Commercial Counsel

After a quick glance at the high-rise office buildings and road projects, the prevailing wage and bonding requirements, the copious codes, and the penalty clauses common to commercial building, the prospect of applying anything useful from the non-residential sector to a residential remodeling business seems remote.

Take a closer look at this $1 trillion-plus industry, however, and you will find truisms that suit a construction business of any size or specialty. Sure, commercial builders and contractors — especially those working on publicly-funded projects — are often required by contract and circumstances to do things that a residential remodeler would rarely, if ever, have (or think) to do. But from these mandates, the best of your nonres brethren create competitive advantages that any contractor can leverage.

Strip away the contractual and the code requirements, the late-delivery damage clauses, and even the fact that commercial companies operate in a matter-of-fact business-to-business environment instead of an emotionally charged business-to-consumer setting, and you come away with three things that those working in the non-residential realm do better than anyone in the construction industry: strategic planning, professionalism, and communication.

This trio is the foundation for the finely tuned bidding and estimating practices, spot-on scheduling, rigorous risk management, and targeted marketing efforts that keep the best commercial contractors focused, in control of their costs, and reliably profitable. Here's how they do it … and how you can too.

Ever heard the term “SWOT”? It's an acronym for Strengths, Weaknesses, Opportunities, and Threats; more important, it's a strategic approach to business that successful commercial contractors follow.

“Commercial builders still have the ability to be creative and passionate about their work, but that's balanced with knowing what's best for their business,” says Leslie Shiner, a senior industry advisor for Intuit Construction Business Solutions, an industry-focused software developer and consultancy in Santa Rosa, Calif. “They take a more strategic approach to profitability.”

Whether through periodic brainstorming sessions or simply by having a solid handle on your capabilities and competitive advantages, a strategic focus helps determine which projects are most likely to result in happy customers and healthy margins … and which ones to avoid from the start. “We have a lot of carpenters on the payroll, so we tend to look first at jobs in which we can use that capability,” says Rick Nugent, president of Nugent Builders in Grand Rapids, Mich.

A strategic focus may also dictate whether Nugent actually bids on a project that appears to fit his company's core competencies. “If there are too many bidders or the pre-bid meeting isn't well-run or is vague, we may back off,” Nugent says, to avoid wasting time and energy on a numbers-only bid process or a flaky client.

That kind of confidence is probably foreign to most remodelers who, like many small or self-employed business owners, harbor fears about steady cash flow. But it's second nature for successful commercial builders to pick and choose their projects, despite carrying a frightening amount of overhead from employees, equipment, and insurance coverage. “They have figured out what they're good at and how to specialize in it,” Shiner says. “That breeds confidence to approach the market more pragmatically and know they'll be profitable.”

Specializing or narrowing your market focus also makes the rest of running a successful construction business easier. A history of actual costs across comparable work, for instance, helps streamline estimating chores on future projects; a legacy of managing subcontractors, suppliers, and clients on similar jobs helps ensure adherence to the schedule (and avoid profit slippage) on the next one. “If you develop specific benchmarks based on your company's past performance and industry standards, and regularly compare them to your current job, you can more closely track the project,” says Leslie Mostow, CPA, a principal with The Reznick Group, a national real estate accounting consulting company in Bethesda, Md., and current chairman of the National Association of Home Builders' National Commercial Builders Council.

Residential remodeling is steadily ridding itself of the public perception of it as a truck-and-dog industry, but the best commercial builders lead the way in presenting a professional front (and back office) to their clients. The result, as with taking a strategic approach to the market, is a well-oiled and profitable machine.

Of course, commercial builders are dealing with other business owners — rather than with homeowners — who not only demand but also know how to identify a high level of professionalism from a contractor. In addition, the myriad demands placed on a commercial construction company with regard to bonding, contract management, and regulatory compliance require a high level of business administration.

But just as a strategic focus is a concept that is easily applied to any segment of the construction industry and creates a competitive advantage, so too is professionalism. As simple as a dedicated fax line, typed proposals and bids, or an e-mail address ending in something other than “Yahoo,” and extending into off-site office space, a Web site, and a formal job-site safety plan, a professional approach shows seriousness, commitment, and the ability to handle the job.

Nugent, for instance, deployed a software program that automatically solicits and collects bids from various qualified subcontractors and materials suppliers via his fax machine. The system not only simplifies the bidding process and eliminates having to scramble on the phone for bids on the day they're due, but also assures Nugent that those submitting bids have their ducks in a row and are providing reliable numbers.

