Discover ... What To Do When The Highwayman Rides Up To The Old Inn Door

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The wind was a torrent of darkness among the gusty trees. The moon was a ghostly galleon tossed upon cloudy seas. The road was a ribbon of moonlight over the purple moor, And the highwayman came riding - Riding - riding - The highwayman came riding, up to the old inn-door.

 

Can you picture the scene ? Those evocative words are the opening stanza from one of my all-time favourite poems ... The Highwayman, written about 115 years ago in 1906, by poet Alfred Noyes. This tragic, narrative poem, is a story about love, murder, sacrifice, heartbreak and even an old property ... I wonder if it needed renovating ?

 

Anyway, it feels like it could be an analogy for many Home Makeover Projects. Yes, too many Home Makeover projects start as tales of dreams, love and sacrifice only to end in heartbreak. Fortunately, not too many Home Makeover murders. For Highwayman, substitute Contractor.

 

Because that's exactly the way many Homeowners regard contractors ... romantic rogues, hell-bent on robbing and pillaging them before riding off into the sunset, never to be heard from again, having left a trail of destruction in their wake. And judging by the outcome of lots of Home Makeover projects, they just might be hitting the nail on the head.

 

So how can any Homeowner avoid catastrophic interactions with their contractors ? Well, the advice is not too dissimilar to the advice that might have been given to anxious travellers in the early 18th Century, when highway robbery became widespread - don't travel alone; avoid lonely roads; don't travel after dark; avoid carrying valuables; travel armed.

 

Wait, what ? How does that remotely relate to advice for Homeowners carrying out Home Makeovers ? Well, it's in the spirit of the advice rather than the actual form of words ... put another way, the same advice would be "Don't. Take. Unnecessary. Risks".

 

I can see some of you are still looking a bit confused. So, what does that mean exactly ? Well, the biggest risks that have the most impact on Home Makeover projects and whether or not they end successfully, relate to costs and contractors. And that's why, in this and over the next few episodes, I'm going to be returning to our elephant-eating theme and going even deeper on Home Makeover project costs and how to reduce the risks in your interaction with contractors.

 

Elephant eating ? If you have no idea what I'm talking about, then I recommend you hop over to our website at thediypm.com/podcast and listen to Episodes 5 through 9. Among other things related to home makeover project costs, you'll also discover how to eat an elephant ... yes, really !!

 

Fact is, getting to grips with project costs can be like dealing with a herd of elephants. Which reminds me about a YouTube clip I've enjoyed watching, of a herd of elephants interacting with some tourists on safari. Quite nerve wracking in fact. Elephants are unpredictable, have no idea of their own strength and can be almost as terrifying as out of control project costs. But the clip is well worth watching, so I'll include a link in the show notes over on our website just mentioned a moment ago.

 

Hello and Welcome to Home Makeover Project Secrets, the show that equips Homeowners with the skills and understanding to execute successful home projects, that goes behind the scenes of Home Build Projects to unlock the secrets and share insider tips and strategies to save money and time on any and every home project. What you learn will give you the confidence to embark boldly on your next project and you’ll know what to do so your story has the happy, dream home ending you deserve.

I’m your host, Andrew Philips …

 

When I talk about "Home Makeovers", I include renovation, remodelling, alterations, additions, going up into attics and down into basements, redevelopments and even ground-up new builds. Any and every project where you're going to be appointing professionals, designing something, buying materials, carrying out construction work, employing contractors and sub-contractors, suppliers and manufacturers and even if you're doing some or all of the work yourself. All things home build.

 

I'm delighted you've joined me today.

 

Because we're dealing with what might be quite complicated information, especially if you are unfamiliar with some of the terminology and processes, the show notes and transcript will be uploaded to our website thediypm.com so you can easily revisit any episode and refer to the key information shared each week. And of course, if you prefer to watch or read an episode, rather than listening, you'll find links on the website as well. We also include any links to resources, free gifts and other useful information mentioned during episodes.

 

So, on the menu today ... getting to grips with some of the different ways Highwaymen ... err, I mean Contractors, present Home Makeover project costs. Understanding, is the first and probably most powerful step towards taking control of your project costs.

 

There are four principle ways we get costs from contractors, sub-contractors, suppliers and manufacturers.

 

The first and most straightforward can simply be called "Prices" - these are quoted on websites and in brochures or in shops and at suppliers. "Prices" typically relate to very well defined items, specific items with few or no variables. If you need fittings for your new shower room then you might locate a website selling a toilet, wash hand basin, shower screen and so on. Click on the item and you'll be quoted the price. And the price quoted is typically a fixed price - there's no opportunity to negotiate.

