By Jim Cory. Back in the early '90s, Chicago-area general contractor John Harty of John G. Harty Ltd. considered the custom home contract he'd just signed a godsend. A recession was on, construction spending was slow, and Harty's company was only just emerging from several lean years. Then his lead foreman quit. That, Harty says, made him decide he "needed to develop a business where we weren't at the mercy of our employees."
Today, John G. Harty Ltd. consists of five people: Harty, his brother (and co-owner) Richard, a laborer, an office manager, and a person who assists clients with design and product selection. Last year the company directed the construction of $3.5 million worth of remodeling projects, most of them six-figure remodels. But today John G. Harty Ltd. has a different contractual relationship with its clients than it used to. Harty functions as a consultant on these projects, charging 13% of construction cost.
After meeting with clients, Harty or his brother Richard asks for a deposit. The size of the deposit depends on the scope of work. For example, the company would charge $2,500 on a quarter million dollar remodel--about 1% of the total.
For that, Harty will advise on approximate costs then work up a budget that will take clients through the bid process. The extent of the budget depends on whether some level of design exists. "In the typical scenario, the customer meets with me before they meet with the architect," Harty says. "I also sit in on meetings with the interior designer and the architect to make sure that the job stays on budget."
In fact, Harty often recommends the architect. From that point forward, events could move in several directions. The clients might opt to hire a general contractor. Most likely, however, they'll hire John G. Harty Ltd. to manage the project and pay the 13% fee for the service.
Management involves assisting in the hiring of subcontractors, selecting and ordering products, and providing on-site supervision. But though the subs Harty recommends are usually the ones hired and though most materials are bought at supply yards where John G. Harty Ltd. has its accounts, Harty neither pays the subs directly nor purchases the products.
Risk = reward
In residential remodeling, there are as many versions of construction management as there are contractors who supply the service. For instance, John G. Harty Ltd. performs daily site supervision on its jobs and takes contractual liability for the outcome of the work, warrantying the labor under its supervision for a year.
But the company isn't typical in those regards. Many companies providing CM services don't run the day to day or take responsibility for the final outcome of the product. When clients are charged an hourly consulting fee to, say, locate subs and troubleshoot when necessary, then the CM company doesn't usually assume any responsibility for the outcome -- or at least doesn't supply a warranty.
Services can vary from job to job, but a firm should know what it's capable of and willing to do. "You can't go into this without very clearly defined roles," says Brent Hull, owner of Hull Historical, a Fort Worth, Texas, remodeling firm. In construction management at the residential level, what varies from one situation to the next, and one company to the next, is the degree of risk and responsibility. Depending on the client, the contract, and the design, responsibilities might include estimating, design work, product selection, negotiating with suppliers, hiring subs, paying subs, and daily on-site job supervision. Or any combination of the above.
"It's whatever's negotiated, and it relates directly to how much of a fee the company will earn," says Mark Pennington, secretary/treasurer of Gardner Fox, a Bryn Mawr, Pa., firm that provides construction management services and has also worked as a general contractor under a CM hired by clients. "The larger the responsibility, the larger the fees should be."
Fees for CM jobs are sometimes fixed up front. More typically though, they're determined as a percentage of total job costs and range anywhere from 5% to 15% or even higher. "Generally," says Tom Avallone, owner of Cobb Hill Construction in Concord, N.H., "we charge a percentage, because at the beginning of the job you often don't know how much it'll cost. You don't want to get locked into a fixed fee if it's an ambiguous job. In general, everybody understands a percentage."
CM as consultant
Some remodeling companies charge an hourly consulting fee for their CM services. CM jobs make up less than 10% of all contracts at Design + Construction Concepts in Northbrook, Ill., a remodeling company owned by two architects. (All other jobs are contracted on a GC basis.) Co-owner Andy Poticha says one CM scenario involves a client with both a limited budget and the "knowledge and desire to do it themselves." Such a client hires Design + Construction Concepts, Poticha says, "to avoid a lot of overhead."
