How to Negotiate More Design/Build Contracts

Are you trying to move your company away from the “joys” of plan-and-spec work and earn more negotiated contracts? As a general contractor, Hedley Construction and Development, Inc.’s estimating and bidding strategy is to negotiate most of our construction work. We attempt to convince customers not to award contracts based on low price, but instead to negotiate exclusively with us. This requires concentrated effort and the identification of specific goals related to sales and marketing. It also requires working with mechanical contractors who understand the Design/Build method.

Our approach to negotiating with potential customers involves a five-step plan:

Step 1. Get on short bid lists (no more than three competitors) with new customers.

Step 2. Get awarded contracts based on low price, and then do a great job.

Step 3. Convert new and one-time customers into repeat customers.

Step 4. Convert repeat customers into loyal customers who only use us to build their projects.

Step 5. Negotiate every project with repeat and loyal customers.

Our company strives for 25% new customers every year, with the other 75% being repeat customers. Our strategy is to convert these repeat customers into loyal customers who only use our company to build their projects. Our biggest goal is to negotiate 90% of all of our contracts.

Do you have a customer contract strategy, with goals that are written down and tracked?

Know What Customers Want
As you seek to increase your number of Design/ Build contracts, you must determine what your potential customers want. Today, every customer wants and expects you to meet a fast schedule, provide quality craftsmanship, and be very competitive. These project requirements are the minimum required to just get on their bid lists. So, to convert a repeat customer into a negotiated loyal customer, you must provide more than what is expected.

Customers who are willing to negotiate a contract want more than the minimum services provided by most contractors. A short list of what they want includes less risk, no field problems, full service and value, no headaches or hassles, no cost overruns or change orders, an on-budget guarantee, a guaranteed completion date, the highest expertise and technical skills, and the best trained and most competent field supervision.

If you want to land more Design/Build contracts, the real questions to consider are:

• What “above and beyond” services do you offer that your customer will value enough to earn you the right to negotiate a Design/Build contract?

• Why should a building owner negotiate a contract with your company?

• If you don’t offer more, shouldn’t customers just ask you to bid the project?

Educate Your Low-bid Customers
Educate your bid customers about how the traditional plan-and-spec approach creates adversarial goals and roles between the building owner, general contractor, HVAC contractor, and subcontractors. When companies win projects based on providing the minimum per the project plans and specifications, based on the lowest price, and conflicting priorities, then challenges will occur. Lowbid companies protect their profit by maximizing their returns via change orders, providing manpower that best works for them, and not caring about overall project goals. Companies awarded contracts based solely on price face the pressures of pleasing several customers on numerous projects at the same time.

With a negotiated contract, the customer has the project based on getting full attention from the contractor, extra services they have committed to perform, and a goal to help make the project a success. This trust and contractual format binds the parties together with a common mission. This overcomes the low bid mentality and gets everyone working as a team.

In addition, the traditional lump sum bid contract places most of the responsibility on the building owner or developer to guarantee that the bid documents, plans, and specifications are perfect. The developer typically hires an architect who processes the plans through the city. Without any contractor input, the owner is on his own when problems, changes, or conflicts occur. The contractors are only contracted to build what’s on the plans and included in the specifications, no more or less. Interferences from the developer, such as field changes or poor plans, will require a cost increase and extension of the completion date.

Using a negotiated contract approach, the contractor assumes much of the developer’s liability and responsibility including some or all of the following: design accuracy, complete plans, scope of work, site conditions and requirements, contract management, quality of materials, overall budget, field conflicts, and schedule.

Sweeten the Deal with Contract Clauses
If you want to negotiate more Design/ Build projects, consider the following contract clauses that may entice a bid customer to negotiate with your company:

Guaranteed maximum price. Offer a guaranteed maximum price based on an agreed-upon scope of work. Work together to create the required scope of work for the project. Mutually develop a budget that works and is realistic. Guarantee that won’t exceed the budget and you have anticipated everything required to complete the project or your scope of work.

Fixed fee. Rather than hiding your profit from your customer, explain what it takes to operate your business, cover your overhead costs, and make a fair profit. Convince him or her that your markup percentages are fair and competitive. Then, offer a fixed overhead and profit fee for the project. A percentage fee gives the wrong impression — when costs increase, so does your profit. In customers’ eyes, this doesn’t give you an incentive to help them reach the project’s budget goals.

Open book. Tell your customer your books and financial job cost records are open for review. You will hide nothing and your customer can participate in the financial, purchasing, and estimating decisions as you arrive at the guaranteed maximum price. At the end of the project, offer to show your customer every dollar you spent. If the final costs exceed the guaranteed maximum cost, your company will be responsible for any overruns. If your final cost is under the estimated guaranteed cost, you’ll share the savings with your customer.

Savings clause. Offer a savings participation with your customer for every dollar you save under the guaranteed maximum cost and the final job cost. After you receive your fee, offer to split the savings on a certain percentage basis between your company and the customer.

Change orders. If the customer comes up with major changes for you during the project, a fair markup on change orders should be anticipated. Markup your changes in a negotiated contract at the same markup percentage as you used when calculating the guaranteed maximum price. Don’t charge more, as it gives the wrong impression that you want lots of changes.

Contingency. Offer to carry a contingency fund in your contract amount for the exclusive use of your customer. As field problems occur, this makes it easier to work out small extras by using this fund for unforeseen items that occur. At the project completion, refund any unused contingency to your customer.

Discounts. Offer trade and material supplier discounts to your customer. Use a contract clause that states that when discounts are available, you’ll inform the customer and ask for the necessary, timely funds to maximize the discount opportunities. These discounts will then accrue to your customer who made the funds available.

Pre-payment options. As an added enticement to negotiate, offer your customer an early pay or no retention discount. Suggest that if you’re paid within 10 days of the completed work, you’ll offer a 1 to 5% discount for quick progress payments.

Additionally, as you complete your scope of work, offer a 2 to 5% discount to not withhold the 10% standard retention from your final invoice for early payment in full.

Negotiating a Contract is a Privilege
When you earn a Design/Build contract, your customer has placed an extra level of trust in your ability to perform. The best way to develop trust is to have customer relationships based on several years of working together. The second best way to get a customer to negotiate with your company is to seek referrals from your good customers. Word of mouth and making loyal customer relationships a priority will ensure you’ll negotiate more contracts in the future.

George Hedley is the owner of Hedley Construction, Orange County, CA, and Hardhat Presentations. He is the author of the “The Business Success Blueprint Series,” now available in eight-workbook and audio CD sets. To receive a free copy of his book, “Everything Contractors Know About Making A Profit,” email George at [email protected]. Call 800/ 851-8553, or visit www.hardhatpresentations.com for additional information.