 

Quite often with construction materials, buying in larger quantities can get you a price reduction. But these are usually predefined and you seldom interact with anyone from the supplier - you just place an order, pay up and wait for the items to be delivered. Not too different from buying groceries online. Prices are usually instantaneously quoted. You see the cost and you buy it, or not. And if you're sensible, you price compare across various websites and suppliers to try to get the lowest price for the item you're looking for. These prices are low risk - you pay the price and get what you paid for ... Internet scams notwithstanding, of course.

 

Then we get situations where the products or materials are a bit more complex and probably require some interaction with a sales team or an interactive website. Variables might be colour, size, quantity and similar factors. They might also include associated elements - like the components of a lighting installation. The light fittings themselves are the key items you want to buy but you also need other stuff - like cables, wiring, plug sockets and junction boxes, with lamps, light switches and other lighting controls. In these instances, we might request a "Quotation".

 

An example might be asking an electrical supplier to quote for the necessary parts for new lighting for your kitchen remodelling project. You might be depending on their expertise to provide all of the bits needed.

 

They will provide a "quote" for you to review, check the listed parts and verify they're what you need before you commit to placing the order. Quotes typically take no more than a few days - inside a week - for the company to issue. They are relatively simple and straightforward. Although the risk in a quote is higher because they cover more complex, composite elements of work and products.

 

But, when the scale of the elements or items becomes more substantial and increasingly complex, perhaps including a number of different trades or work elements - including labour, materials and even machinery, equipment or tools, then we usually get competitive costs via a tender or bid process. I expect you're probably more or less familiar with the principles of the process.

 

Typically you will pre-select a shortlist of contractors or sub-contractors and invite them to submit bids or tenders to carry out the work specified. And for this to be a worthwhile exercise, you will usually provide a lot more, detailed information to the tendering or bidding contractors. This might include design drawings, specifications, a schedule of works or pricing analysis.

 

Bidding or tendering takes longer than just getting the price or a quote. And the amount of time you allow will directly influence the quality and reliability of the tenders or bids. If you allow too little time, wise contractors will just withdraw from the process because they need to do the job properly. Bids and tenders from others contractors who do submit their costs, would probably be full of risk. I'd be suspicious how much of the bid or tender is accurate and how much is based on guesswork ?

 

But, if you allow too much time, contractors will either lose interest or do nothing with the bid invitation for a couple of weeks before getting on it... so all that really happens is you waste time. Just like that well known Homeowner, Goldilocks and her three unsatisfactory tenants, you need to pick a tender period that is neither too short nor long ... it needs to be just right.

 

When you are inviting bids or tenders for complex works, the contractor will need to reach out, in turn, to their suppliers and sub-contractors and ask them to provide prices, quotes and bids. Once they receive those bids back, they select their team and collate all the costs into their bid or tender document. And all these processes add up. The time taken depends on the size and complexity of the project, as well as on the relative size of the contractor's organisation - meaning how many employees they have in their estimating and tender submission teams - and on how busy they are when they receive your invite.

 

For Home Makeover projects it is not unusual to allow four to six weeks and in some cases even longer for contractors to prepare and submit their bid or tender documents and best cost. Let me mention, in passing, that, in the next few weeks, in the second and third instalments of this mini-series, I'll be going even deeper on tendering or bidding processes.

 

The fourth way we get costs from contractors is through "negotiation", a topic I've talked about in previous episodes. Quite often this forms part of a hybrid process that might include an element of quoting or tendering / bidding followed by discussions focused on ways to improve aspects of the quote, tender or bid. Most often the Client is seeking to improve some aspect - perhaps getting the costs down or reducing the project timescale.

 

This may require changing the design or components originally specified. If the contractor you like most and really want to work with doesn't submit the lowest tender or bid, you might enter into negotiations to find ways they can reduce their overall cost so you can appoint them.

 

And this also applies very often when the lowest tender or bid amounts are more than you want to spend. So you invite the contractor with the lowest bid or tender to work with you to tweak the project scope to get to a total you can afford. This hybrid approach has the benefit of sourcing both competitive costs and getting the contractor's engagement to get the numbers to work, through the negotiation at the end of the process. An additional benefit, is you get to work closely with your preferred contractor before they are fully appointed, so, if they fail to get where you need them to, then you still have the option to negotiate with other tenderers or bidders.

 

And now it's time for a curved ball ... did you know, not all of the costs submitted either through quotations or through tendering or bidding are provided on the same basis. And it's important to understand why costs that contractors submit may differ, what makes them different and why do contractors need to do this even.