In that scenario, Design + Construction Concepts will prepare drawings, assist in product selection, and recommend subs. The owner pays for the materials and hires the trades. For these services, Design + Construction Concepts charges fees ranging from $125 to $175 per hour.
The reason D+CC even considers these jobs, Poticha says, is to build referrals. "They may not be our client, but they sometimes sing as much, if not more, because they know they couldn't have achieved their project without our expertise."
Brent Hull's CM jobs also resemble consulting. Hull Historical's CM projects tend to be smaller -- $40,000 to $100,000 -- with the company providing subs, supplier contacts, management, and any necessary problem-solving. Management "means we'll oversee it and help them through the process," says Hull. It does not mean daily site supervision. On one job -- a $60,000 addition -- Hull was at the site three times the first week but about once every three weeks as the project wound down. Fees for this service range from 5% to 10% of cost, depending on the size of the job and the level of responsibility, and do not include architectural drawings, for which clients are charged an additional $50 an hour for drafting. Generally, for jobs under $20,000, Hull always charges 10% because "you need to make sure you're going to get at least a couple thousand dollars for your time and experience." For larger jobs, 5% is the norm, but that depends on the level of involvement. Hull charged one recent client, an interior designer, the lower rate because she was used to dealing with subs and scheduling. "Five percent is a risk management deal," Hull says. "We'll provide subs that do good work, but they've got to manage and pay the subs."
Forming a team
Whatever the method of payment, what separates the CM from the general contractor is responsibility. The GC signs a contract to build a project for a specified price in a specified time frame. The CM represents the homeowners' interests in a situation where a GC may be present, with the CM representing the owner as advisor, overseer, and troubleshooter.
"Changing the tone of the project from one that's potentially adversarial to one that's cooperative," says Tom Avallone, is one of the major advantages of construction management services. "And a lot of people recognize the value of that." Avallone points out that, in a CM situation, he almost always makes his presentation as part of a team, which may include an architect, a landscape designer, even an engineer. The choice for owners, he says, is making on-going decisions in conference with team leaders vs. simply hiring the lowest cost guy.
"I can't promise them they'll save money," Avallone says. "But I can promise that we'll secure the best building and that we're not going to scrimp, save, and cut corners, unless that's what they actually want."
Philadelphia remodeler Myles Pettengill, owner of Archway Builders, a company with a market niche in both restoration and condo conversions, charges clients an average of 15% for CM services. This includes hiring subcontractors, making product selections, and on-site supervision and often involves completing architectural plans with input from the whole team.
"Each sub takes the package and works around that," Pettingill explains. "For example, an electrical contractor can do a power diagram and a lighting diagram. Our job is to coordinate that and look out for interferences."
Trust is key
The position of being the client's trusted confidante, rather than the GC with the lowest bid, gives the CM both authority and leeway on a job. Most CMs bid out the various portions of a multi-trade job to subs and prefer working with subcontractors they know. Using the subs they know is key to getting the quality the client's paying for.
"The typical GC needs to make a certain amount of money, so he's out shopping subs," Harty points out. "He might use an electrician he hasn't used before because the guy's cheap." Harty says he makes it clear to homeowners that for the sake of quality and jobsite harmony he prefers hiring subcontractors whose work he's familiar with. If the homeowner decides to hire his own plumber, Harty's contract will not guarantee the plumber's work.
"Let's say I have three bids for electrical," Avallone says. "The guy with the bid in the middle is someone I've worked with. I am going to recommend him to the owner on the basis of experience, compatibility, and the belief that he'll give me the best product. The GC may not use the middle guy because if he does he may not get the job. To get the job, he'll be forced to use the low bidder."
In such situations, hiring for CM services wouldn't save the client money, but remodelers like Harty and Avallone say selling CM services is about trust, not price. Clients are buying the assurance that the job will be done the way they want it, on time, and at a reasonable price. They're buying expertise.
"When you get to that interview, it's rarely about the numbers," Avallone says. "It's about who you are, do we like you, and are we going to work well with you?"