21/08/2019

Self-Build Part 3: Contractor Issues

Welcome to the last in our three-part series on how to avoid common pitfalls in Self Build projects. This final blog post discusses some of the common issues which arise when working with Contractors, and how to avoid them.

So, what are the most common issues?

Insufficient detail at tender stage resulting in additional cost and time risk to the client.
Choosing a ‘bad’ contractor
Inadequate or absent Construction Contract, and no Contract Administrator resulting in risk to the client
Project delays caused by contractor, and inadequate recourse.

The result?

Projects going over budget

The solution?

Chose the right contractor, and the right construction contract

Tendering the right information

Your design is finalised, Planning Approval granted, and you are working through the detailed design with your design team. At this point you will need to consider what information you will be producing for the contractors to price, and once again there is a choice of the level of risk you are willing to accept.

There are two main options for producing information for pricing, and each has their own pros and cons.

The first, and simplest, is to get the contractor to price on the basis of the Specification and Drawings. In this instance, the contractor is required to undertake a full measure of the drawings and specification provided, to enable them to cost the project. The advantage of this method is that you do not have to employ a quantity surveyor for this option; your architect will, if appointed to do so, be able to tender this on your behalf. However, there is a risk associated with it.

It’s worth remembering that measuring the quantities required for a building is a lot of work. Most small contractors either have a single in-house estimator to do their tendering, valuing and billing, or perhaps they employ a third party to do this for them. This therefore has a cost associated for the contractor. And, assuming you are tendering to three or more contractors, each contractor will know they only have a 1/3 chance of securing the project. They will therefore not want to lose money on pricing a project with a low chance of success. It is therefore firstly pretty certain that they will build the costs of tendering into their tender figure somehow, probably through increased overheads and profit, to ensure that they makes their money back if they wins the work.

Secondly, in case they are not successful, they will want to keep their costs to a minimum. The contractor may therefore not measure as accurately as they otherwise might, and may just add inflated figures for the sake of speed, artificially inflating the overall tender sum. There’s relatively little risk in this for them, as the know that the other contractors will be likely to be doing the same!

It’s worth also noting that with this option, you are unlikely to get much of a breakdown of the tender figure you receive, therefore won’t be able to spot these inflated figures. It will make comparison between tendering contractors more difficult, and errors or discrepancies more tricky to spot. A further risk to you as the client is that any errors or omissions within the drawings or specification will not have been priced, and will therefore cost you extra. If it isn’t expressly stated somewhere in the documents, it won’t have been priced.

The second option available to you is to employ your Quantity Surveyor to produce what is known as a Bill of Quantities. This document is a full and unambiguous measured breakdown of all the building elements, down to the metre length or m2, and is often built upon the cost plan already undertaken with considerably more detail added.

This will probably, depending on the size of your house, cost you in the region of £5000 to produce. However, in our experience, contractors who are provided with a bill of quantities find it much easier to price a project, and therefore price more accurately and therefore more competitively. The contractor will be required to provide you with the priced Bill with his tender return, which allows you to both compare one tender to another, and easily spot any areas where you might wish to spend more or need to spend less. It also acts as a very useful tool during the construction stage, as it allows you to easily compare the contractor’s requests for stage payment as the work progresses against the costs in the Bill, thereby ensuring that there are no overly inflated applications for payment being made.

So, while there is an upfront cost to you, in our experience that cost is usually more than recouped in lower tender sums and better management. Later on we will talk about construction Contracts, and how these can also be a tool in ensuring that costs and time do not run away with you.

Choosing the right contractor

It is likely that your architect and quantity surveyor will be able to provide you with a few recommendations for contractors they have worked with before with some success. However, I would always advise not to just take their word for it! We would usually recommend tendering to around three contractors, to give a good range of competition without being excessive. You will therefore probably want a shortlist of five or six to look into. In the first instance, either you or, if appointed for this stage, your architect, should approach the six contractors and ask them if they are interested in tendering for the project. Some may not be; they may be too busy, it may not be in the right area for them, and it’s better to find out now than just sending them the tender ‘cold’.

If they are interested, ask them to provide recent client references for projects similar to yours. These need to be names and email addresses or telephone numbers, rather than copies of statements. Ideally, you want to be able to speak to the clients and even, if they’re willing, go and see the houses that the contractor has built to see the quality for yourself.

Using a formal contract

Choosing the right form of contract for your project is quite a big topic, and has many factors. This is something you should discuss in detail with your architect and they will advise you on the basis of your projects and needs. However, I will make a few pertinent points. Firstly, don’t ever be tempted to not have a formal building contract. By that I mean, do not think that by simply signing a contractor’s terms and conditions and sending an email accepting their quote that you are sufficiently covered if a problem arises. ‘Proper’ Construction Contracts, particularly those produced by the Joint Contracts Tribunal (JCT) and the RIBA, are documents designed to cover all eventualities, and protect both parties from financial risk. They can be lengthy, depending on the form chosen, but are the only way of ensuring that your huge investment is adequately protected. I am focussing here on the JCT contracts, but there are others, and you should follow the advice of your architect.

