Speaker 1 (00:00):
<Silence>
Speaker 2 (00:09): Here we go General Contractors Baton Rouge!
Hey, welcome back to the K-Cup. I’m your host, Joe nor Tripp, and John Kelly is back in the saddle this week, and we have him in here for a special episode. We’re gonna be discussing three common types of construction contracts that you may run into, into the industry. So the three contracts we’re gonna talk about today, we hope to clarify these a little bit for y’all and you know, talk about some of the pros and cons of each of these. But they’re the negotiated contract cost plus contract and lump sum contract. So that’s what’s brewing this week on the KC Cup. So here we go. Let’s dive in, John. So we wanted to talk about these three types of you know, construction contracts and you know, negotiated contract. I like to call that kind of like the collaboration contract because it, it, it, it’s something that is a result of early collaboration between a project owner and a contractor. Maybe even a General Contractors Baton Rouge.
Speaker 2 (01:06):
The cost plus it’s a contract that kind of lends itself to you know, scope not really being clear or maybe a, a, you know, just a real basic set of plans that don’t really define everything in the project. And then lump sum, that’s pretty probably the most common contract that we see in construction, particularly in commercial and in the public space because it’s, you know, it’s, it’s the one that the owner really prefers because they know what the final cost is gonna be. And if you take it for that amount, it’s your job to, you know, perform the defined scope and get it done for that amount. So maybe you could give us kind of your rundown on, I know you have a lot more intimate knowledge of these, ’cause you’ve been in every one of these scenarios over the years. So tell us a little bit about these. Yeah,
Speaker 3 (01:50): Again, I Hope the General Contractors Baton Rouge stay tuned.
And I think today we’re gonna be talking about ’em in their simplest form, right? I mean, there’s, there’s things you can do, you know guaranteed maximums and all kind of stuff that you can add to these contracts and bonus structures and different stuff. But today we’re just gonna talk about ’em in their simplest form, just so hopefully, you know, some owners or whoever looking to, you know, get into contracts can understand the different types. Yeah. and so, you know, the negotiated contract is is, is the con is it’s a contract that we like, obviously we can sit down with an owner, we can sit down with an end user client, and we negotiate a price that works for, for both sides. Yeah. at the end of the day, they do know the number, they do have a number but it, it wasn’t a number that’s been through a bid process or, you know, just the bottom dollar amount.
Speaker 3 (02:37):
Yeah. It’s, it’s an owner saying, look, we’re willing to pay probably a little bit more than we would in a bid process to work with a contractor that we know is gonna give us a good job. Yeah. And then it also allows us to build that extra money into the bid to be able to provide the value that we feel like we bring. Yeah. so that’s what a negotiated contract looks like. We sit down at the table, it may be a number of times back and forth Yeah. And we try to find a happy spot for us and the end user to get their project done. Yeah. and then cost plus structure it’s, it’s actually taking the actual cost of a project and adding a percentage to it, which would essentially be the fee that we’re paid as as a general contractor(s) Baton Rouge.
Speaker 3 (03:26):
Yeah. and what that looks like is, you know, just recording the actual cost of the contract, you know, how many labor, how many labor hours was spent, how much material was bought you know, what kind of supervision went into the project, and then adding a percentage on top of that once that’s tallied. Yeah. and that’s, that’s cost plus. Yeah. And then the last one is lump sum. Yeah. And lump sum is basically you take a set of plans and you give ’em a hard dollar number and you say, look, we’re gonna build your project for this amount of money. Yeah. no matter what without some crazy changes, this is gonna be your number. Yeah. and, and you lock in. Yeah. So that’s, that’s the three forms of contracts. Now, like I said earlier, that’s in their simplest form, they Yeah. They, they have a lot of wiggle room and changes some
Speaker 2 (04:18): Still with us General Contractors Baton Rouge?
Nuance there. Yes. Yeah. So, well, let’s drill in on those a little bit. Okay. Let’s do it. Alright, let’s go ahead and start with negotiated contracts. Again, this is the one that I like to call, you know, the collaboration contract because usually negotiated as the result of the project owner, you know, being involved with the contractor at the earliest stages of a project, you know, maybe even as early as the concept, you know Yeah. Being brought out and definitely with the design and all that. So some of the pros of that type of contract for an owner would be, would be what?
