How to make a Fixed Price Construction Contract???

Hi Guys,

After a 2 units subdivision construction is going to be finished, I'm heading to my next 4 townhouse construction. Due to how I got from my 1st construction contract, which gives me a lot of headache :mad: paying unexpected variable charges from the builder, this time I really want to specify as many details as I can before signing a contract.

Should you please share any of your experiences or maybe lessons about how to specify a construction contract instead of a standard HIA contract, it would be most appreciated!

Thanks a lot in advance!

Ryan
 
Ryan you answerd your own question, make sure your plans and specifications cover all works. Your contract once signed will make this binding.

Chomp
 
Thanks!

But actually, the question should be how to specify and what to specify based on experiences or lessons?

Any samples would be most welcome

Cheers

Ryan:)
 
I'm not going to rattle of specifics for thirty odd trades etc..., you seem to be serious about what you are doing.

As per usual you need to educate yourself or learn from your mistakes, you will probably end up doing both! I know I still do.

A good start would obviously be to include the items omitted from your last developement, I'm sure there are some good books on estimating as well, have you thought about going to tafe?

Chomp
 
you need to check the drawings, specification and any preliminary estimates with very close scrutiny before signing contract make make sure the builder hasnt excluded items you want

common exclusions builders leave out to watch for are:

painting, floor coverings, asbestos removal, window furnishings, water tanks, landscaping, garden taps.. some may also omitt engineer, council & consultant fees and get you to pay them direct

you also need to look closely at the prime cost items and provisional sums the builder has made - will these likely cover the fittings you will choose? have a look how many lights& powerpoints the builder has allowed for enough? has the builder included floor to ceiling wet area tiling or just a tiled skirting row?

there are many traps for young players and the hia/ mba std contracts are weighted heavily in favour of the builder so make sure you understand everything and ask as many questions as you need to before signing
 
i am slowly mooving through some quotes/estimates. and whilst i am trying to compete with the others that do these quotes, they write them so the initial deposit and payments schedual is half cut so to speak??
eg, if i allow for a kitchen, and have 15k for the allowance, this is reasonable, for a nice granate top kitchen.
i could have an allowence in the estimate for 7 k and it will be cheaper at the end of the estimate.but you would struggle in getting one that cheap,
so for kitchen, allowence., 7k, bathroom 5k render 4k doors and fittings, 1k , roof and gutters, 9k total = 26k
but the job could not be done for this. if i estimate 15k kitchen, 8k bathrm, 6k render 5k doors 8k roof and gutters totaling 42k this is the likely amt it would cost, but which estimate do you think the customer will go with, ??/
likely the first one, but expect 16k of extras.........:(
 
hi cragb i know how you feel i work in resi building aswell... the industry is so competitive builders always under cutting each other to win work,, its is often via this method skinny prov sums and also not allowing for heritage/ bushfire regulations etc and charging by variation after contract has been signed. particualy prevalent in design and construct builders

in answer to your question ryan probably the best way to avoid what happened to you 1st time around... get an architect or good draftsman to do your drawings and a complete detailed specification with everything you want included and a bill of quantities, then get your 2 or 3 quotes based on this full documentation. Then you can truly compare the builders quotes against each other
 
in answer to your question ryan probably the best way to avoid what happened to you 1st time around... get an architect or good draftsman to do your drawings and a complete detailed specification with everything you want included and a bill of quantities, then get your 2 or 3 quotes based on this full documentation. Then you can truly compare the builders quotes against each other

That's some of the worst advice i've heard. An architect will charge anywhere from 5-15% of the contract value for work that is often provide free of charge by a lot of builders or at a cost that is refunded if you sign a building contract with them.

If you're worried about provisional sums or prime costs in a building contract then add a 'selections allowance' of say $10,000 to the contract before you get finance. Any portion of the $10k that isn't spent will be refunded on completion of the project.

Also, saying the HIA or MBA building contracts is in favour of the builder is also a false comment. HIA contracts are actually pretty much 50/50 when it comes to fairness for either party and the MBA contracts lean more towards the consumer than the builder. The simple truth is many people don't formally challenge a builder when things go wrong or believe builders comments when they challenge the contract rather than seeking independant advice.
 
That's some of the worst advice i've heard. An architect will charge anywhere from 5-15% of the contract value for work that is often provide free of charge by a lot of builders or at a cost that is refunded if you sign a building contract with them.

If you're worried about provisional sums or prime costs in a building contract then add a 'selections allowance' of say $10,000 to the contract before you get finance. Any portion of the $10k that isn't spent will be refunded on completion of the project.

