The ABC's of contractor fees
If you’ve never had call to work with a commercial general contractor, you may be wondering just how a contractor charges for a project.
At Chad Fisher Construction we typically work with one of three contracting methods:
- Design/Build with Guaranteed Maximum Price (GMP);
- Negotiated with GMP;
- Competitive Bid / Build.
If you aren’t familiar with these terms, let’s take a minute or two to get you up to speed.
Design/Build - Guaranteed Maximum Price
Design-build is a construction delivery method in which the architect and general contractor fundamentally act as the same entity. Many project owners choose design-build for its benefits, such as cutting down on overall project time and cost savings associated with efficient design and fewer change orders.
A Guaranteed Maximum Price contract usually goes hand-in-hand with design-build construction. Simply stated, the GMP is the estimated hard cost of the job plus a stated overhead and profit fee (contractor’s fee) at a predefined, maximum level.
If the job experiences cost overruns, the contractor absorbs those costs, essentially eating into its profit. However, if the job comes in under budget the project owner realizes cost savings.
The contractor’s fee is either a set amount or a percentage of the contractor's job cost.
What might that look like? Let’s say you have an estimated job cost (materials and labor) X plus the contractor’s fee of Y. The contractor will always keep Y, but if X goes over budget, Y won’t be as large. If X is under budget, then you as project owner realize savings, and the contractor has the Y amount in full.
Running an efficient operation benefits both the owner and contractor. These two entities work together throughout the process to ensure costs are in check every step of the way. This collaborative effort is also a hallmark of the design-build process.
This method has proven time and again to produce an end product that is as efficient as possible at the lowest possible cost. It also produces a solid “team” that works together to the end - and beyond - completion, oftentimes taking care of the building owner's needs well into the future.
Negotiated with GMP
The negotiated contract method is relatively similar to the design-build GMP. The difference lays in the design delivery method: In this scenario the architectural design is oftentimes completed without the aid of a contractor's input. After the design is complete, the final design details and construction costs are negotiated between the contractor and owner. Once again, those costs have a guaranteed maximum price and the contractor has a separate fee.
The advantage in this method is that it gives the owner a chance to interview and select a contractor and allow for their final input into the plans before construction begins. The main disadvantage is that the owner will often realize additional design costs and possible time delays due to plan revisions suggested by the selected contractor.
The bid-build contract originates from the traditional design-bid-build method of delivery in which the project is designed without the benefit of a contractor’s involvement, and then bids are evaluated for how well they match your project’s scope and your predetermined requirements. (Cost is but one element of the final decision.)
Be aware that competitive-bid-build is the most likely scenario in which change orders occur. These changes often result in large overruns of an owner’s cost to the project.
The decision is yours
Each project has its own requirements, so any one of these contract methods may be just right for your project. If you have any questions on which contract method is right for you, contact us for a consultation.