakes and give you some helpful advice to aid you in your switch. Who knows? Maybe if we can eliminate enough of the unknowns, you may just actually enjoy the ride this time. So let’s begin.




The Estimating & Bidding Process


The commercial construction estimate is similar to what you’re used to with residential, but with notable exceptions. The main building blocks are still there. There are direct costs including “in-house” labor, project materials, sub-contracted work and any other costs that are part of the actual, physical construction of the project. These direct costs are then combined with indirect costs. Indirect costs include things like general conditions (not to be confused with “general requirements,” which we discuss below); insurances, bonding, design/engineering fees, permits, administration, profit/overhead and other intangible expenditures/responsibilities that—though not a physical part of the construction—have to be provided in order to fulfill the obligations of the construction agreement. Of course, if you’re providing a service, the cost to do so needs to be accounted for in your estimate.




No More “Slushing”


Before I continue, let me just note here that yes, I know I am generalizing here in my discussion of the residential market. I’m speaking based upon my observations over the years and I do realize that I’m painting with a very wide brush. This is necessary for brevity.




In the past, in residential, it was likely that the direct and indirect costs—though present in the construction process—were not so delineated and broken down in the estimate. In my residential days, it was not at all unusual to see the cost for things like insurances, design/engineering allowances, company general conditions (often including scaffolding/staging, permits, inspections, fees, travel time/vehicles/fuel, small tools/blades, office/administrative overhead, profit/markup and miscellaneous field overhead (my favorite) or other indirect costs appear as one line item at the bottom of the estimate sheet—often expressed as a percentage of all the costs above it on the page. It was also common to bid a direct cost (carpentry labor, materials, interior finishes, roofing) by the square foot or other unit number instead of doing a more lengthy take-off or acquire a sub number. Cabinet, carpeting, lighting and finish allowances were also much more prevalent.




And here’s the thing: For the most part, this method worked just fine. We made money. The problem was, it wasn’t due to our fiscal genius or because we owned a superior control over our costing techniques that we did well. To the detriment of our egos, it was more a result of the fact that residential construction (for the most part) was a far more predictable world. There was never THAT much deviation from one home to another. Though tweaked bigger, smaller, fancier, technologically or aesthetically, the basic building block—the house—remained fundamentally the same. The components were consistent and predictable. And yes, builder’s love “predictable.” “Predictable” means that labor productivity increases dramatically through familiarity and there are more “knowns” out on site. With less volatility, schedules are met, quality is enhanced, client relationships are buoyed and profits grow more stable. So it was OK to “slush” below-the-line (indirect) costs into one line item because you were sure that all of the sub-components of that line item would be covered comfortably once everything came out in the wash.




The Party’s Over


But the breaking down and delineation (or lack thereof) of one’s bid changes almost immediately in commercial construction—and for a variety of reasons. Commercial estimates have to be broken down. One reason is that unlike residential, commercial construction opportunities vary dramatically. Yes, providence may smile upon you, and you may find a (much coveted) niche of building exclusively one style such as only shopping malls for instance—but don’t count on it. Today’s competitive commercial markets and the changing needs of commercial clients make it necessary to excel in many different genres of almost limitless variety ranging from strip malls to schools to nuclear plants to office buildings and more. And needless to say, this means a lot of variation.




Another reason you may need to break down your bid is because commercial owners and the A/E (architectural/engineering) firms they hire commonly ask for a breakdown of all costs as a requirement of the commercial construction agreement you signed. This breakdown is used as a billing tool as the job goes along. Your request for payment is often submitted monthly during construction, and each line-item is assigned a “percentage complete” by first the contractor, then adjusted often by the owner’s rep. Breaking down the contractor’s costs is a control method that helps ensure the owner/client that he’s not being over-billed through (for instance) the practice of “front-end loading” or (more commonly) by the method of “slushing” many tasks/costs into one large general line-item that is not as easy to understand.




But a more pragmatic, common-sense reason the commercial estimate is more broken down is this: Dollar amounts in commercial are generally much higher than residential. Instead of dealing with $200,000, you’re staring at $2 million. Risk is much greater, and it becomes paramount to pay more attention to the costing of individual tasks, responsibilities and duties. This often necessitates breaking a line item down into sub-components to better understand it and cost it. And to do so, you need to be organized. You need a method to the madness. Well, lucky for you, there’s already a template you can use to organize your estimates. It’s called CSI MasterFormat™.