Speaker 3 (04:52): Hey keep calling out those General Contractors Baton Rouge.
Yeah. Well, I mean, I think the pro in that, in that for the owner is that they’re handpicking the contractor and they know, you know, whether it’s based on reputation or other, another experience with ’em that they’re going to get a, they’re going to get a good job. To me that’s, that’s the, the whole point behind the negotiated contract is like, I, I want a good quality project and I know that I can hire this company and I can get it. So I think the biggest pro for the owner is you’re handpicking a contractor and you’re going to get what you’re expecting.
Speaker 2 (05:28):
Yeah, exactly. And that kind of gets back to the whole design thing. Like if the contractor’s involved early on in, in the process with the owner, they’re probably gonna get to, you know, participate in informing the design in in some manner. It, it, even if the design is complete, they’re gonna get to do a review of that probably prior to, you know, construction documents or whatever, and and be able to offer some insight there. So again, like what you’re saying is it may cost a little bit more in the long run, but it, it’s more of an insurance that the project owner’s gonna get the project that they really, you know, want on paper Yeah. They’re gonna end up with, with, with what they want because they’re not putting, you know, the dollar necessarily before the, the ideal outcome, I guess you could call it. Yeah. So what about some cons? What do you, what would you see as some, some downside from the owner’s perspective for, and maybe the contractor’s perspective too, on a project that’s, that’s gonna be a negotiated project.
Speaker 3 (06:33):
Yeah, so I mean, I think the con that you, we would call it a con, but you know, when you think about how we answered the pro, it, it may not necessarily be a con, and a con would just be that maybe they’re not getting the absolute cheapest price Yeah. For this project. Yeah. it’s costing a little more, there’s a little more money when it comes to the actual cost mm-hmm <affirmative>. But, but the cost of getting what, you know, you’re getting Yeah. Knowing that you’re getting that quality Yeah. You know, outweighs the little bit of savings that you may could get Yeah. If you went down to the, to the lower tier or low bid situation. Yeah. So while there is a little more money, I don’t know that we can really call it more cost because you, you are actually getting a value for that. Yeah. so I mean, I think
Speaker 2 (07:23):
It’s increased value, so really, you know, how do you relate that to Yes. The cost really.
Speaker 3 (07:29):
Yeah. And, and hard to put a
Speaker 2 (07:30):
Number on that
Speaker 3 (07:31):
Typically in a negotiated situation when you, when you leave the table, both parties are happy, like, we’re, we’re content with the money, they’re gonna pay us to do this project. Yeah. And they’re content, you know, with the price that, that they landed on to have to, you know, pay to get the project done. Yeah. So to me, that’s one of the tougher ones to really kind of point out pros and cons. But, you know, the things that we just mentioned are kind of where I would leave
Speaker 2 (07:56):
That. Yeah. One of the pros I was thinking of too is that with that negotiated contract, when you’re on the same page early on like that, and you may be participating in the design phase as well as a contractor, it kind of allows for faster start times. Like you might be able to go ahead and start doing things like demolition or site prep because you’re already on the same page at kind, you’re, you’ve kind of formed a team really right. Early on. It’s not this acrimonious, you know, relationship that sometimes can occur like in lump sum and, and cost plus where everyone’s on pins and needles about what the bottom dollar’s gonna be. It’s, you’re, you’re basically acting like team members so you can agree to, well, let’s go ahead and dive in and get this going and let’s, we can start with this. Right. And, and
Speaker 3 (08:45):
Well too, even just the project, like, you know, kind of got my brain going another direction, but even just getting the project started Yeah. In a, in a negotiated contract you know, you’re not waiting through that loan bid process Yeah. Where, you know, maybe you go bid a contract, you’re like, wow, they’re too high, so you go bid somebody else, and Yeah. Everybody’s coming up with the same numbers and it’s more than you wanted to pay or whatever. You know, that negotiated process, you kind of just lock in on somebody that you know and you trust. Yeah. You work through the numbers as quick as possible, and then you go to work. So in a negotiated contract, you could probably get your project or, or you would likely get your project to construction quicker than
Speaker 2 (09:27):
Yeah, I would think
Speaker 3 (09:27):
So than the other process.