Also, saying the HIA or MBA building contracts is in favour of the builder is also a false comment. HIA contracts are actually pretty much 50/50 when it comes to fairness for either party and the MBA contracts lean more towards the consumer than the builder. The simple truth is many people don't formally challenge a builder when things go wrong or believe builders comments when they challenge the contract rather than seeking independant advice.

I totally agree well said

Chomp
 
Thanks so much for all the sharing.

So far, I've got 4 quotes for the 4 units. The quote ranges from $760K to $1.2M. before I question further, I'd like to describe my site and units first as below:

a. Site size: 15.3m X 67m
b. Very Slope site: the end boundary is about 7 meters higher than the front boundary.
c. The Unit size:
unit1, 28sq, 4 bedroom+3bath+4toilet+double garage
unit2, 19sq, 3 bedroom+2bath+2toilet+double garage
unit3, 15sq, 3 bedroom+2bath+2toilet+double garage
unit4, 13sq, 2 bedroom+2bath+2toilet+single garage(plus 1 car space)

the quote price mentioned above has included the excavation cost already, but what confuse me is such a big different price, and also not quite sure how much might be the true cost for the construction? and what's the minimum profit margin usually a builder is seeking for? If I can answer those questions, then I can sum up the "true cost" and "profit", then I can figure out what quote is a reasonable one, instead of too low (easy to cause a lot of trouble after signing the contract) or too high (obviously, use too much of myself profit).

Sincere thanks

Ryan
 
good point of view

As per usual you need to educate yourself or learn from your mistakes, you will probably end up doing both! I know I still do.

A good start would obviously be to include the items omitted from your last developement, I'm sure there are some good books on estimating as well, have you thought about going to tafe?

Chomp

Thanks Chomp, totally agree. Have finished reading Ron FORLEE's "Residential Property Development -- A step by step guide for investors" a few years ago. Now I'm going to review it again, then read Richard Peiser's "Professional Real Estate Development, The ULI Guide to the Business".

Haven't got the plan to do a tafe yet, but doing estimation is really important! do you have any good books related to recommend?

If take a tafe, what courses do you prefer according to your practice experience?

Thanks!;)
 
selection allowance question

If you're worried about provisional sums or prime costs in a building contract then add a 'selections allowance' of say $10,000 to the contract before you get finance. Any portion of the $10k that isn't spent will be refunded on completion of the project.

Thanks Snort,

Usually, items such as landscaping, driveway, fencing, demolish etc might be the optional or say selections. I got a question is can I ask another trader finish those job instead of the builder if I can find a cheaper one?

For example: demolish allowance is 15K in the building contract. after contract starts, if the builder quote me the demolish fee is actually 14K, but I found some traders quote me saying 10K, can I ask the builder to use the 10K quote trader to do the demolishing, then at the end, the builder shall refund me 5K back as for this specific item, am I right?:p

Cheers
 
MBA or HIA

Also, saying the HIA or MBA building contracts is in favour of the builder is also a false comment. HIA contracts are actually pretty much 50/50 when it comes to fairness for either party and the MBA contracts lean more towards the consumer than the builder.

does this mean I shall insist the builder on using the MBA template contract instead of the HIA one?:rolleyes:
 
Thanks so much for all the sharing.

So far, I've got 4 quotes for the 4 units. The quote ranges from $760K to $1.2M. before I question further, I'd like to describe my site and units first as below:

a. Site size: 15.3m X 67m
b. Very Slope site: the end boundary is about 7 meters higher than the front boundary.
c. The Unit size:
unit1, 28sq, 4 bedroom+3bath+4toilet+double garage
unit2, 19sq, 3 bedroom+2bath+2toilet+double garage
unit3, 15sq, 3 bedroom+2bath+2toilet+double garage
unit4, 13sq, 2 bedroom+2bath+2toilet+single garage(plus 1 car space)

the quote price mentioned above has included the excavation cost already, but what confuse me is such a big different price, and also not quite sure how much might be the true cost for the construction? and what's the minimum profit margin usually a builder is seeking for? If I can answer those questions, then I can sum up the "true cost" and "profit", then I can figure out what quote is a reasonable one, instead of too low (easy to cause a lot of trouble after signing the contract) or too high (obviously, use too much of myself profit).

Sincere thanks

Ryan

Ryan,
Based on my experience, big differences in prices is common between trades, but I dont compare builders so for you it is more involved. I do an estimate of the trade put a price to the estimate and then I have my figure. Any one who is close to that is being realistic anyone else (unless they have made an error is trying it on). They do this with me on a regular basis, I have never fallen for it but they persist anyway, why I couldnt tell you.

