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Construction Cost Avoidance

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Matthew J. Incinelli, PartnerCRI Orlando

407-644-7455mincinelli@cricpa.com

Rob Broline, ManagerCRI Melbourne321-426-3026

rbroline@cricpa.com

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Hard Bid

Characteristics: • Fixed price• Competitively bid• Basically requires complete plans• Low bidder generally chosen

Advantages: • Potential lower price• Comfort of competitive bid• Limited negotiations

Disadvantages: • Usually susceptible to many change orders• Motivation of contractor to cut costs (quality)• Must take qualified low bidder

(qualifications more general)• Generally not auditable• Increases chance of litigation

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CM at Risk

Characteristics: • CM chosen based on qualifications proposal• Partnering environment• GMP/Fee negotiated• Audit at conclusion

Advantages: • Owner uses firm of their choice• Partnering arrangement• Costs audited at end• Plans don’t have to be complete to start• Quality less of a concern

Disadvantages: • Potential for higher price (not competitively bid)• Requires effective negotiations and historical data

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Design Build

Characteristics: • CM/Architect team• Chosen based on qualifications proposal• Partnering environment• GMP/Fee negotiated• Audit at conclusion

Advantages: • Owner uses firm of their choice• Partnering arrangement• Plans can be less complete to start• Costs audited at end• Quicker from design to completion (fast track)

Disadvantages: • Less accountability from architect• Potential for higher price (not competitively bid)• Requires effective negotiations and historical data

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Cost + Fee Contracts with a Guaranteed Maximum Price

What does the guaranteed maximum price represent?

Components of the guaranteed maximum price• Cost of the work:

• General conditions• General requirements• Subcontract/Owner direct purchases

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Cost + Fee Contracts with a Guaranteed Maximum Price

Components of the guaranteed maximum price (cont.)

Insurances:•Payment and performance bond•General liability insurance•Subguard

Fee

Contingency:•Contractor•Owner contingency

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5 Project Services

• Contract review

• Guaranteed Maximum Price review

• Periodic pay application review

• Interim date procedures

• Close out procedures

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• Preventative

• Clarifies contract terms

• Industry best practices

• Residual value

• Accomplished prior to the contract being signed

• Should commence as soon as contract is drafted

Contract Review

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• Identify and test problem areas on the front end

• Review of key rates (insurances, subguard, labor burden, etc.)

• Verification of key labor rates

• Similar benefits to contract review

• Commences at the time Guaranteed Maximum Price is submitted to the Owner by the Contractor

GMP Review

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• Examine billing of key items

• Can be tailored to review high risk items the Owner identifies

• Ensures that the Construction Manager is properly documenting cost items

• Tests for advance billing

• Verify policies and procedures are in place and being followed

• Commenced upon receipt of monthly pay application from Contractor

Periodic Pay Application Review

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• Identify cost savings early

• Early resolution of disputed items

• Speeds up the Project close out

• Examples of procedures

– Sample subcontractor files

– Sample labor and labor burden costs

– Examine billing of insurances, subguard

• Commences when certain milestones are achieved, usually when most of the major subcontractors have started their billing process

Interim Date Procedures

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• Establishes the final project costs

• Verifies financial compliance to contractual terms

• Incorporates all previous findings and verifies compliance

• Provides assurance and third party independence to total project costs

Close Out Procedures

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Commenced upon:• Substantial completion achieved• Final change order and pay application is

received (may be a draft)• When Owner still owes money

to the Contractor to ensure prompt cooperation

Close Out Procedures

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I know my fiscal risk is mitigated because…1. I have a good attorney2. I have a guaranteed maximum price3. The Architect certifies payment4. I have a financial statement audit5. I have a robust payables process

Top 5 reasons used for not utilizing a construction auditor

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Advantages to Independent Review

• Assurance

• Return

• Accountability

• Efficiency

• Affordability

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• Lump sum– Must negotiate and verify!

– Discount to change to lump sum

• Cost of the work– Not preferred, why?

• Not-to-exceed– Preferred method; it has a ceiling and

savings come back to the Owner.

How do you contract for general conditions costs?

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• Labor costs– Verify at time of submission– Discussions regarding escalation through project period

• Vehicles– Monthly rates– Number of vehicles– Time period of project

• General requirements– Trailer, office supplies, cell phones, etc.– Temporary facilities and utilities, clean up– Computer costs and software

• Labor burden

Important! Detailed listing of what is contained in the general conditions

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• Advantages/disadvantages of:– Fixed rate

• Negotiate and verify!

– Not-to-exceed• Sets a ceiling

– Cost of work• Risk remains for high percentages (retirement, health, paid time off, etc.)• Only if the contract strictly defines components

• Proper components– What should be included in labor burden?

Labor Burden

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• Protection– Who is protected?

• Rate– What is an average subcontractor

bond rate?

• Floor• Retentions/Losses

– Difficult to audit; better to set a reasonable rate in the contract.

Subguard / Subcontractor Bonds

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• Rates– CM allocates the corporate

policy across all projects

• Limits– Contract sets limits; CM often

exceeds the coverages

• Self-insured vs. third party insurance– Difficult allocation: estimated losses, deductibles,

policy for large losses

Insurances

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• Limits

• Tiered

Subcontractor Change Order Clauses

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• Limits– Establish a percentage - original

CM fee % or flat rate for change orders

• Addition/Deductive change orders

Construction Manager Change Order Markup

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• Approval/bidding– Owner should pre-approve prior to bids being

issued.– Risk is in getting responses from 3rd party bidders

• Cost plus– Self-performed can be done as

a mini guaranteed maximum price,with a pre-determined fee for overhead and profit

Self-Performed Work

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• Limits– Determine acceptable limits

• Software• Overhead vs. Project costs

– Purchased vs. rental equipment

Construction Manager’s Internal Charges(vehicles, equipment, computers, etc.)

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Questions?