Speaker 2 (09:28):
Yeah, for sure. All right. Well that sounds good. I mean, that makes negotiated contracts look pretty attractive from, you know, definitely from the contractor side, I think. And and I would think there’s some pluses there for the project owners too. Yeah,
Speaker 3 (09:42):
Definitely.
Speaker 2 (09:43):
So let’s go ahead and talk about the second type of contract and that being cost plus, we know that cost plus is probably, you know, it’s typically where the actual construction costs are gonna be covered, you know, material and labor, and then the contractor’s gonna negotiate either a percentage, you know, tacked onto all that cost or, you know, I guess you could even negotiate like a, a flat fee or something. I don’t know. Right. I, I, hopefully you’re gonna clarify that for us a little bit, <laugh>, but it’s, it’s really ideal when you just, there’s a lot of variables you just don’t have a clear picture on, on all the, you know, the details of the project, so Right. Tell us a little bit about the pros and then we’ll get into some cons of it too.
Speaker 3 (10:27):
Yeah. So co cost plus is a little bit it’s a little bit difficult for us. I mean, we’re largely a management company. We don’t have we don’t have a lot of guys out there hanging the sheet rock or standing up the studs or anything like that. Yeah. so with us it’s, when we’re talking about cost plus here, a lot of times it’s kind of a hybrid model almost. Yeah. It’s like we’re getting we’re getting hard dollar numbers from a lot of our subs Yeah. And within we’re, we’re putting a, a cost on top of that Yeah. With the owner or for the owner. Yeah. So it’s not as, as clear cut as just tracking hours tracking material. It just gets a lot harder for us to be, you know, be with a, a subcontractor tracking their hours and their time and their material.
Speaker 3 (11:16):
Yeah. So the hybrid model that we kind of do is, you know, somewhat cost plus we don’t do a ton of that. Yeah. But but that would be the way that, that we do that. I think, and also, like you mentioned, it’s used a lot of times in a situation where you don’t really know to the extent of what something’s going to take. I mean, we typically would try to throw out a budget number, like it’s gonna take us four weeks, but yeah. You know, just work with us and we would do it that way. Yeah. so that’s, that’s where we would use it, but very, really kind of uncommon for us. But
Speaker 2 (11:54):
Sounds like it would complicate like pay apps, submit pay apps and invoicing and things
Speaker 3 (11:59):
Like that. Yeah. I mean, and when we do do it, you know, obviously any kind of sub you know, sub invoices, material invoices, you know, our time here, whatever services we’re providing as a management company Yeah. We, we obviously have all those invoices on the back of the payout Yeah. To show, you know, what exactly we’re billing for. Yes. but anyway, I’m not really answering your question. You asked me the pros and cons, and I’m trying to tell you how we have used it here some. Sure. But I mean, I think, I think the pros, the pros for it is the owner is getting the actual cost of the contract or the cost of the project. Yeah. You know, plus the percentage that the that the general contractor Yeah. Puts out there and typically they, they’ve agreed to that amount, so they’re, they’re content knowing that it’s going to be 10% or 15% or whatever it is.
Speaker 3 (12:50):
Yeah. So they are getting the actual cost plus that we’ll call it a management fee Yeah. Plus that management fee from the general contractor. Mm-Hmm <affirmative>. And then, you know, I guess the con the con in my mind is, well, one, you know, you have to be careful. Are are people dragging this out? Are they, you know, are they taking a lot longer than they should? If you’re not real familiar Yes. With the processes. Yes. Then as an owner, you don’t really know if it’s should take ’em that long. Yeah. Now, in our case, obviously we, we consider ourself, you know, high integrity and we’re, we’re never gonna let a situation like that happen. Yeah. But you hear about it all the time. Yes. So that would be a con is, is an honor not knowing how long something should take. Yeah. And, and allowing, you know, allowing somebody to drag it out and, and take it a lot longer than, than really need be. Again, I don’t think, I mean, we don’t use a lot of this, we don’t do a lot of cost plus in this sense. Yeah. but I think that would be one con that, you know, that you could consider for sure.