If you have all the specifications and a finishing schedule for your project. And you cant do it yourself, consider going to a QS or getting a couple more prices from different builders.

Profit varies I think on a job that size they would be hoping for 20%, but it all depends on how much they want the work.

Chomp
 
Thanks Chomp, totally agree. Have finished reading Ron FORLEE's "Residential Property Development -- A step by step guide for investors" a few years ago. Now I'm going to review it again, then read Richard Peiser's "Professional Real Estate Development, The ULI Guide to the Business".

Haven't got the plan to do a tafe yet, but doing estimation is really important! do you have any good books related to recommend?

If take a tafe, what courses do you prefer according to your practice experience?

Thanks!;)

I did the Diploma of Builders Registration and Diploma of Building in WA. There should be something similar in your state.

You should be able to do the estimating subjects without having to do anything else, but I might be wrong.

Chomp
 
Thanks Snort,

Usually, items such as landscaping, driveway, fencing, demolish etc might be the optional or say selections. I got a question is can I ask another trader finish those job instead of the builder if I can find a cheaper one?

For example: demolish allowance is 15K in the building contract. after contract starts, if the builder quote me the demolish fee is actually 14K, but I found some traders quote me saying 10K, can I ask the builder to use the 10K quote trader to do the demolishing, then at the end, the builder shall refund me 5K back as for this specific item, am I right?:p

Cheers

Im not sure where you are coming from with this one, your contract will bind you to the work involved, anything outside of this is up for negotiation as to who will perform it and at what price.

If you sign a lump sum contract your builder has the obligation to build what is asked for. He wouldnt charge you any more if he made a mistake and ordered too many bricks and he wouldnt give you a discount if he managed to get trades cheaper than his original price.

Chomp
 
Chomp,

I think he's suggesting he might want the trades treated like PC items where you make an allowance for them, but substitute actual rates when they are achieved. Obviously I don't see that as working. You can't have a contract which holds the builder to a capped price on one hand but allows you to cut and paste elements willy nilly to reduce costs on the other. You take the good with the bad and hold the builder to his fixed price. He wins on some and loses on others. If he's good then he knows what he's in for and has quoted accordingly.

I'm in the process of tendering my townhouse build right now too. I was also concerned about contract variations so I've engaged a third party who operate in Sydney to do the full specification, tender and selection process for me. Very reasonable for $2500 given its a $1.2M build cost. I can't comment on their performance as yet but early indications are good. They're called The Site Foreman if you're interested, and there may be other mobs like this that operate out of Melbourne too if you want a professional to do the contract up for you and protect your interests.

And, before anyone asks, you get to specify whoever you want to be included in the tender process. There's no jobs for the boys going on. They know who they're working for.

Cheers,
Michael
 
Chomp,

I think he's suggesting he might want the trades treated like PC items where you make an allowance for them, but substitute actual rates when they are achieved. Obviously I don't see that as working. You can't have a contract which holds the builder to a capped price on one hand but allows you to cut and paste elements willy nilly to reduce costs on the other. You take the good with the bad and hold the builder to his fixed price. He wins on some and loses on others. If he's good then he knows what he's in for and has quoted accordingly.

I'm in the process of tendering my townhouse build right now too. I was also concerned about contract variations so I've engaged a third party who operate in Sydney to do the full specification, tender and selection process for me. Very reasonable for $2500 given its a $1.2M build cost. I can't comment on their performance as yet but early indications are good. They're called The Site Foreman if you're interested, and there may be other mobs like this that operate out of Melbourne too if you want a professional to do the contract up for you and protect your interests.

And, before anyone asks, you get to specify whoever you want to be included in the tender process. There's no jobs for the boys going on. They know who they're working for.

Cheers,
Michael

Hi Michael,

That seems extemely cheap for a minimum of around 3 weeks work.

Chomp
 
Hi Michael,

That seems extemely cheap for a minimum of around 3 weeks work.

Chomp
Yeah it is. They make their money out of the project management and use the tender process as a bit of a loss leader. If the project financials stack up then I might try and squeeze them in to project manage it for me too now that I'm living in Brisbane. Also, a lot of it is form work for them now. They've done a lot of these so its really just cut and paste, bundle and tender. There will be some effort involved, but $2.5K for some admin is still pretty good.

I think project management was $50K odd or more. So they can afford the teaser rate on the tender process. But, at the end of the day, given its a water tight fixed price contract, I might just get the builder to do it and put a quantity surveyor on the payroll to sign off on the progressive payments.

Cheers,
Michael
 
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