Remodeler's Exchange: To build or design-build, that is the question

In today’s remodeling market, establishing and working with design-build clients can be a difficult process. Professional Remodeler’s Tom Swartz talked to remodelers Bob Peterson and Sherry Schwab about their design-build model, and each offers tips that can make a design-build project successful. 

 

 

 

This month featuring:

Bob Peterson, CGR, CAPS
ABD Design/Build, Fort Collins, Colo.

ABD Design/Build is a renovation and design-build company that focuses on major renovations and updates, as well as minor repairs and cosmetic work. Besides Peterson, the firm employs seven full-time employees.

 

Sherry Schwab, CGR, CAPS
HCS Construction Services Co., Bellevue, Wash.

HCS Construction Services Company has more than 30 years of experience in remodeling and reconstruction and offers a comprehensive range of services. The firm currently has eight full-time employees.

 

 

 

Tom Swartz: Define what your design-build model looks like.

Bob Peterson: “What I’m calling design-build is a process in which once we’ve met with a customer and determined they’re actually a fit for our business model, then we control every facet of the project. We establish that we have a client-company relationship—from design through estimating through interior design through production. Even once in awhile, but not every job, we take it on through into furniture and window coverings.”

Sherry Schwab: “We are probably the opposite of Bob, in that we do not have an in-house designer in our employment. So technically I’d say we are not a design-build company. What we do rely on is our relationship with a variety of designers, and I will even add architects to that list. We meet with the client, and then we determine what it is that the client has a vision for and what their needs are; and then based on our ‘stable’ of relationships that we have, we will choose a designer then to meet with the client. So although we don’t have an in-house designer, we have that capability within our reach to use.”

Swartz: Can you expound on using independent designers and/or architects?

Schwab: “We will meet with the client, and we will determine their personality and their vision of what their project is that they have in mind. Based on our relationships and knowledge on the people we work with, we will choose a designer that we feel is going to have the best rapport with the client. That client and designer will meet, and we will be present at that meeting; that is for them to talk to one another and see if it’s a good fit, and then we go from there.”

Swartz: Can you talk about the use of in-house designers and whether you ever deal with independent designers and/or architects.

Peterson: “The answer to that question is rarely. We typically use our own staff designers and drafts people. We do not have an architect on staff. He is an AIBD approved designer.

We just don’t deviate from that too much because we totally believe, and we actually sell to our clients, the single point of accountability philosophy. If at any time once we start and build a relationship through the end of the project, if there’s an issue, they only have one phone number that they have to remember; and that’s our phone number. There’s never any finger pointing between designers. The disconnect of having an architect, interior designer and contractor—we eliminate that entirely.”

Swartz: Does the independent designer deal directly with the client?

Schwab: “[Say] our client basically is pleased with the designer, they developed a rapport, [and] they have the same vision. At that point, our client contracts directly with the designer. There is no markup from us for that. We leave the designer and the client to work together. Again, the designer is going to have their own contract, [but] we are involved in the process.

We know from the construction standpoint that we need to lend an ear occasionally as to what some of the selections are and what is doable. But again, I’m going to fall back on these relationships that we have developed with these designers. We consider them professionals. So if we’ve found that the client and the designer work well together, [and] they’re going to be happy, then we are able to concentrate on the construction. We know that with a good design, it’s going to make our production more efficient, [and] it’s going to make it more cost effective. We also feel that we’re doing a service for the client. Now remember, the client usually has come to us first, so we are already in the door. But by not charging the client that fee, we’ve been able to develop that concentration on the construction, which is the service that we offer, and that they are not actually paying a premium price for us just putting our markup on that. If we were to actually run the designer’s contract through us, we would have to do some kind of markup. So by allowing this process, we are able for the client to take charge and save some money there, and we are considered a construction specialist.”

Swartz: Do you have a design-build contract or agreement? Do you charge for it?

Peterson: “We do have a design agreement, [but] it’s not a true design-build. We commit no one to the build process until we get through the conceptual design stage. Our design agreement, yes, is a design agreement that is a profit center for ABD. We obviously have a markup in that. Again, once we get through the conceptual phase with the client, the result is a proposal to do the build portion of the project. It’s nonrefundable. It’s paying for professional services. It has nothing to do with the construction stage. We just do it that way because we feel like if a client comes to us first, we owe it to them to try to design something within a budget parameter that they give to us.”

Schwab: “By the client not paying us directly but contracting directly with the designer, we actually don’t waste our time or money. And actually by knowing their budget we think that we have encouraged honesty on their part. If a client goes in with a wish list, and the designer designs based on those wishes and the budget isn’t there, then it’s going to be a waste of time and money and it’s going to cost the client more down the road. I think that budget and honesty here is critical to this process for us.”

Swartz: How do you truly and honestly get the budget?

Schwab: “We try to establish that general basis—what is it [they] want to do, what’s their vision. Then you come up with basically what do they expect to pay for that, and you have a discussion with them. And you can tell in pretty short order whether their vision and their money are realistic or not. And you can go from there and start nailing it down.”

Swartz: Do you give them a ballpark figure or do you ask what they want to spend?

Schwab: “You can establish early on that they are expecting an entire house for $20,000 versus [just] the bathroom. You can know what the range is here. That’s not unusual that sometimes people need to go back and do their homework a little bit more. We have found through the years that by being honest and up front with them, that rarely is someone upset with you. Really, they’ll go back and do their homework and, actually, they’ll come back to you because of your honesty—that it just isn’t doable for the money that they have at this time.”