CSI Format


Unlike residential construction, when bidding a commercial project you’ll likely be addressing a set of working drawings and a specification manual (before the specifications were often found on the drawings themselves). This “spec book” is commonly laid out in CSI (Construction Specifications Institute) numerical order—divisions 1 through 16. There are more divisions, but these 16 are most common. A GC may use all the divisions, a subcontractor only some. CSI is a private organization that sets specific construction tasks into numbered categories and subcategories. Here are the typical main CSI categories/numbers that you’ll find in most private commercial projects:


CSI Div# / DESCRIPTION

1 / General Requirements




2 / Site Work




3 / Construction trade




4 / Masonry




5 / Metals




6 / Wood & Plastics




7 / Thermal & Moisture Protection




8 / Doors & Windows




9 / Finishes




10 / Specialties




11 / Equipment




12 / Furnishings




13 / Special Construction




14 / Conveying Systems




15 / Mechanical




16 / Electrical




All of these divisions have sub-divisions and even sub-sub-divisions. You can learn more about CSI online at www.csinet.org. As a commercial estimator, you’ll need to read any divisions pertaining to (or even related to) your specific scope of work.




General Requirements


But there’s more. All participants in normal commercial construction bids are not only responsible for their own division(s) of work, but are also obligated to read and comply with “Division 1.000 General Requirements” (not to be confused with a company’s general conditions like those above). This important division instills additional responsibility (and therefore cost) on all of the participants bidding the project. Yes, some of your own company general conditions may be duplicated in division 1, but there are often other responsibilities set forth that are more job-specific. These often need to appear as an additional line item on your bid. These might include such responsibilities as these:




• Documented third-party testing and reporting of your materials and processes.




• Mock-ups, submittals, samples and shop drawings required before work can commence in the field.




• Safety programs, OSHA compliance and HAZCOM/hazardous materials documentation.




• Special insurances and bonds (including bid bonds, performance/payment bonds and more).




• Increased office/administrative man-hours for addressing (written) change requests, mandatory project meetings and enhanced accounting procedures.




• Warranty and closeout procedures including closeout affidavits, O & M (operations and maintenance) manuals, warranties, labor guarantees and “as-built” drawings (showing what really occurred in the field including deviations from the original plans).




• *And much more. You’ll really only know by reading the division completely.




Don’t expect to be reimbursed later on for these costs. Once you sign the agreement (whether prime or sub), you’re hooked. You must comply completely with the documents and division 1.0 says these things are your responsibility.




Bid Delivery: The Proposal


In residential construction, the method for delivering your bid proposal to a client was likely a summary involving a scope of work and the cost for said work on your own company letterhead. This changes for commercial construction, though you will still occasionally use the custom letter approach. You will often be required to submit your bid on someone else’s bid form. It sounds like a small change but believe me, it affects more than just presentation. All of a sudden, you lose control over your quotation. You often are no longer allowed to qualify or indemnify your bid (although the owner and designer are—more than ever, but more on that below) and, in fact, you may not even be allowed to write anywhere on the bid form other than on the lines designated by the owners. If you do write elsewhere, you risk having your bid disqualified. Basically, the message comes down to this: If you wish to submit a bid at all (understand that the owner/architect/engineer are well aware that they are often the only game in town and that you need to bid the work), you have already agreed with the requirements set forth in the bid documents.




The Bid Form & Addenda


Understand that your quotation isn’t complete until you’ve assigned costs to all the items on the bid form that affect your scope of work. Don’t assume this is optional.




And be sure in your bid to account for any addenda. Addenda are formal changes to the bid documents that have happened after the documents have been let out for bid. Most of the time, these are clarifications and details flushed out during the bid process by bidders, and then sent to the bidding GCs by the architect. Your proposals must include all addenda; if not, your bid may be deemed incomplete and you may be disqualified.




Submittals & Shop Drawings




After you’ve been awarded a contract or purchase order in commercial construction, it’s common for the owner’s representative to request a submittal or shop drawings. This is part of your responsibility and was previously spelled out in the specification manual in either division 1.0 or the divisions falling under your scope. The shop drawing/submittal process is a “checks and balances” system to ensure the owner, architect and GC that you’re providing the proper products and installation required by the original specification. You may suggest a substitution, which may or may not be accepted), but this does not relieve your responsibility to provide the product or method as it was originally specified.




Project Schedules


Contractual agreements and project schedules (as mentioned earlier) are extremely important in commercial construction. Not making the pre-set completion date can serve up substantial penalties for the GC—and that may be passed on to you. These penalties are known as “liquidated damages” and are generally assessed as a fixed dollar amount paid back to the owner for every day the GC is late. There may also be bonuses for finishing ahead of schedule, but these are not nearly as common as liquidated damages.




Closing


These are just highlights. Of course there is much more—we haven’t even touched on the construction itself. But it will all come in time and with diligence. One thing will not change: You will still be expected to deliver your product skillfully, completely, within budget and on time. Follow these basic fundamentals of good business and you’ll come out all right in the end.




S. S. Saucerman has more than 30 years of experience in residential and commercial construction estimating, project management, building material sales and as a writer for construction industry. He also taught Building Construction Technology for 11 years at Rock Valley College, Rockford, Ill.

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