The Traditional System
When an owner wants to build a commercial or multi-family project, they will seek to hire an architect to design the project and then hire a general contractor. They’ll traditionally get several bids and may award the project to the lowest bidder and enter into a lump sum contract agreement thinking that everything is covered. However, most are unaware of the problems that often go along with this type of arrangement or the big risks that are involved. Here are just a few to look at to help you to understand the benefits of GVG’s CM system.
- The relationship between most general contractors and owners tends to be very adversarial. The goals of the two are complete opposites. The owner wants to get the project built at the lowest reasonable cost and not pay the contractor too much too soon…The GC is trying to maximize his profits and collect as much as he can as early as he can.
- It boils down to a battle of wills and if the owner has engaged the architect to provide contract administration, the architect gets stuck in the middle trying to keep the peace. If there is no architectural involvement then an owner, who may have little or no experience in building projects, may be ill equipped to deal with a seasoned, professional general contractor who has built hundreds of projects and knows every trick in the book to accomplish his goals.
- The typical GC when preparing the schedule of values for the project will frontload it so he gets more of the money in the beginning stages of the project and less towards the end. By doing so he can, in most cases, collect his profit for the entire project by the time he gets the 1st or 2nd draw. Though there is nothing illegal about this it is very dangerous for obvious reasons and the GC’s incentive to get the project done quickly is now gone. The GC has all the leverage he needs to get his way on many things including change orders.
- If the GC is in financial trouble on other projects he may use your money to bail himself out of trouble there and hope he gets more projects to draw from before he has to complete yours. If he abandons the project, you’ll find out all too soon that he has been paid far in excess of what he has earned and you are left holding the bag. Even holding a 10% retainage on the GC payments is of no value. The GC will hold the same retainage on all the subs and since he has frontloaded everything he will then have in his possession a whole lot of what CPA’s refer to as “unearned income”.
- GC’s will typically hire an on-site project superintendent to help with scheduling of subs and to watch over their work to help make sure it’s done right. Most GC’s hire cheap superintendents in order to cut cost. The problem with this is that having someone on site that lacks the background and experience needed creates a lot of problems that can result in project delays, poor quality and injuries.
- Seasoned, well experienced professional project superintendents or project managers command much higher salaries than what I refer to as project babysitters. The GC will generally have a project manager that is managing a number of projects with a superintendent on each one. This all sounds good except that because of the poor quality of the superintendent, the project manager has to be too involved in the day to day activities and as a result gets spread too thin. Once the project manager gets loaded down with too many projects things start falling through the cracks and your project suffers in many ways.
- Typically the owner or lender will pay the GC each month based on his approved application for payment. Then the GC is supposed to pay each subcontractor and/or supplier who did the work shown on the pay request that month. Most of the contract disasters happen because the money flows through the GC firm and the owner and the lender are depending on the GC to be financially responsible and pay the subs and suppliers immediately. However, many GC’s hold off paying subs as long as they can. This may cripple the ability of the subs to perform on your project as they would like to do and as a result your project slows down.
- Sometimes the GC may misapply the money and use it for other things such as paying subs on other projects, paying his huge overhead expenses, covering payroll on other projects or even taking a trip to Vegas. A GC can be losing money on another project and needing the money from your project to pay those subs. Because of all this, the lender has to look real close at the financial stability of the GC. Even when GC’s abandon a project it’s a result of the misapplication of funds and/or the realization that he screwed up on the estimate and is going to lose a lot of money if he continues on with the project. All of this is because the money flows through the GC.
- With the traditional delivery systems, once the GC has the contract they will typically go to work and get more sub bids and/or negotiate with the subs to get their cost down and increase profits. They may have bid the project at 5% fee for overhead and profit but by the time the GC gets finished beating up the subs he may double his profit. All of the savings will go in his pocket.
- Sometimes the GC doesn’t care if the sub is going to lose money or not. If the sub goes broke on your job he’ll just replace him with another. Do you want your project built by subs that are making little or nothing on the job? I can assure you that these subs will send their crews to projects where they are making money and will stall on sending them where they are not making money. Even though the owner is paying for it all, they get none of the savings and his project suffers.
With GVG's construction management system we have totally eliminated all of these problems.