 

Let's start with the best type of cost ... and that's a fixed cost or fixed price. This is a composite cost or collection of costs for everything needed to get a specific job done. Let's use an example like the remodelling of say an older kitchen and separate dining room layout to an open plan kitchen diner with a full kitchen replacement.

 

So, imagine ... you've invited bids from a few contractors - more about that in the next episode. You always want to invite the contractors to submit prices on a fixed price basis.

Why ? In a word, this means the contractor is carrying the risk ... but more about that next week.

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A fixed price is sometimes also referred to as a lump sum. This is recognised as a traditional means of procuring construction work. Contractors are familiar with this approach. Simply explained, a lump sum is a total cost provided by a contractor to carry out an agreed scope of works. This amount then becomes the basis of the contract agreement for the work scoped.

 

But, a key requirement for contractors to provide fixed costs, is that the work required must be well defined - whether by drawn information on technical drawings or plans and / or in specification documentation. For the contractor to fix their price, they need to be clear that they can minimise the risks of doing so. If there is anything they don't understand, that's not clear, then they will resist fixing the cost of it.

 

Two key advantages of fixed or lump sum costs include ...

They reduce Homeowners risk and

When based on well-defined design information, it makes comparisons between contractors much more straightforward

 

But there are disadvantages worth mentioning ...

By passing cost risk to the contractor, they will probably include a risk margin into their tender sum or bid amount which has the effect of inflating the final cost.

The bid or tender process may take longer both in the preparation of the tender or bid documentation and in analysing bids or tenders submitted before you can select the best contractor and get them going on site.

 

One of the ways experienced contractors may seek to share the risk with the Client - the Homeowner - is to qualify their bid or tender. And they do this when the tender or bid documentation has holes in it, is incomplete or inadequate.

They do this by stating assumptions they have made when preparing their costs and by listing anything they have explicitly excluded or omitted from their bid or tender amount. And they do this particularly in reaction to unclear or insufficiently defined design information.

 

The qualifications contractors include don't necessarily make their tender or quote invalid but Homeowners evaluating tenders or bids must be very careful to assess these when considering competitive bids.

 

In our imaginary kitchen / diner remodelling example, if you haven't provided full details of the new kitchen millwork or joinery - the cupboards, the doors, the exact sizes, the materials and finishes - like painted or wood veneered or laminate - then the contractor may do one of three things :

 

One - they may simply exclude the cost of the kitchen completely and only price the other elements that they believe to be adequately specified. If you get so excited when you see their obviously much lower bid cost and fail to check it includes for everything, you can find yourself making a very unpleasant discovery after they are already appointed, when you realise the cost of the kitchen is excluded. You may well have appointed a contractor whose overall cost, once the kitchen is added, is actually higher than another tenderer or bidder. And that's a huge bummer.

 

Or two - and intelligent, capable, experienced contractors are likely to do this - they make an assumption based on their experience of what might be suitable and include a cost for that option and they qualify their tender or bid accordingly. But this means you need to check very thoroughly that the option offered is something you like, has the required functionality and quality standard. Again, you may pick the lowest priced contractor only to discover that the quality or design or finishes of the kitchen they had included isn't anything like what you were expecting. Also a bummer when the cost jumps up as you refuse their option and then end up with the more costly option you had always envisioned.

 

It's very important to realise that you cannot rely on a contractor's assumptions. Even though they may be based on their years of experience and on what a previous client wanted ... because they may be nothing like what you want. The contractor might assume tiling in the shower room just runs halfway up the wall when you want it to run full height. Check all assumptions. Ask questions. Always specifically ask them to list any assumptions they have made in preparing their bid or tender.

 

And three - Sometimes contractors may include provisional sums in their tenders or bids. Like fixed prices or lump sums, this term is also well understood by contractors. But not so much by Homeowners. A Provisional Sum is like a placeholder amount. It's not an actual cost for a specific item, it is just a reserve, included in the overall total that is replaced when the actual cost of the item can be determined.

 

Let me explain how that works. Let's say your new kitchen is supposed to include a large, double door fridge and freezer. And let's imagine that the usual cost for such an appliance is say $ 1,500 for a reasonable quality unit. But there are a wide variety of brands, offering an even wider variety of sizes and finishes and functions. So if you didn't expressly state which brand, what size, which model with whatever options you prefer, then the contractor might include a Provisional Sum for the item.

 

And that's fine if his "Provisional Sum" is close to the actual cost of the unit you want. But more often than not, the contractor just sticks in a placeholder that could be way off the real, end cost. So maybe he includes a Provisional Sum of just $ 500. When he asks which unit you want, you give him the details of the $ 1,500 unit you've fallen in love with. Bummer number three ... the price goes up again ... in this example, by $ 1,000. The problem is not the provisional sum, it's that it wasn't adequately considered at the time the contractor's tender or bid was accepted.

