Avoiding construction project cost overruns

June 1, 2010
In current day construction and lending — when buildings are appraised less than they cost to build — it becomes even more important to build at the price quoted in your signed general contractor contract ...

For more on this topic, go to www.dentaleconomics.com and search using the following key words: dental office design, dental office construction, Dr. Jeff Carter, Pat Carter.

In current day construction and lending — when buildings are appraised less than they cost to build — it becomes even more important to build at the price quoted in your signed general contractor contract and limit cost expansion through change orders during construction. We have challenged the assumption that 15% to 25% cost overruns are acceptable as a “normal” part of the construction process. The fact that lenders recommend a 20% contingency in their lending terms is testament to this typical assumption for projects — dentistry included.

Project cost overruns are a top concern expressed to us by dentists when considering a new project. Therefore, this deserves our attention. We offer you candid observations for your consideration if you really want to limit the expansion of your general contractor’s quoted cost of construction:

1 Understand the difference between an estimate and a price. When you submit a floor plan to a general contractor (GC) for pricing, the cost response is an estimate — not a price. You set yourself up if you assume an estimate based on your floor plan qualifies as a legitimate cost of construction for your project. Understand, GCs working with limited information give you as inexpensive a number as reasonable to keep you interested in their involvement in your project, knowing they aren’t obligated to price anything the floor plan doesn’t describe. Projects priced from a minimal set of drawings that then proceed into construction are doomed to expand with cost overruns.

2 A GC can effectively price only what is specified. If it isn’t in your drawing documentation, then it either isn’t in the quoted price or it becomes a cost assumption — an allowance. That’s it. You can’t hold your contractor to an overall quoted construction price for items that are omitted (not shown) or items for which “assumptions” are made. You can argue that a GC experienced in “dental” will know what to price, but our experience has shown that allowances never cover the cost of what you finally select for your project. Both omissions and allowances are legitimate triggers for change orders during construction. And change orders are adds to your project’s originally “quoted” construction price.

3 Make your design decisions prior to pricing. The more you leave to the GC’s pricing discretion, the greater your chance for cost overruns. This is something you can avoid. To avoid allowances, establish a project timeline with enough time for you to make the decisions necessary. Include interior finish materials such as ceiling, flooring, wall materials, hardware, wood finishes, laminate materials, etc., for pricing by the GC. The goal is to describe the design intent, including selections that are specifically “designed” for your project, so when priced they are included in the cost of your project, rather than as “allowance assumptions.”

4 More drawings doesn’t mean more cost. “Won’t my project cost more if I have a lot of drawings?” was a recent comment from a dentist. We were surprised by this perception, but it invites an important point of clarification. It is true, the more complicated the design of a space, the more detailing (more drawings) will be required to describe it effectively. However, we are promoting a “good set of drawings” for effective pricing, not an “overdesigned project and an expansive set of drawings.” Our assumption is your design team is presenting and designing concepts that fall within the budget established for your project.

Effective drawings should describe that design intent — how it works, how it looks, how it is detailed per the agreed budget with few decisions, or questions, left to the GC. The fewer cost assumptions required by the GC, the more realistic the price quoted for your project at the beginning of construction ... with less potential for adds during construction.

Most GCs prefer a “good set of drawings” from which to price a project. It means they can avoid the conflicts inherent with a project loaded in cost assumptions, and a dentist assuming the originally quoted price will be the final cost of construction for his or her project.

However, when asked to price and build from minimal drawings, your GC will do so, because he or she wants the project and knows that every “discovery” made during construction that is not included in the drawings will be a legitimate cost ADD back to you. This is a cost overrun scenario that is repeated over and over in the pricing and building of dental projects.

Next month: “The anatomy of a change order.”

Jeff Carter, DDS, and Pat Carter, IIDA, are owners of PDG- Practice Design Group. Located in Buda, Texas, PDG offers a full range of design and consulting services to dentists nationwide. For information, call (800) 511-7110 or visit www.practicedesigngroup.com.

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