By Ritchie Clapson CEng MIStructE, propertyCEO
The step up from having a jobbing builder to working with a main contractor is one of the significant differences between a refurbishment project and a small-scale development. But how can you make sure you pick a good contractor?
The first step is to run a tender. This is where you create a specification for your job, and you put it out to several contractors so that they can provide you with a quote. It’s your best chance of getting an apples vs. apples comparison between quotes.
How many contractors should you court? Let’s look at the situation from their perspective.
Responding to a tender involves a fair amount of work on their part, with no guarantee of any payback. If they know they’re competing against a dozen or more other contractors, then they may think the odds are stacked against them, so why bother responding, particularly if they’re not short of work. I’d say you want to be aiming to approach between five and ten contractors, from which you’ll have a fair chance of more than half of them responding.
The next thing you want to consider is whether to run a strip-out tender first, ahead of the main tender.
Let’s assume you’re converting a commercial building into residential flats. The contractor’s first job will be to strip out the structure. This could expose some additional work requirements that weren’t obvious before the strip out took place. If you’ve already appointed your contractor for the complete works, then they’ve got you over a barrel since they can charge you for this additional work without fear of competition from other developers. But, if you run a strip-out tender first, then you have an option to switch if your strip-out contractor’s quote for the main works is too expensive. And since they know you have the option to jump ship, it should keep their pricing keen.
Let’s now consider how tenders work.
New developers can be surprised by the huge range of prices they often receive from contractors when they run a tender. How can the same job elicit such diverse quotes? Well, some contractors may be stuffed to the gunnels with work, and so they don’t really need your project. If they respond at all, they’ll build in some chunky profits, as they don’t mind taking on the extra work if it’s going to pay handsomely. At the other end of the scale, we have the contractor who’s short of work. He desperately wants your business, so he puts in a highly competitive quote. But there’s a potential sting in the tail that you, as the developer, need to look out for. It’s known as the extras and overs.
I’ll give you an example. Let’s assume that your tender specified that the contractor must fit wooden doors throughout. Your problem manifests itself when the contractor rolls up on-site with some cheap, single panel doors made from balsa wood that look like they’re straight out of a 1950’s institution. Those aren’t the sort of wooden doors you wanted, you explain. No problem, the contractor replies, they’ll get nicer ones. But later that month, their bill arrives, and it’s several thousand over budget. And all because of the additional cost of upgrading the doors.
You see the developer’s problem. And if only it ended at doors. In reality, the contractor can pull this trick on any item where the specification in the tender isn’t specific enough. They’ll fit the cheapest, nastiest materials that still meet the tender requirement, and you’ll be wanting to upgrade left, right and centre. And if you appoint a contractor who has cut their costs to the bone to win your business, they’ll be on the lookout to maximise the extras and overs at every opportunity to claw back some profit. When it comes to contractors’ quotes, cheap isn’t always cheerful. Plus, they’ve got you over a barrel, as the costs of switching contractors halfway through a project will almost certainly be prohibitive. The answer, then, is to be highly prescriptive in your tender about what you want. Name the exact make and model of doors you want to be fitted. You can also stipulate “or of similar quality and specification, to client’s approval” as contractors may be able to obtain a similar product at a lower price, which will ultimately benefit you.
This tendering business may sound a little daunting if you’re new to development, but fortunately, help is at hand in the form of a cost consultant, aka a quantity surveyor. These are critical members of your professional team whose job it is to price up development projects and run tenders. Luckily for you, they’ve been around the block a few times, so they’ll be able to run your tender with an experienced head on their shoulders. Therefore, appointing one would be right up there on my list of recommendations, as the DIY approach will almost certainly cost you more money than you’d save in cost consultant’s fees. You need to be the CEO of your project, not the hands-on project manager.
Another consideration concerns the level of experience the contractor has in doing the type of project you’re tendering. Here we need to consider things from the point of view of your commercial lender who will be financing your development.