 

So, careful bid or tender analysis is essential to discover and understand what's not included - the exclusions, what's been qualified - those assumptions, and whether all the costs are fixed or lump sum prices and if any are Provisional Sums.

 

And now I can't avoid some unpleasant, four-letter words. Two actually. There is a very common way contractors can submit tender or bid costs but which you need to be very wary about. Those two dirty words are "Cost Plus". This is another term generally well understood by professional contractors but Homeowners are not always aware of the dangers they conceal.

 

On the face of it, it might seem a fair and reasonable basis for entering into a contract. And it's particularly enticing when you're in a hurry to get going and you haven't got your project fully designed. If the contractor knows this, they may offer you to do the job on a "Cost Plus" basis.

 

Simply put, they propose to charge you the actual cost and then add on their overhead and profit margin. Now if you're in any kind of commercial business, you may well understand overheads and profit margins. You'll know that most companies need overhead and profit margins of at least 10% to be able to stay in business. Many as much as 25% to 30%. Of course, all businesses aim for even higher margins, the highest they can get away with. But when negotiating their overhead and profit margin with you, Contractors know you'll laugh them out of the room if they suggest a 100% mark-up. So they quote what they think you'll pay - let's say 15%. Maybe you see that and think "Wow, my business aims for 35%, so 15% is very reasonable" and you jump to accept the deal.

 

But ... and you've heard me say this before, there's always a "but" to beware of.

This method allows way too many loopholes for a contractor to inflate the costs. Take labour charges for example. In a fixed price contract, the contractor quotes a fixed price for installing a new shower room and let's say he bases his costs on doing the work in 5 days. If he takes 6 days, he has to swallow the extra cost. If he does it in 4, he benefits and makes a profit. So he's actually motivated to work quickly. So if you can accept the overall cost, you don't really mind if he manages to do the work faster. What you want to avoid is the cost going up and the time taken getting longer.

 

Unfortunately, in a "cost plus" contract, an unprincipled contractor might be motivated to take extra time - he'll get paid for it plus his mark-up. Why would he make any attempt to work faster. There's actually a disincentive for him to do so.

 

And when he presents his invoice for one of his subcontractors, can you trust that the invoice is real and not inflated ? Having caught contractors doing this myself, I would be cynical and believe that the temptation to contractors to have their friend, who they know well and work with often, add a bit extra onto their invoice so when it's presented for payment plus the contractor's mark-up, you end up paying money that will end up in your contractor's pocket.

 

This is a common practice in construction. It can even be made to sound reasonable. Like a volume discount. The sub-contractor might happily agree a 10% or more kick-back to a general contractor who keeps giving them project work. Except that it's dishonest if the general or main contractor doesn't declare it to their client - you.

 

And a final warning ... the amount of effort it takes to police and verify things like timesheets presented for work carried out for site crew, means it is unlikely you will really check that every hour claimed by every operative on the site is legit. Hours are easily inflated. Actual numbers of workers can be faked. Quantities of materials on invoices are difficult to check. An old contracting trick is to present an invoice for materials delivered to your site - you might even check the quantity off the delivery vehicle. But what you don't notice is that over the next few days a few lengths of timber, a few sheets of wallboard or other materials find their way onto the back of a pickup and end up on another site ... so you're subsidising the contractor's work on another project.

 

These are just a few of the many ways contractors can rig cost plus contracts in their favour. So my advice is to avoid them like the plague. They are risky. Even for an expert who is trained, knows what to look out for and has a ton of time to spend in checking and verifying every invoice, timesheet and so on.

 

And that wraps this episode in which we've covered prices, quotes, bids or tenders, fixed or lump sum costs, exclusions, assumptions, qualifications, provisional sums and cost plus.

 

As I warned you, a whole herd of elephants crashing through the brush that have the potential to trample your precious home makeover project. Just as you would on safari, you need to tread warily, keep your eyes wide open and understand how these beasts behave so you know what to do when they charge.

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To make sure you never miss an episode, why not subscribe to Home Makeover Project Secrets on our website at www.thediypm.com where you'll also find our blog posts and details about our upcoming Project Masterclasses and Training Courses.

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If you have a question about a project you're planning or already running, please reach out and email me on faq@thediypm.com.

 

If you have a challenge to overcome then I can just about guarantee others are also facing the same or similar challenges. It’s always reassuring to know you’re not the only one battling away …

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It's been great to have you with me today and I look forward to having you back for the next Episode of Home Makeover Project Secrets.

 

All the best on your Home Makeover project adventures.

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Andrew Philips, Project Management Coach