The JCT produce two forms of contract which are suitable for traditionally procured residential new build housing projects, which have their pros and cons. These are the Minor Works contract and the Intermediate Contract. Some clients would opt to utilise the smaller and simpler Minor Works contract, but we always advise that for a new build house, the Intermediate form offers the most appropriate level of security for a client.

It is worth noting that for most of the standard building contracts, you as the client are required to appoint a Contract Administrator to manage the contract on your behalf. This must be a person who is able to act impartially (i.e. it cannot be yourself and it cannot be the contractor) and is therefore often the architect. Now while you may pay your architect for undertaking this role, you will find that he has a legal responsibility to act impartially, so be warned that in the case of a dispute he may not always find in your favour.

The second point here is a big one. You should never, ever make an upfront payment to the contractor unless you have that payment protected by an advance payment bond; allowances for which are set out within the contract. A builder going bust and you losing your money is the last thing you need.

While on the possibility of builders going bust, I’d like to touch on an element of a project known as a Contractor’s Design Portion. As the name suggests, this is an element of a build project for which the contractor is responsible for the design, not just the installation and materials. This is as old as build projects themselves, but the industry has been slow to pick up on the legal and contractual ramifications of them. So, as an example, you would like underfloor heating for your home. On a small project like a house you don’t want to pay an M&E engineer to design the system for you, therefore you leave the design to the contractor’s M&E subcontractor. This would be a contractor design portion. In the old days, that would be that, and there would be nothing specifically in writing within the contract.

However, imagine that the underfloor heating goes wrong 6 months after you move in. The system has been designed incorrectly and the whole of the floor of your house has to be broken out and the system reinstalled. The cost of this is high; you have a beautiful polished concrete floor which has to be replaced; the implications of introducing wet concrete and polishing into your finished and furnished house are widespread. The subcontractor goes bust, as he can’t afford the cost to his small business. The responsibility passes up the line to the main contractor. He is also a small contractor. He also goes bust. You are then left with no recourse against anyone, and no heating.

So the answer to this is to specify a form of contract which allows for named Contractor’s Design Portions. Both the JCT Minor Works and Intermediate forms have an option to include CDPs to varying degrees. Long story short, the implication of this is that your contractor is required to carry professional indemnity insurance, just like every other design professional. If the subcontractor goes bust, the main contractor’s PI insurance would therefore pick up the tab for the remedial work. This is something which would need to be considered at tender stage. When selecting your contractors you would need to make them aware that there are CDPs, and ensure that they carry PI insurance. Not all contractors do, particularly the smaller ones for whom the risk of having to fold their business is more acceptable than monthly insurance payments. So, one to look out for.

The final point to mention in this section is the use of Liquidated and Ascertained Damages within a construction contract. LADs as they’re more commonly known are a weekly or monthly amount of money which is set out within the contract that the contractor must pay to you the client for delays to the completion date of a project, where the delay is the fault of the contractor. Where the delay is down to late decisions or changes, extensions of time to the contract would be granted, but where the delay is down to the contractor, LADs can be deducted from the contractor’s payments. Now it’s important to note that this amount is not a ‘penalty’; you can’t penalise the contractor for being late. However, genuine costs that you might incur such as additional rent if you’re in rented accommodation, or interest payments on financing, or storage costs for your belongings are genuine costs, and can be used to calculate the LADs figure.

So that concludes our three-part whistle-stop tour of the common pitfalls of self-build projects. I hope this is helpful, and please do get in touch if you have any questions.

View more blog posts.

23/10/2018

Self-build Part 1: How to avoid common pitfalls

If you are considering a self-build project, it’s pretty much a given that you’ll be an avid Grand Designs fan. As you’ll know from the show, many things can (and usually do) go wrong on these dream builds, but generally speaking the end result is usually the same: increased cost. While this can make for entertaining television, it’s not so much fun when the spiralling costs are your own...

23/10/2018

Self-build Part 1: How to avoid common pitfalls

So, what causes projects to go overbudget? There are three broad categories which can be the causes of overspend, and over the next three months I’ll be releasing blog posts covering these three areas, and the steps you can take to avoid falling into those common traps.

This first post covers the first of the three categories, and by far the most common, which is:

Starting a construction project on site with an unclear or unrealistic idea of the project costs or timescales.

So what are the common Issues?