- With our system we are on the owner and architects side of the table looking out for their interest from beginning to end. Since our fees are not based on a percentage we have no incentive at all to be in conflict with the owner’s goals. Our goals are the same…to get the project completed at the lowest reasonable cost and to make sure the subs do not collect too much too soon.
- We also have a very owner/architect/lender friendly attitude that you will find very enjoyable. The difference is quite refreshing.
- Since the funds do not flow through GVG it’s impossible for us to frontload anything. It then becomes part of our duty to scrutinize the subcontractor’s schedule of values and make sure it is reasonably balanced and keep them from frontloading.
- Since we’ve been doing this a very long time we are very well equipped to do that. We know all the tricks the subs try to pull and how to avoid them. You can be assured that you are only paying for what each sub has actually earned less retainage.
- Our approach to supervision is different. We believe that it is more cost effective to have well seasoned, highly experienced on-site project managers rather than cheap project baby sitters that many GC’s hire. Then the construction manager can easily oversee many projects and reduce the number of hours he will have involved with each project. Since part of our fees are based on the CM’s hours involved this will save the owner more than the extra cost of the higher salary paid.
- This approach also enables GVG to seek out and hire the best of the best. When you have this type person on your project you will immediately see the difference in the speed, quality, safety and cost of the project. The difference is like night and day. The on site project manager must be on our payroll to comply with Florida Statutes. He will be covered by worker’s comp. along with any other employees of GVG that may be needed…
- With our system the funds do not flow through GVG to the subs & suppliers. The bank draws go directly to the owner’s bank account. Or the bank may elect to issue the checks directly to the subs and suppliers. We will receive, review and approve the sub’s pay request each month and we will review the invoices with the owner and the owner or bank will write joint checks to each one naming the sub and GVG. We will then endorse the checks and give them to each sub in exchange for the proper waiver of lien. With this system the owner pays only for what each sub has earned minus the 10% retainage.
- This also completely eliminates the need for a payment and performance bond. A bond will generally cost the owner and additional 1% of the total contract amount. On a 5 million dollar project that would add $50,000 to the owner’s cost. Not to mention that bonds are not fail safe either. Bonding companies can go broke, leaving the owner with nothing. It all becomes so unnecessary with GVG’s CM system because with this system you are no longer having to depend on the financial stability or strength of the general contractor…the control of the money remains where it should be…with the owner.
- With our system you have a choice of two different types of AIA contracts. They are both AIA CMc agreements where the construction manager is also the constructor (Contractor of record). One has no guaranteed maximum price (GMP) and one does. With the first one 100% of the savings go to the owner and with the GMP agreement we will share the savings and our CM fee is a little higher due to the added risk. In both scenarios the savings are known and are all out on the table.
- To be perfectly honest, we work just as hard to save the owner money with either one. It’s just that some owners are not comfortable not having a GMP. In both types of agreements the way we’ve structured our fees in our CM system results in the fee for overhead and profit being substantially less than what most GC’s will charge.
We will be the contractor of record, pull the building permits and build your project as your general contractor and construction manager. We will do everything any large commercial GC will do … only better, for less money and without the risk or cost of bonds.
Rather than charging a percentage of the cost we have split our fees up into two types. The first one is based on the hours (with a fixed maximum) that our Construction Manager spends with your project each month at an hourly rate shown in our contract agreement. This accomplishes a number of things. That way the owner can, if he so desired, handle some aspects of the overall management and thereby reduce our hours and save himself some money. The extent of the owner’s involvement greatly depends on his time available, his desire to be involved and his experience in building projects. Naturally we can’t pull the permit and let the owner manage the whole project. Florida statutes don’t allow that but there are plenty of things an owner can do. If the owner doesn’t want to do any of it then we will do it all.
The second part of our fees does not start until the first permit is pulled and ends when the project is CO’d. This is a small monthly fee and is the same every month. It could be as little as $3000/mo on small projects or perhaps $5,000/mo or more on larger projects. This fee would be prorated at the first and last month of the project based on a 30 day month.
The combination of these two fees will be substantially less than what you would pay to most other GC’s. The bigger the project, the bigger the savings will be. For example, on a 5 million dollar project the owner could easily save $100,000 or more. On a 20 million dollar project that savings could be over $300,000.
