We asked our lead instructor Sid this question and here was his response:
Well, that question comes up for the last 30 years. The very first thing is present yourself as a professional, to start with. People want to deal with professional people. If they are willing to put in a lot of money, they want to know that the person they're dealing with presents an image of self-confidence, presents an image of being a professional, shows up at the right time. So it starts off with how we present ourselves in the first place when we meet the customer.
But then we get into a more challenging situation here, and in the market we talk about pre-qualifying them. You have to remember that the customers also pre-qualifying us, whether they want to work with us or not, but at the same time we're also pre-qualifying them. We want make sure we want to work with them. And not only would we become accustomed to knowing which is best for both of us is to spend some time together, and that generally it happens over asking the question, "Well, what is it that you're looking for? What is it that you want done?"
And as simple as that would sound, oftentimes we have customers that don't know what they want. They have a conception of an addition or building a house, but have they taken the time to actually spend and having it designed or putting their thoughts down on paper? So we have to realize that if we're dealing with a customer that already has plans and owns the property, then we're dealing with someone who is pretty much on their way to getting prices.
But that comes to the next question…
Are they wanting prices to shop your price around with other people, or do they really want to deal with you because they know of your background or they have some way of knowing who you are? If they just want to shop around, one of the things that we have to determine is do they already have a set of plans inspect and do they know about what they're going to be able to pay?
How do we determine how to bid this job form?
And so if we have it down on paper, we have a document that we can use to determine what the price is going to be. And the very first question they'll throw out at you is, "Okay, here's my set of plans." Mind you, this is the first time that you're sitting down with them and they're saying, "Well, how much will it cost to build this house?" And yeah, you don't know the design, you don't know the specs, you don't know what their preferences are. And so what we do is we can come with what we call the "ballpark quote."
I don't like getting ballpark quotes if I can avoid it. Ballpark quotes can be too wide of a range. It can range from $150 a square foot to $250 a square foot, and sometimes even more than that. So what I want to try to do is take an average look on their plans and their specs, and I can determine the approximate value per square foot the build is. But now let's say they say, "Well, we realize that we're going to spend $200, $300 thousand, maybe a million dollars to build this house." They already know what the target price is.
Well, then we come to the major issue here, is... we need to come up with some way to quote the job for them. And I call that a "pre-construction agreement." And the pre-construction agreement helps us to focus on getting them their numbers.
How is a pre-construction deposit determined?
Well, first of all, let's talk about the pre-construction agreement. The pre-construction agreement is an agreement for myself as a general contractor to come up with a realistic price of building this house. And in order for me to do that, it's going to cost a lot of time and a lot of money. And I've been through this with other contractors over the years. It's a common practice of mine to ask in the class, "How many people in here have spent a lot of time estimating a job, spending weeks putting numbers together and then to go to the customer and then customer never calls you back?" And a tremendous amount of hands go up. And I asked them the question, "Well, how much did you make in doing that estimate form?" And of course the answer's always zero. They didn't charge him anything for it.
So what I have learned from other contractors…
Mainly in other states that have been doing this for a long time, and some of our people who've taken our class and they are starting to do it as well, if they do a pre-construction agreement and that says, "Mr and Mrs Jones, our policy, in order to give you a price that doesn't fluctuate, it's going to take the effort of a lot of people and a lot of time to put those numbers together. But here's one thing that our company can offer to you. And that is that when we give you our quote for doing this job, if you've signed that estimate within 30 days, or that quote in 30 days, that price will not change and that's what we’ll build your house at. The price will not change. I will not come back to you later, halfway through the project and say, 'By the way, there's been a price increase on this or that.' We don't do that."
The whole idea is to eliminate that questionable character of a contractor after the project started and said, "Oops, I missed something." We won't do that. In order for me to do that, I have you look over this agreement and there's a cost for me to come up with your cost, and that cost generally ranges from 1% to 5%. Now, let's put that in realistic numbers. Let's say, for example, the house is going to cost $1 million. I'm going to ask 2%. Well, what's 2% of $1 million? $20,000. Or I could ask 1%, which would be $10,000. The whole idea is to be compensated for myself and everybody involved in this project to put a number together for this customer. For the sake of simplicity, let's use $10,000, 1% of the project.
What do I do with that money?
One of the things I do is I use that money to compensate my subcontractors and suppliers for their efforts to give me a quick turnaround time on their estimate on this project. Dealing with the subs that idea with, and the suppliers I deal with, I can usually put together a final dollar package under two weeks, from one week, but no longer than two weeks. So what I do is I go to my lumber supplier, I have a salesperson, and I give that salesperson a certain amount of money to get my estimate done quickly. And sometimes that means that my plans go on top of other people's plans to get an estimate for it. And I do that with all my subs. I pay my subs to give me an estimate.
They don't ask for it. We offer them an incentive to get the estimate turned around quickly and it can range for electricians. It might be $150 to $200. Same with the plumber. Same with the mechanical guys, because oftentimes I need a mechanical plan drawn also. So what I'm doing is I'm compensating them a couple of hundred bucks a piece and that goes all the way down to almost every supplier and to every subcontractor on the job, including the excavating guy, the basement excavating guy, the concrete guys for the driveway. Everybody gets something for estimating this package, but mainly what they're doing is giving me a quick turnaround time in that process. And I also get compensated for my time.
Is he going to use the full $10,000? Absolutely not. There'll be money left over. So what I can then do is I can now go back to the customer with a contract, with the real actual price of doing that job, and give them a final number.
If they sign the contract within 30 days, that price will not change.
My subcontractors and my suppliers, no, they've got to remain good on those prices during the term of the contract. Once in a rare while something will increase. Normally there is money enough to cover those costs should there be a price increase, but it's not going to be excessive. So that's one of the reasons why we do a pre-construction agreement.
We now have a realistic price for doing the job and we've now received the deposit to put the number together. A polite way of saying this, and it's a common term used in the construction industry, I don't treat my subcontractors and suppliers as bid horse. I just don't say, "Give me a number," and then go and shop it around and use somebody else. And that's why we have good subs and people I can go to, to get my numbers right away, and it's all about running a business properly. Their time is valuable. My time is valuable. If you want my services or our services, then you need to compensate us for providing those professional services.