Swartz: How important are budgets, and how do you go about establishing them?

Peterson: “It’s the key to our whole model. When we get a lead, whether it be new, fresh, repeat/referral, or however it comes in, part of our on-phone [conversation] before we go to the house qualification is a discussion about budget. Now, we don’t ask for the budget on that phone call, but we tell them we will be discussing [their] budget. You need to be thinking about what you are willing to invest in your home, because when we get out there and look at this project, and talk about the project in generalities, we need to make sure that your budget is realistic to what you are desiring to do to your home. So we plant that seed very strongly. Then when we get to the house, we do our typical process of a little bit of warm-up—let’s get to know each other—then we will have them walk through the house and tell us what’s broken, what needs fixed, what their pain is, etc. Then we will ask them if they have considered what their budget is. Now, it’s very typical for them to come back and say, ‘Well we don’t really know what this will cost.’ It’s very typical for us to look them in the eye, and this may sound a little bit crass, but we will look them in the eye and say, ‘You know what? Neither do we, because we haven’t built it yet.’ Because we’ve talked in generalities. We really don’t know whether they want granite countertops or laminate countertops yet. We don’t know whether they want vinyl windows, or Anderson windows, or Marvin windows. We don’t know that at that stage. So when I say that, it’s my lead in to explaining our process and why we do that process; which is to eventually get them to be a very savvy consumer in getting a price for their project that actually means something because it includes a name brand window that’s specified in the proposal, it includes a countertop, etc. So it either leads me that direction, which is fine, or we carry that budget discussion a little bit further. And then sometimes, yes, I am forced into giving them that proverbial ballpark number. Now my proverbial ballpark number can be a little bit smart-alecky, too. I tell them that kitchens today are being started at maybe $25,000-$30,000 and go up to $200,000. ‘Which one do you want?’ Their response to that will be, ‘Not the $200,000 one.’ [So] I gained a little bit. Then I’ll come back and say, ‘OK, I gave you this range, so would you say you are more in the $50,000-$70,000 range?’ And then they’ll say, ‘Yeah.’ Guess what? I just won.”

Swartz: Have you ever done the design process and are paid for it, then the client takes your plan to someone else to bid or build it?

Peterson: “Occasionally. We close about 80 percent of our design agreements into construction. But there’s always that 20 percent that we don’t get for multiple reasons. Our design agreement is structured so that we’ve covered because the plans that we draw are very, very difficult to build off of. We give people the option to buy those plans for a considerably increased cost over the original design agreement. So if you they want permit-ready plans, we’ll let them buy them from us, but they’re going to have to want them pretty bad.”

Schwab: “That seems to happen very, very rarely. When we first take in a phone call from a client, we basically qualify them on that phone call. How did they learn about us [and] where do our leads come from. One of the key questions I look for is, ‘Do you do a free estimate?’ If that’s the first question out of the gate, it always seems to be somewhat of an indicator that this is a person who probably is looking for something without wanting to pay you for it, even that initial service. We do not charge in this state for any estimate, and that’s pretty standard knowledge and practice. But when I have someone who asks that first, before they want to know even anything about our company, it’s kind of an indicator there. And there are several of those types of questions.

Once we have determined that this person who has called in is of some interest and we should go out and look at the job, we’ll set up an appointment and we will go out and meet with these people. At that time, that’s when we are building that relationship with the client. So although down the road we bring in a designer, it’s still part of a partnership. We don’t get involved in the design contract, but we are involved in the relationship with that client all the way through. So it’s much of what Bob does, it’s just a different way of doing it. Same thing at that initial meeting, when you look at what the client wants to do. You get an idea of what types of countertops are you looking at, what types of flooring are you looking at, how many walls are you looking at moving, what kind of plumbing changes are going to be involved here in order to do what you’re looking at. And at that time, our sales team basically will make suggestions—perhaps here’s another alternative to consider. So our process is really the building of the relationship all the way through. And we rarely have someone go out and take our numbers and competitively price it. We do sometimes get into situations where there might be two contractors. We do not encourage and we don’t spend much time on clients basically saying, ‘I’m going to take five bids and choose one of them.’ We work from the get-go to establish that relationship that we will be your contractor. We also know that we are competitively priced. And we can usually, in any type of competitive bidding like that, if it’s a comparison of apples to apples, we’re going to come in favorable.”

Swartz: How do you handle the pricing of a contract?

Peterson: “First off, we always 100 percent of the time do a fixed-priced contract. [We] don’t even go to cost-plus or time and materials. Second off, everything’s hard bid. I won’t say everything’s hard bid, but our design process allows us to literally get a hard bid for countertop X. Or we’ve got plans, [and] I can look at my framers—and we subcontract framing—and say, ‘Hard bid: What are you going to charge us to frame this?’ Same thing with demo work and so forth. So I would say that 75-80 percent of our numbers in our estimate are hard, hard numbers. The un-hard numbers are project management and things like that.”

Swartz: Does the customer ever know or ask what your markups are on subcontractors, material and/or labor? Do you itemize that breakdown for them?

Peterson: “Yes, they do ask. Our labor is plugged in at $35 an hour. Now, it’s marked up after that. And I don’t pay anybody $35 an hour, so it’s going in there as a burden-to-number and then it’s marked up. I’m not ashamed. The labor goes in here $35 an hour. Shoot, they hired a plumber for $75, so I’m not embarrassed with that. Now with our markup on it, it’s more like [the plumber].” PR