Speaker 2 (13:58):
Yeah. I think the flexibility thing with design would be a, a plus because if you’re disagreeing to pay a, a percentage over whatever something costs you, I, I would believe the project owner would feel more free about making changes on the fly. You know, they see, as they see the project come together, they might say, you know, we need to add this over here. Yeah. Or maybe, like you, you discussed earlier, we were talking about it and you said that not only that, but maybe you value engineer something as it’s starting to take shape and you realize, look, we could save some money here by doing, you know, right. A instead of B or whatever. Yeah.
Speaker 3 (14:37):
I think it goes both ways at that point, you know, and that is a good, that is a, you know, an obvious pro or cost plus is, you know, if you’re, if you’re ahead of schedule and you’re beating your numbers and you wanna do nicer floors Yeah. And you wanna do nicer cabinets or nicer doors or whatever, you know, you can change on the fly. Look, yeah. We’re ahead of budget, we’re doing upgrade, we’re doing really good, let’s upgrade some things here. Yeah. And then you could do that the opposite direction too. You could say, look, we’ve spent a little more than we wanted to spend in the front end. Yeah. Let’s lower our floors a little bit, or let’s, you know, let’s change our trim package or whatever. Exactly. And try to reduce the cost. So that, that is a great pro, actually of, of, of a cost plus. Yeah. Is you, you have some flexibility to kind of move in and out because you’re not locked in Yeah. As you would be on a negotiated or, or a lump sum.
Speaker 2 (15:26):
Yeah. On the con side, I would think on cost plus, it would take a lot more owner involvement to, you know, if, if they’re not comfortable with the contractor, don’t have a good relationship, I would think they’d want to be really like, on top of the money, you know? Yeah. You know, looking at the invoices, looking at the payouts very closely like you were saying, monitoring how long certain things are taking, stuff like that. So it’s one of the more owner involved forms of contract. Right. I would say. So that would be, you know, might be a big con for some. Yeah.
Speaker 3 (16:00):
And I think, I mean, cost plus is gonna be something that’s really used when you’ve, you’ve had multiple jobs with somebody. You’ve done a, you know, you’ve done a lot of
Speaker 2 (16:07):
Work with, they trust you and they say, just go handle it. They’re
Speaker 3 (16:10):
Gonna be very comfortable. Yeah. And I guess another pro two to that is just you could literally start that tomorrow. Yeah. Like, we don’t have to go look through the plans, we don’t have to go figure all this out. Yeah. Like cost plus, like, let’s do it. You know what I mean? Yeah. Yeah. And even in those instances, we still try to provide budget, like I mentioned earlier. So it, it’s not like, let’s start tomorrow, but but you technically could, you know? Yeah. So,
Speaker 2 (16:38):
Cool. All right. So that’s pretty good coverage of cost plus. So let’s get into the last one of the three, the lump sum contract. This is a, you know, this is probably the most common contract you’re gonna see in the contracting world in construction, particularly in commercial construction. If you’re in the public bid market. Basically lump sum is, is what you’re gonna end up with for a contract. So let’s go ahead and, and dive in. I guess let’s talk about some pros of that, you know, you would see from lump sum.
Speaker 3 (17:10):
Yeah. I mean, lump sum the obvious pro for that is, you know, the owner knows exactly what they’re gonna pay in the beginning. Yeah. You know, barring any major changes Yeah. Or unforeseen condition. And that’s really what they wanna know. Like they, they, most people feel comfortable going into that because they already know exactly what they’re gonna spend
Speaker 2 (17:30):
X amount of dollars
Speaker 3 (17:32):
Yeah. And, and that makes ’em happy. You know, they, they just feel good about it. Yeah. you know, obviously in our world, there’s a few different scenarios for lump sum contracts. I mean, we do some public bid stuff, so lump sum is, you know, you’re given a number in the public bid, you’re given a number that you’re gonna do the project for. Yeah. But then in the public bid world, you got some very tight, very tight margins that you gotta compete with. So Yeah. You really kind of gotta, you know, get down there pretty low. Yes. and then we have the lump sum in, you know, in the private side of things where it’s the same scenario. It’s the same scenario, but in the public setting, they have to go with the lower bid. Yeah. And the private setting, they technically can choose whoever they want.
