Lump Sum General Contractors… Yes or No?
When contracting for construction utilizing the CMAR approach most owners ask themselves if agreeing to a lump sum for general conditions type cost is the best contracting method. While there is not one answer to all questions, there should be a discussion of the pros and cons associated with payment plans for general conditions type costs.
Where to Start…
A great place to start is analyzing the reasons for selecting a fixed amount for GCs in the first place. Are these types of costs difficult to review, in that there are many small expenses? Are some of these costs difficult to understand, such as payroll burden and insurance? Might some of these costs, such as supervision and management, be subjective? Are we trying to eliminate the need to evaluate subjectivity?
Secondly, if we are going to specify a fixed amount for GCs, we must define General Conditions. Defining anything labeled as “General” takes work and specificity in order to ensure understanding.
Because there is no one “correct” approach, the question should not be binary (yes or no). There is a third option, Not to Exceed (NTE). NTE can be a good option in that the sum cannot be higher than, but could be less than, and can also be reviewed or audited if needed.
Factors to Consider
Without writing a dissertation on each of these points, it is important to consider problems that might arise from the lump sum GC’s method, along with other relevant factors.
Sure, invoices take time to review, and GC’s costs come with a lot of invoices. However, in some cases, not all invoices must be reviewed. Having the ability to review, but not the requirement, may be helpful.
Getting the lowest GC’s bid is occasionally a good thing, but having the best CM supervision is almost always a good thing. How many projects have gone awry because of excessive supervision or overly qualified personnel? A low bid for GCs (at least 50% complete supervision and management) positively correlates to less supervision and less experienced personnel. Incentivizing less supervision and experience is not our goal, but it may be the result.
There can be a case for certain types of GC’s costs being subjective. Mostly, off-site vs. on-site persons as reimbursable. This can be mitigated by making the dividing line clear in your contract and including that contract in your RFP.
In addition to the possible misaligned goals of the owner and CM with low bid GCs, another result of an LS GC’s approach could be a CM shifting GC’s type costs to the Cost of Work, either in a subcontract or in self-performed work.
Transparency is Key
Lastly, what starts as fixed, doesn’t always remain fixed. Having full transparency to actual costs when a claim for additional GCs arises might be helpful.
When we have these discussions (which are quite frequent), we agree with the CM that the Lump Sum is not adjustable. This, however, does not mean that it is not auditable. Also, just because the CM (at the moment) might think that certain costs are not reimbursable doesn’t mean that they are not project-related records that are auditable by the Owner’s accountants.
Why Does this Matter?
You may ask, “Why do we care, as long as we are not being charged any more than we agreed to and if they aren’t going to bill us that cost?” There are many reasons, including:
Credits related to the reimbursable Cost of Work may be miscoded to the LS or not reimbursable job cost (accidentally, of course), thereby inflating the Cost of Work.
Costs that are to be apportioned to the lump sum and to the reimbursable cost may only be charged to the reimbursable cost (again, an oversight). Having access to all the cost records would make such errors easy to spot (Dumpsters for demo work vs. dumpsters for new construction trash, where demo work is being self-performed on a lump sum basis).
Costs that are charged to non-reimbursable may point to other errors, like consultants being billed as employees (at fixed labor rates), or rental equipment from third parties being charged as if it were owned by the CM.
Illegal expenditures may be hidden in LS or non-reimbursable job costs.
As you are contemplating the above, also contemplate that well over 50% of the time, a review of the project records designated by the CM to be LS or not reimbursable indicates that credits are owed to reimbursable Cost of Work that would have not been discovered otherwise.