Before they agree to lend you the money, they’ll be taking a long hard look at the proposed contractor to see if they’re up to the job. Have they done this type of project before, and what’s their track record? You need to adopt the same approach when considering which contractors to invite to tender. Make sure you get to see some of the projects they’ve worked on recently and check that they’re a good fit for the scale and type of project you’ll be asking them to tender for.
You’ll also need to be thinking about the financial situation of each contractor you approach. Your lender will be all too familiar with the significant challenges and additional costs incurred when a contractor goes bust, and clearly, you should have the same concern. So, what can you do? There are no guarantees, but a little due diligence can go a long way. First, check out their latest accounts by going onto the government’s Companies House website. What’s the scale of their business, and how profitable is it? Also, how much cash do they have in the bank? Contractors are notorious for experiencing cash flow issues, so check out their assets column to see if they’ve enough put aside to weather any storms. If this sort of analysis isn’t your bag, ask your accountant to do it for you.
You should also try to understand how important your project is likely to be to them. To do this, compare the value of your project (the estimated construction costs) with the contractor’s turnover from the latest available year in their accounts. If your contract would be a mere drop in their ocean, you need to ask yourself how important a customer you’ll be to them. Will they pull people off your project to work on their more important customers’ sites? When you say ‘jump,’ will they say, ‘how high?’ or will they simply make some polite non-committal noises and then absolutely nothing will happen because they’ve got bigger fish to fry?
What if the opposite is true and your project is twice the value of the contractor’s turnover last year? Then your problem is a very different one. You’re guaranteed to be that contractor’s best customer, but you may also be their only one. If works fall behind and you need the contractor to bring more hands on deck, will they be able to oblige? Or are you already using all of their scant resources? It’s a dilemma, for sure, and one that is best resolved by being somewhere in the middle. You want to be significant enough to a contractor that you have some clout if you ask them to step up to the plate, but not so important that they lack the resources to be able to move the needle if you need them to. My advice is to look for contractors where your tender is worth between 10% and 25% of their annual turnover. That should give you a fair chance of ticking both boxes.
Location is another consideration to bear in mind. Firstly, is the contractor based reasonably close to your project geographically? While contractors can travel, there’s a cost element involved that you need to bear in mind. Would you be better finding another contractor who’s right on the doorstep? Secondly, some contractors are based in (or may target) more affluent areas, and their higher prices reflect this. If your project is located in such an area, you might want to consider appointing a contractor from slightly further afield. That way, you dodge the higher local prices, albeit you may have to fork out slightly more to account for your contractor’s travel costs.
Finally, there is the question of recommendations and testimonials. A good recommendation is worth a lot more than all the pretty pictures and marketing blurb on the contractor’s website. Make sure you ask to see past projects and an existing development. Have your eyes and ears wide open when you visit; you may not be able to judge the quality of the workmanship, but there are some obvious checks. Is the site tidy, or does it look like a bombsite? Is it bustling with activity, or is there very little going on? Do the workmen appear happy with their lot or grimly waiting for clocking off time? See if you can have a chat with some sub-contractors and see what feedback you get from them. And, of course, speak to other developers who have used them, particularly if you know of a site that wasn’t offered up as a testimonial by the contractor. Was that a project that went off the rails? If so, you might hear another side of their story.
Hopefully, these tips will help you get a great contractor on board. I’ll leave you with one final nugget. Once you’ve appointed your contractor, make a point of building a good relationship with the ultimate decision-maker, whether that’s the managing director or whichever executive is responsible for your project. No development project ever went completely smoothly, and when you encounter a bump in the road, you want to be able to have a friendly chat with the MD over a cup of tea to see if you, as the two bosses, can come to a solution that can then be relayed to the troops.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is a veteran property developer of almost 40 years and co-founder of propertyCEO, a nationwide property development and training company that helps people create a successful property development business in their spare time. It makes use of students’ existing life skills while teaching them the property, business, and mindset knowledge they need to undertake small scale developments successfully, with the emphasis on utilising existing permitted development rights to minimize risk and maximize returns.
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