3 Ways to Keep Commercial Construction Costs under Control

Published March 9, 2016 by Whirlwind Team

construction costs

Like everything else in this world, from the demise of the 10 cent candy bar to the rise of cars costing over $30,000, construction costs continue to rise. Higher demand in summer for materials and labor really pushes prices up but costs increase all year around.

If you can reign in commercial construction costs, you and your client both benefit from a better margin and faster ROI. Here we outline three pathways to keeping costs under control.

Reduce/Reuse/Recycle

A good place to start is with what you already have. If you are doing a remodel or reconstruction take a good look at which materials could be saved and used again. Reusing minimizes the material purchased for the project.

By the way, steel is 100% recyclable and reusable. If the structure has a steel frame, you can readily re-use it as is or carefully deconstruct the frame to reuse the members in another configuration or for another project. If this isn’t feasible, the steel can be recycled and formed into new members and other products.

Consider reusing ductwork and heating and air conditioning units if they are in good condition. Electrical panels and service, bathroom plumbing, and other existing infrastructure can also remain, decreasing the costs of replacement.

If the building under renovation has something of interest, like a wall with an interesting backstory from prohibition, it can add interest to the new renovation while maintaining a tie to history. Look for these types of unique objects before knocking everything down.

If nothing else, donate materials you can’t use to a charity such as Habitat for Humanity. It will still be recycled and could be taken as a write-off. That’s a win-win.

Pricing strategies

There are a number of pricing strategies you can follow. You can customize which you use according to the project or, to simplify administration, use just one. In any case, each of these is designed to minimize misunderstandings and to balance the risk/benefit ratio. Higher risks can often lead to higher costs while low risk may translate into low revenues.

Fixed price/Fixed scope of work

  • Who assumes risk: Contractor
  • Who received benefits: Contractor
  • If the actual costs are lower than the contract price, contractor revenue increases.
  • If the actual costs are higher than the contractor price, the contractor loses money.

Since the client assumes none of the risk, it doesn’t matter either way to him. The biggest bonus for the client or owner is knowing exactly how much the project will cost up front and works best for all concerned with well-defined scope-of-work up front.

Not-to-exceed

Also known as NTE, Not-to-Exceed contracts are structured with a ceiling on cost.

  • Who assumes risk: Contractor
  • Who received benefits: Client/Owner
  • If actual costs are less than contracted, the client only pays the actual costs; contractor revenues decrease.
  • If actual costs are more than contracted, the client only pays the contract price; the contractor loses revenue.

Most contractors only use this type of pricing structure to sell jobs. Since the contractor assumes all of the risk and none of the benefits, the owner is the only one who really wins.

Aggregate not-to-exceed

This is similar to the NTE but allows the contractor to control risk better.

  • Who assumes risk: Contractor
  • Who received benefits: Client/Owner

In this pricing strategy, the owner breaks down the job into smaller projects, each with its own set contract price. If the contractor can bring a small project in under contract price, the savings can be used to offset overages on other parts of the job.

The client still receives all the benefits but it may help the contractor minimize losses by aggregating profit and loss across a project. Another way to structure this is to split the final revenue/losses with the client.

Time and materials (T&M)

Use this when there is no way of knowing the scope of work and therefore, the prices for labor and materials are unknown. You can’t put a price on something you don’t know about!

  • Who assumes risk: Client/Owner
  • Who receives benefit: Client/Owner
  • There is no risk or benefit for the contractor. The price is what it is and that’s what the client pays.

Projects where this type of pricing is appropriate include those with unknown damage to existing structures and materials, or where there is a long list of smaller items that is too time-consuming to estimate.

Most of the risk to the client involves unscrupulous contractors, vendors, or subs who substantially overcharge for services or products.

Allowance

This is like T&M where at least a general scope is known. It may have a predetermined number attached for labor or materials.

  • Who assumes risk: Client/Owner
  • Who receives benefit: Client/Owner
  • Better risk management than T&M

This is often used when a particular type of material or product is wanted but the exact price and type are not known at the time of contract.

Smart building

Keeping costs under control is just smart business when you come right down to it. All that is left is the details of how the project gets done in a reasonable amount of time and for a reasonable amount of money.

The best way to contain costs is to do proper planning from the very beginning of the project and do not rush to completion. More errors and more rework occur when a project is thrown together too fast. As an experienced contractor, you and your team should have a good enough understanding of the needs of a project.

Build for what the owner values, not for what you or your team value. Talk to the client, find out as much as you can about the project and its use. Partner with the owner and with architects, designers, and subcontractors to bring a range of knowledge together to plot the best path forward.

If you want to ease administration, you can create a common scope of work to use with architects on all your projects, which can give you a way to compare apples to apples when it comes time to determine ROI. And for marketing purposes, use the right models or examples of your work; if you can use a higher value example you will be able to sell a higher priced structure.

Clients want to know they’ve gotten good value while contractors want to make revenue and build good reputations so they can get repeat business. In both cases, keeping construction costs under control can help both parties reach their goal. Build smart, price smart, and reuse and recycle whenever possible.

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