Historically a lot of work goes into a residential construction project before a contract is signed and any payments begin. For some businesses this can turn into a costly gamble where hours are sunk into a custom estimate for a client only to see the project fizzle out. In a business where time really means money you can take steps to ensure you protect your most valuable asset and start using preconstruction agreements to ensure you get paid for your estimates.
What are preconstruction service agreements?
Preconstruction service agreements are formal contracts between contractors and their clients detailing the services contractors will perform for clients and what the associated costs will be. Like any service agreement, this agreement helps create transparency between parties.
To help understand the benefits home builders and remodelers can see and the best practices when implementing this agreements, we connected with CoConstruct partner Todd Dawalt, owner of The Construction Leading Edge and an Executive Coach for contractors. The following are excerpts from a conversation with Todd Dawalt on this subject.
What are the biggest benefits builders and remodelers get out of using preconstruction services agreements?
Increased bottom line
Many of the worst profit bleeds builders and remodelers deal with on their projects can be traced back to “free estimates.” These profit bleeds include rework, doing work you aren’t paid for, schedule overruns, lost productivity, and more. The cause of these problems are often a result of scope gaps, allowances, unforeseen conditions, and other items missed during the estimating process.
By using these agreements, you can take the time to thoroughly plan and estimate your projects to try to avoid these costly issues that are the root cause of your profit bleeds.
More time for you
There is no better way to filter out time wasters, price checkers, tire kickers, and unqualified leads than to have them write a check. Unfortunately, a builder may invest 10, 20, or 30+ hours preparing an estimate, only to find out the lead wasn’t qualified.
Using a preconstruction service agreement in your sales process can cut that down to less than an hour. This will free you up to spend more time with your qualified leads and paying customers. If the answer is ultimately going to be “No”, you want to spend as little effort and time as possible to get there, right?
What's typically included in a preconstruction service agreement?
There are five parts of a solid preconstruction services agreement:
- Deliverables: This is a checklist of the services you’ll provide as part of the agreement, which can include needs assessment, design, selections, and preconstruction and estimating services.
- Timeframe: When should the customer expect to receive the deliverables?
- Compensation: What is their investment?
- Qualifications and Exclusions: Details regarding the scope of work you’re performing.
- Legal stuff: You’ll want to include some basic language about indemnification, dispute resolution, and termination.
How should home builders and remodelers charge for preconstruction service agreements?
I recommend charging a lump sum fee and collecting at least 50% upon signing the agreement. This pushes all the negotiation on price to the front of the process, before you do any work, and avoids haggling over T&M invoices and hourly rates AFTER you’ve done the work.
If you have to, or are more comfortable working on an hourly rate, I suggest setting a budget for the effort, collecting a retainer up front, and getting approval from the client before exceeding the budget amount.
Is there a standard preconstruction service agreement template or should all residential construction companies find what works for their business?
Most home builders and remodelers who have decided to utilize preconstruction service agreements have developed their own basic agreement template, and continue to tweak their process, pricing, and documents through trial and error on their own.
Many have fine-tuned their agreement by sharing ideas and best practices with other like-minded builders and remodelers who use CoConstruct in groups like The Builder Mastermind Group or the CoConstruct Community.
Ready to get started and paid for your estimates? Then learn the three questions you can ask your prospects so they'll want to pay for an estimate.