There are plenty of horror stories about contractors not finishing jobs, running out of money, going bust, causing delays, charging for extras, and so on. So, what’s the secret of dodging a bullet and finding an honest, hardworking, solvent, and committed contractor who won’t charge you a fortune for the privilege?
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.
Responding to a tender involves a fair amount of work for a contractor, with no guarantee of any payback. If they know they’re competing against a dozen or more other contractors, 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. If 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 beforehand.
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. Some contractors may have a lot of work and 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 developers 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.
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.
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.
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.
No development project ever goes completely smoothly, but hopefully, these tips will help you get a great contractor on board.
*Ritchie Clapson CEngMIStructE is the Director and Owner of propertyCEO