Failure to consider Whole Project Costs vs Construction Costs
Not taking (or not believing) the advice given by construction professionals on construction costs.
Failure to consider inflation and contingency sums when considering project costs.
Proceeding to planning application, technical design, and even starting on site on the basis of inaccurate or non-existent cost information

Seems like a no brainer, I know, but you would be surprised how many self-builders chose to either not take (or not believe) expert advice on construction costs.

The result?

Projects going over budget.

The solution?

Be sure of your finances before committing to any work.

So how do you go about it?

There is a two-step solution to these issues. The first is to utilise the experience and knowledge of your design team to give you an early stage outline of Whole-Project Costs before the design work commences.

Your architect will be able to advise you of the project costs you might need to consider over and above the actual cost of constructing the building, such as consultants fees, surveys and reports (and the VAT payable on them), fees charged by the Local Authority for planning and building regulations approvals and, in the case of remodelling or refurbishments projects, VAT payable on construction costs.

It’s worth noting that while architects will provide you with all the information they can on which consultants and reports may be required at this very early stage, until design progresses it’s often not possible to know for certain exactly what will be required. Your architect also won’t be able to tell you for definite how much other consultants will charge in fees, but they can often give a rough idea based on recent projects, or can obtain quotations on your behalf. I will speak about contingency funds shortly, but this is an area where you will need scope to be flexible in your budget figures.

Once these fees and other project costs are deducted from your overall budget, you will be left with an amount which you can use as your construction budget cost. Your architect will advise you of cost per square meter rates for construction, usually within a range based on your location, site conditions and brief, as well as complexity of build and quality of finish. These figures may at first seem higher than you expect but will be based on your architect’s experience of the construction costs of recently completed projects in your area. These figures can be a useful starting point to allow you to calculate the size and/or quality house you can realistically achieve for your budget.

The second step towards cost certainty is to employ a Quantity Surveyor to undertake one, or even multiple, Cost Plans for your project. We generally advise our clients that, alongside the architect, the quantity surveyor should be one of the first consultants appointed unless working with a builder from the start.

We recommend the appointment of the quantity surveyor to undertake an outline cost plan at the early design stage, certainly pre-planning. This has the benefit of ensuring that the scheme being designed is looking likely to be within budget before a planning application is submitted. While your architect will be able to advise whether you are ‘roughly’ on track, Architects are not cost consultants, and as such can only advise to the limitations of the information available to them.

An outline cost plan at this stage can be produced from basic architect’s plan, elevation and section drawings and a basic outline specification. The risk in not having this cost plan undertaken is that you may require further design work and even a return to planning if it transpires the house as designed is not within your budget, which will carry a far greater time and financial penalty.

Alongside the actual cost of the design, there are several items the quantity surveyor will consider within his cost plan.

The first is the approximate level of preliminaries, overheads and profit being charged by the local contractors in the area. If you know at this stage whether you are intending on undertaking elements of the work yourself, which would therefore not be subject to contractor’s overheads and profit, discuss this with your QS, as they will be able to adjust the cost plan accordingly.

The second element to discuss with the QS is when you think that the building work is likely to be undertaken. While most people will want to start work as soon as possible, you may for some reason not be able to start for two to three years, in which case the QS will need to build a greater allowance for inflation into the cost plan than normal.

The third element to discuss is the level of contingency to be included. The QS will usually include a contingency figure within the cost plan; if you have a separate ‘pot’ of money outside your construction budget then advise the QS accordingly. At this point, it is worth discussing contingency figures, and where they are usually pitched.

An early stage cost plan such as this one will usually allow a blanket overall 10% contingency sum. This 10% can be considered in two halves. 5% of the figure would be what we would term a ‘design reserve’. This is to allow for the fact that at this stage the detailed design has not yet been undertaken, and to allow for cost which may arise as the detailed design is finalised. For instance, at this stage the QS will allow a single lump sum for waterproofing. On undertaking the detailed design, it may transpire that a more expensive or complex solution is required due to site conditions. This figure allows for those design decision to be made without adding cost to the budget. By the time the project is priced, either in a second cost plan or priced by contractors, these decisions will hopefully mostly have been finalised and those costs incorporated in the main sections, and so this figure may drop to 1%, allowing for any last minute decisions along the way.

The second half of the contingency figure is what we would term ‘construction contingency’. This figure allows for issues arising on site which cannot be foreseen, for which additional works or materials are required. If you have a particularly challenging site or build, your QS or architect may advise you to increase your construction contingency allowance. Many of those Grand Designs projects had no contingency allowance at all, or what they did have wasn’t enough.

Hopefully this blog has given you an idea of the importance of being sure of your costs before starting work, and how to avoid it. Next month I’ll take you through Design and Regulatory issues, and how a lack of proper control of these items can result in projects going over budget.

Please feel free to get in touch if you have any questions.

View more blog posts.

Most recent

Select month