Back to my office space. Now that I had signed a lease, I needed to work on choosing a general contractor. As with everything else, I had no experience with construction, and didn’t even know what a general contractor actually did. Thanks to Google and my leasing agent, I think I was able to make a prudent decision on arranging my leasehold improvements.
As I’ve mentioned previously, my leasing agent brought in the same 2 general contractors, that I had used previously, to provide an estimate for tenant improvements. Originally, I thought I had to use my landlord’s personal contractor as a contingency for the tenant improvement allowance, and that these estimates were just for the purposes of negotiating my lease. However, the landlord actually let me use my own general contractor, which I hear should be cheaper because the landlord’s contractor has no competitive incentive to drive prices down.
Both contractor’s came within 5% of each other with their estimates. However, the two estimates were not quite the same.
This group was the cheaper of the two. This company was based in San Jose and Reno since 1988, with an annual volume of $1 to $3 million. The estimator was a project manager, who would ultimately oversee consturction if I chose to hire this company. He was prompt and professional, but not overtly personable.
This contractor came back with a higher price tag. The company was based in Redwood City, which is 20 miles from San Jose. This group had been in business for 21 years, with an annual volume of over $5 million. The actual owner came to provide the estimate. He was very friendly, thorough, and listened carefully to my construction needs.
Neither of these companies were strictly medical office contractors, but my leasing agent told me that they had extensive experience in the industry.
Both contractors’ estimated costs included detailed itemizations, of which I performed a head to head comparison on a separate piece of paper. These components included demolition, cabinetry, doors and frames, drywall, flooring, insulation, painting, plumbing, electrical, HVAC reconfiguration, fire sprinklers, general conditions, and contractor overhead and profit.
General conditions are costs that are not specifically related to materials or labor. Such costs include supervision, project management, other administrative tasks, temporary barricades of the premises, and clean-up after completion of construction. I thought that supervision and project management were the same thing, but when I asked the contractors, they told me that supervision was the actual onsite presence of a supervisor who oversees construction, and that project management was more of the administrative planning and allocation of resources to the project. Either way, the general conditions costs were about 10 to 15% of the entire estimate.
Contractor A charged 8% for contractor overhead and profit, and contractor B charged 7.5%. Both contractors charged 1% for contractor insurance.
Although contractor A came back with a lower total estimate, when I performed the head to head comparison of each itemized cost, I realized that contractor A actually had left out a few items that contractor B had included in the estimate. For example, one big thing that was missing was the fire sprinkler system, which contractor B estimated to be $4,500. In addition, contractor B’s itemizations were broken down to much more detailed components. Overall, contractor B’s general conditions estimates were higher, but all other components were similar. Contractor A charged significantly more for plumbing and flooring, but contractor B charged a little more for all other areas.
So, although contractor A came back with a lower total estimate, I thought that contractor B’s estimate was more complete and less fraught with potential hidden costs. So, don’t let a lower bottom line fool you into going with one company. You have to scrutinize why one company is cheaper than the other. On the flip side, don’t assume that the more expensive contractor is more honest and more complete.
Remember I told you that everything in the commercial real estate world is negotiable? Same goes with your contractor. These estimates are not final offers. You can always try to drive the price down. Of course, you don’t want to drive the price down so much that your contractors will start using cheap material and unreliable labor.
At this point, I was leaning toward going with contractor B. However, I chose to call each contractor to try to negotiate the price down, as well as to ask a few other questions. I told each contractor that I wanted to keep my budget under a certain dollar figure, which would amount to a 7 to 10% discount. I didn’t try to haggle too much. I just told them how much I wanted to spend for my leasehold improvments, and asked them to see what they could do. Thankfully, contractors are dying for business these days, and they are quite open to negotiations. Contractor B ended up giving me a 4% discount and contractor A came back with the same price, but included all the missing items this time. With these revised estimates, contractor B was going to cost only $1,000 more than contractor A.
Now, let’s go over the other questions I asked these contractors.
First, let me clarify what general contractors do. Originally, I thought that the general contractor performed all the construction. That’s actually not true. The general contractor might perform some parts of the construction directly, but most things are outsourced to subcontractors. So, you want to ask what will be done by subcontractors and what will be done in-house. It’s probably a good idea to check the general contractor’s references, but if you want to be really thorough, you could also ask for references for all their subcontractors as well.
The estimator will not necessarily be the project manager. So, you should find out exactly who the project manager will be, and try to speak with him or her. You also want to ask how often you will be in communication with the project manager while construction is ongoing.
Also ask about how reliably the project would be completed by the target date. The premises’ infrastructure cannot be closed until a building permit is obtained. However, demolition and certain parts of construction can be peformed while a building permit is pending. You want to ask if the contractor would begin these portions with a pending permit.
I also asked about the warranty. Both companies would provide a 1 year warranty on construction.
A couple things I didn’t ask, but you might want to ask, is their business history, including prior bankruptcies. Also consider asking how many ongoing projects the contractor currently has in order to gauge how easy it would be for them to devote time to your project. You could also ask to conduct site visits on previously completed projects, or you could just ask to see pictures.
I ended up going with contractor B. Although they were $1,000 more expensive, I felt more comfortable with the people. First off, it was very nice to see the owner himself come out to provide the estimate, instead of a representative. In addition, both the owner and the project manager seemed like good people, whom I could trust. Also, even though contractor A came back with a more complete estimate, I still didn’t like the fact that they had omitted a few items on the original estimate. I still couldn’t be 100% sure that they weren’t going to try to pull another fast one on me. I’m sure these omissions could’ve been honest mistakes, but I didn’t want to chance it.
Having gone through this process, I can understand how a patient feels when selecting a doctor. I still don’t know exactly what a good general contractor is. I pretty much made my decision on how friendly the contractor was, and how much I thought I could trust them. I’m sure that patients do the same thing when evaluating a physician. Patients have no idea who’s a competent surgeon or clinician. They make their judgments mainly based on the doctor’s bedside manner. And you know what, I don’t think that’s actually a bad way to do it. If a doctor seems trustworthy, you will know that he or she will act in your best interest, and will try his or her best to provide the proper care.