The more rigid and extensive plans and specifications of a commercial job have conditioned commercial builders to take a highly professional approach to their bidding and estimating procedures. “Once you bid on a publicly funded project — and increasingly any commercial job — you're locked into it,” says Bob Ross, president of Robert Ross Construction in Austin, Texas, which specializes in franchise restaurant and retail outlets. Even change orders requested and approved by the client may not be recouped, he says. “You really need a good system behind you [in the office] to be successful.”

Mostow offers another practical means to achieve professionalism. “On any jobsite, the safety and appearance of your crew can create a great deal of attention, not only for your company, but also for your client,” he says. “For these reasons, and as a form of marketing, many commercial contractor crews wear matching work shirts on the site.”

And while a homeowner collecting bids for a room addition might not be as strict as a school district or a fast-food franchiser with regard to your estimate, presenting a clean, comprehensive, and reliable bid —and a dedicated office line or cell number for business-only calls and a crew that can be easily identified — can make the difference in getting the job.

Commercial jobs — even those that most closely resemble residential work in their scale and materials use — are renowned for their complexity regarding building code and safety compliance, tighter scheduling, and dispute resolution.

The best commercial builders employ practices that both require and encourage regular and productive communication among all involved parties to achieve success. “It's not enough to simply fulfill the conditions of the contract,” says Jeffery Campbell, Ph.D., who chairs the facilities management program at Brigham Young University in Provo, Utah, and culled a commercial building “best practices” manual for NAHB. “You have to manage the human side of the project.”

For instance, Campbell encourages the practice of conducting a meeting or a survey of the key project players, including the owner, prior to the start of construction to reach a consensus about the administration and procedures that will be followed to deliver the job within the terms of the contract. “It clarifies expectations and goes beyond the written construction documents,” he says.

Such a forum is separate from (and prior to) a typical pre-construction meeting, which focuses on logistics and value-engineering more so than communication and change-order processes, Campbell says, resulting in better client relations and retention.

The latter meeting, a staple among commercial builders and increasingly popular on the residential side, is a critical step to staying on schedule. Although commercial jobs can stretch out for months given their higher level of complexity and larger scale than a single-house project, the deadline is usually inflexible, based on an owner opening for business on a certain date to meet his numbers and satisfy his lenders, for example, or on classrooms being ready for the fall semester.

To keep everyone in line, commercial builders launch project-specific Web sites to not only solicit bids and post plans and specs, but to also remain live throughout the job as a resource and reference. Through the project Web site, anyone on the team with password permission can confirm and update the schedule, track change orders, manage disputes and claims, review requests for information, and check for lien releases, among other functions reliant on effective communication.

Toward the end of the job, especially one with an extended schedule, commercial contractors have taken to reconvening the team to rekindle their enthusiasm and close out the project on time. Near the completion of a $49 million expansion of Atlanta's Georgia World Congress Center, for instance, the general contractor held a half-day session with representatives of each project partner to expose obstacles to completing the job on schedule and to set action plans to overcome them. As a result, the team transformed an anticipated six-week delay — and significant penalties — to an on-time delivery.

Perhaps nowhere is effective communication more critical than the process of managing change orders. A perennial thorn in the side of remodelers, it is one area where the most successful commercial contractors are at their best. “If residential contractors would apply the same best practices to their change-order process instead of relying on a handshake or a conversation, they wouldn't have any problems,” Shiner says.

Specifically, those practices include a paper trail of requests, estimates, and client confirmation or approval of any changes to the contract that can be used to deflect disputes, force payments, or avoid delay penalties upon completion. “The key is to be prompt about pricing the change and communicating any anticipated delays it will cause,” Ross says. “Don't wait until the end of the job to submit them for payment.”

Other risk-management practices include automatically sending and collecting lien waivers for any subcontract over $500 (perhaps lower for a remodeling job) and submitting the releases as part of a payment application package to the client to trigger a draw based on work performed to date — one of Nugent's policies.

Another one: Nugent conducts at least three mandated, in-office training sessions a year regarding its jobsite safety plan and procedures. The company supplements these meetings with more frequent toolbox talks. Like many practices born from contractual or regulatory mandates (think OSHA), safety and a dedication to risk management are practices that any contractor can apply. “Just because you don't have to, doesn't mean you shouldn't,” Shiner says.

On the surface, commercial work and residential remodeling look like apples and elephants. But when it comes to strategic planning, professionalism, and communication, there are significant cross-over practices. “Most of us in the construction business know these things,” Ross says. “We get into trouble when we start to deviate from the plan.” —Rich Binsacca is a freelance writer in Boise, Idaho.