How to Negotiate with Your Contractor
Whether you own or lease, real estate is a huge expense for any business. If you are planning on remodeling your space, or building a new facility, the expenses can skyrocket. Quality construction costs money, but that’s no reason to throw away money by failing to plan properly or negotiate with your contractor. Negotiation is at the heart of debt collection, and so I’m fascinated by how negotiations differ from industry to industry. I was recently speaking with a good friend, who is also an architect, and he shared these tips for negotiating with your contractor.
There are a ton of talented, honest contractors out there. There are also a lot of shady people looking to make a quick buck. Your build out is too important to hire someone without checking references. Some of our advice for checking the credit of new clients applies to anyone with whom you’ll be working.
Get a Ballpark Estimate
One of the frustrations of purchasing or planning any big event or item is having people ask what your budget is, when you don’t know what a reasonable budget should be. It’s the same with construction. Consider having your architect do a simple one-page design that you can take to one contractor to get a ballpark estimate. This way you have a general idea of what the project is going to cost and if you have the necessary funds to move forward. To save time choose a contractor that you expect to get a full bid from later. So, make sure you check references before you reach out to get the ballpark estimate.
Be Specific (on most things)
Once you have a ballpark budget, and know that you can meet that budget, have the architect do the full plan. Your full plan should be tight on the specifications so that your expectations are clearly defined. While the general build-out of what you want has to be specified at this stage, you may not know exactly what plumbing fixtures, light fixtures, appliances and flooring you want. So instead of trying to specify these details, the plan can indicate that the owner will provide these items and the contractor will simply do the installation. Your contractor should be able to budget the labor and overhead without knowing exactly what items they are installing.
If you don’t do it this way, one contractor may assume $50 for a faucet and another might assume $200. The more of these unspecified items in the plans, the more chance there is for the bids to be very different from each other. Keep in mind, you may eventually choose to have your contractor purchase certain fixtures for you, as they often have discounts or access to wholesale prices.
The Rule of Three
You should send your plan out to three contractors. Preparing a bid takes a lot of time and effort, so many contractors will not bid on projects if there are too many competitors. Just so you know, contractors are like any other group of professionals, they talk to each other. The contractors in your area have a way of finding out who else was approached and is bidding.
Once you get the bids, you should create a spreadsheet and compare all the different categories, then look at pricing for each category. Your architect may be able to help you decide what the “categories” are. Beware, if one contractor is much lower in a category than the other two, it could be because of a mistake. Double check with the contractor to ensure that they didn’t leave something out.
A key term to negotiate that most people don’t think about is change orders. Every job is going to have change orders. For your own budget, you should have a contingency of 10% to 15% of the bid saved for changes. You don’t have to spend this, but don’t be surprised if you do. Ask the contractor to agree, as part of the bids, that change orders will be priced at the sub-contractors’ price plus maybe 15% for the general contractors management of the change order and then another 5% for the general contractors profit. This helps you in two ways. The 5% profit margin will motivate the contractor to minimize the number of change orders. In some situations, they won’t even bother to do the change order as the paperwork is more hassle than the money they make on it.
When you have your choice narrowed down to two contractors, you can do a final negotiation. You can call one or both up, say that their bids are extremely close, and you just want to find out if they have any wiggle room. You don’t have to tell them how much to cut the price. They’ll know where they might have room. You just need them to understand that they are not likely to get the job unless they come down in price.
Being experts at collections means we have a lot of experience with negotiations. As with any negotiation, it’s important that you view the negotiation with your contractor as a partnership, not a competition. You don’t want a resentful contractor doing your build out. Doing your research, listening, and being upfront in your needs and plans will all help you secure the best possible deal.
About The Author:
Dean Kaplan is Principal at The Kaplan Group. Dean's expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.