Speaker 3 (18:19):
Yeah. so as a contractor, you have to weigh, you know, what that project means to you, you know, how tight are you willing to take it? Yeah. Typically, you’re not gonna take those projects as tight as you would like a public bid. Yeah. and just hope that if you’re not low, you know, they decide to use you based on the value that you get. I know a lot of times it comes with the interviews and different things Yeah. And that, in that private bid lump sum bid. Sure. And what they’re wanting to do is they still wanna know their number, but they wanna have options. You know what I mean? Yeah. so the lump the pro for any of those situations is that they know the number, they, they know what they’re, you know, what they final number is going to be.
Speaker 2 (19:02):
Yeah, for sure. I would think a a con that comes to my mind is that, you know, when a, a lump sum contract is taken at the, at the, you know, lowest possible number then that contractor really is being incentivized to make sure it happens for that number. So that could lead to, you know I, I think what they call it is, is schedule compression or shrinkage. But it’s where you start really like cutting corners to get stuff done and you know, you might be switching out some materials and, you know, and all kinds of different things could happen in that scenario where a contractor’s trying to make sure they can get it, get it done for, you know, under that. Right. Whatever that lump sum amount is. So there’s a little bit of that right there. And of course, that’s also the other side of that con is that it would require a lot of more involvement on the owner or architect’s, you know, part to manage all that kind of thing. So
Speaker 3 (20:05):
Yeah, I agree. I think that’s the biggest con with, with, with the lump sum is, you know, you know, the owner knows what the price is, but there’s no guarantee exactly what you’re going to get, you know, depending on the contractor who you’re working with. Yeah. Because cheaper’s not always better. I mean, sometimes that’s right to make it happen for that number, you may not be able to do some of the things that would probably give you a better product for sure. So definitely I see that as being the, you know, the major con with the lump sum number. Yeah.
Speaker 2 (20:36):
Cool. So any closing thoughts on any of those, those three types of contracts?
Speaker 3 (20:40):
No. I mean, hopefully hopefully, you know, we’re able to explain some, a few different contract methods and kind of how we use them. Yeah. You know, hopefully I didn’t muddy up the water too much on the cost plus, I mean, we do some cost plus and it’s, it’s just not as clear as, as man hours material percentage here. You know, it’s, it’s, it’s,
Speaker 2 (21:02):
It’s a lot of nuance in there. Yeah.
Speaker 3 (21:04):
There’s a lot of nuance in, in our cost plus structure. Yeah. but we, we do use all three of ’em. Hopefully we gave a clear example of, of how these things work and hopefully, hopefully they learn something from it.
Speaker 2 (21:16):
Yeah. So hopefully that helped clear up the contract types we got negotiated, which is a contract that happens through early collaboration between the project owner and the contractor. We got cost plus, which is something where if the scope’s not really clearly defined or the plans are very basic and there’s a lot more detail that you know, is gonna take place in the, in the plan, but just isn’t on paper, you, you may want to do cost plus and then you have lump sum, which is really the most common contract that we see in commercial construction, particularly in the public bid market. So hopefully we clarified those three, kind of give you a definition of each the situations where they would be useful and what some of the pros and cons are with each of those. ’cause They definitely all have pluses and minuses associated with them. Right. Like most things so <laugh>. But hey, we appreciate you coming back to the K-Cup. We’re glad to see you here. Come back next week, we’ll have another great show for you and just we’ll see you when you come back. Have a great week. Thanks.
Speaker 3 (22:27):
Bye bye. See ya.
Speaker 2 (22:30):
See ya.