We will e-mail an invoice to the owner on the 25th day of each month and the owner will wire the payment directly into GVG’s bank account by the 5th. The invoice submitted will show our CM fees for the month and details of any expense reimbursements such as plan copies, overnight or courier service, etc.
We use the AIA CMc contract agreements. I’ll be glad to send you a copy for you to review. We use the AIA documents because most architects, owners and lenders are comfortable with them.
We will prepare a project schedule using MS Project software and provide it to the owner, architect and lender. Updates will be done on a continuous basis and also distributed to everyone.
Naturally, every owner needs to know about what the project is going to cost. We will solicit bids from subcontractors in every category and prepare a detailed estimate for the project. This estimate will become a part of the contract and be referred to as the Control Estimate. Each month we will submit an estimate update.
Payments to Subs and Suppliers
Subs and suppliers will send their invoices or payment request to GVG for review and approval on or before the 25th of each month. Once approved we will review the invoices with the owner or bank and they will issue joint checks to each sub and GVG. We will endorse these checks and have the subs/suppliers come to the job site to pick them up in exchange for the proper lien waivers.
Lien waivers are then faxed to the owner and lender. Some types of vendors such as engineering firms used for inspections or testing, large supply stores like Home Depot, etc will be endorsed and mailed.
If the owner desires, he may elect to set up accounts directly with these firms and have them invoice the owner directly but it’s generally better if GVG maintains control of these payments to make sure the owner is not over billed.
We use an established firm that is a licensed and approved private provider for every city and county jurisdiction in the state for the plan review and for the building inspections. We submit plans to them, once they are satisfied that the plans meet all the code requirements they will expedite getting the permit from the county or city much faster than it could ever be done otherwise.
GVG provides the county or city with an authorization letter to authorize them to act on our behalf. They will notify us of the amounts needed to pay for permit applications, permit fees, impact fees, etc. The building permit will be issued to GVG Builders, LLC. and we will become the contractor of record.
With the private provider doing the onsite inspections for us we can get exact, time specific inspections anytime of day, night or weekends. The cost involved with these inspections will be included in the project estimate and will more than pay for itself.
Most commercial general contractors have nice fancy offices, company vehicles, a variety of office personnel including estimators, receptionist, accountants along with a pile of other overhead expenses that come along with all that. It could run several hundred thousand dollars a year. They are generally quite proud of their offices and are quick to bring owners in to try and impress them with it all. However, most owner/clients haven’t stopped to consider that they receive little to no benefit from all that expense. Ninety Eight percent of all those expenses are for the general contractor’s benefit. Not yours. All you really need is the license holder. If he is a seasoned contractor he could manage your project without any of that expense. If he has seasoned on-site project managers at each job he can oversee many projects.
At GVG Builders we keep our overhead to an absolute minimum. And because we do that we are able to build your project for far less than they can and at the same time provide you with superior service. All you really need is the construction manager ( License holder) and a good on site project manager.
The other issue is that other contractors, who have large overhead expenses, absolutely have to do a certain amount of business and a large amount of annual gross profit to pay for it all. When work slows down, as it always does occasionally, They can easily begin losing money big time and that negative cash flow can be devastating to your project. With our CM system we have eliminated that problem completely.
We will prepare a schedule of values on your behalf as required by the bank which will be shown on the AIA G702 and G703 payment application forms. We will prepare the draw request each month and review with you and/or your architect and then submit it to the bank. The bank will schedule their inspector to visit the jobsite to inspect the work and we will meet with him to answer any questions he may have. Once approved, the bank will transfer the funds into the owner’s bank account or may elect to issue the checks directly.
GVG will continue getting more prices from subs and suppliers until it becomes time to issue an AIA subcontract to each one. For example, the site contractor may be the first subcontract to be issued since they are the first ones needed on the job. However, close behind are the other major subs such as electrical, plumbing, HVAC, Fire Sprinklers, Concrete/Masonry, etc. as well as any long lead items. Once we have a signed subcontract we will forward a copy to the owner, lender and if the architect is providing Contract Administration they will get a copy as well.
GVG carries general liability insurance . We will also require all subcontractors to submit insurance certificates before starting work showing the required coverages of general liability and worker’s comp. These certificates will show the owner as the certificate holder and GVG as additionally insured and copies will be sent to the owner.