Updated: Aug 24, 2020
How do you spend less on contractors?
There are many stages of the contracting process, from shopping around to estimating, hiring, managing, (maybe firing!), and then close-out.
Here is a list of a few things you should do to protect yourself, client, or business:
Shop, Shop Around
Never go with the first estimate. This may seem like a no-brainer, but when you're eager to get started on it may be tempting to just hire the first contractor you talk to. It may take about 5 quotes to find a more realistic going rate for your project.
Go Over the Project Line by Line
Break down all of the costs.
Sometimes, contractors may assume you want things that you don't, and you may often find elements of the project that you could do yourself or put off until later when you have more money to play with.
When you go line by line through the budget, don't be shy about questioning anything that you don't understand. Your contractor may have assumed that you want something you actually don't care for! Take this opportunity to decide which parts of the project, if any, you want to take on yourself and discuss anything you want to source for yourself.
Do it In-House (if you are able)
What skills and time do you or your team have?
Do you have a buyer? Do you have a consultant, an engineer, etc.
Know what your skills are.
If you can do something yourself, then why take the time to look and hire?
But know what you're doing, as you may have to pay a contractor more to fix mistakes.
Also be very specific on what you agree with your contractor, redos or late finishes may hurt you if this isn't planned properly!
You may find materials much less expensive on your own than through your contractor.
If you want to source some of the materials yourself, just make sure you agree before the project gets started.
Don't wait until the project has started to decide what you want or don't want to source on your own. Instead, sit down with your contractor before the project starts, and go through the budget line by line.
You want to make sure you know when they will need each item on site, what the quantities need to be, and what the labor costs cover if they are putting anything together for you.
Unexpected hiccups may mean additional costs, so stay on top of your construction schedule.
For example, make sure you know what areas need to be clear and take care of that before workers arrive.
It's not cost-effective to pay workers to just stand around!
A good scheduling software may help greatly here (such as Primavera P6) in the hand of an employee or team dedicated to Contractor Management. For a larger job, you may have to provide accommodation for you, your team, or others during certain parts of the process.
Make sure you know this ahead of time!
Staying organized also means keeping up with any paperwork and staying on top of your contractor, if necessary. If your contractor is responsible for pulling permits, make sure you know what's due and when, so you can check to see that everything is properly permitted. If your city slaps you with a stop-work order, you may face costly delays in the project and possibly fines.
- Build During the Off-Season Fixing or replacing that roof in winter may save you 10 percent over summer. Like many industries, the construction business has busy and slow times each year.
You may save between 4 and 5 percent by starting your project when contractors tend to be slow.
On a more seasonal project, roofing, you may save as much as 10 percent by doing the work in the winter. Not only might you save money, but you also receive better service from your contractors during the offseason.
Since contractors are less busy, they may take more time to meet with you, answer your questions, and go through those budgets line by line (see below!) to see where you could save some cash.
Know When to Spend
Sometimes, saving a buck now will cost you in the future.
A contractor who gives you a lower cost per square foot may seem like a bargain, but sometimes this means substandard work.
When you're looking at quotes, maybe look at the middle of the road estimates from someone with good recommendations.
You're not really saving money if you have to redo the work in just a few years.
The same thing goes for sourcing materials. If you're redoing your project, don't choose the cheapest appliances.
Read reviews and choose efficient quality appliances that may last longer and help reduce your energy and water bills.
Opting for quality may cost more up-front, but how much did you really save if you have to replace or repair every few years? Not wasting money is great, but construction is an investment.
When you're trying to budget, it's sometimes easy to forget about resale value.
Consider your costs at every step!
Job Definition and Scoping
Invest time in defining and agreeing on the scope of work before contractors start.
Clear definitions, embedded into every document from the request for proposal to the final contract.
When contractors don't know what resources an effort will require, they may understandably plan for a situation that might be more demanding than normal.
For example, if a poorly-spaced welding effort could take anywhere from a few hours to a few days, contractors will likely set their compensation to reflect the longer timescale.
Definitions also make it less likely that contractors will carry out work that they assume is needed, but that hasn't actually been requested.
Such as cleaning the site when the client already has a janitorial-services contractor!
Let the company work more closely with contractors to manage shared costs. For example, for contractors to plan on the exact power tools and systems they would have to bring on-site at each stage so that people don't waste time looking for items later on.
Understand the work content
Ignorance isn't bliss: Instead, it may lead to a lot of waste.
Without a clear understanding of each job's work content, how can we analyze the contractor's price or recognize when it could be lower.
That's why the best managers make sure that their teams understand at least the basic content of all work.
High-level benchmarks aren't enough: job estimates need detail down to the length and number of bends in a pipe that's to be welded.
In more-open markets, this is less of an issue. A homeowner who wants a small job done may find at least five contractors to quote for the job.
Even though they may not understand the work content, they may receive a good price just by comparing the bids as they come in.
However, in the specialized fields typical of heavy industry, markets are a lot less perfect.
Often there are limited numbers of suppliers in the area, with significant barriers to entry. As a result, the best way to negotiate a good price for the work is to understand the work before engaging a contractor.
When an invoice doesn't describe the details of the work completed, it's impossible to know if anything's been added or if the work is being done in the agreed way.
It's not unusual to see invoices with line items like "associated repairs" priced at well over $70,000, with no further information on what was done, or why.
This makes it much harder to agree on appropriate pricing or to manage contractor performance over time. Often this bundling of multiple jobs into one line item on an invoice prevents confirmation that the total billed is the total agreed to.
Companies should contractually require contractors to provide detailed invoices, listing the exact work done, and all of the resources required to complete it.
By ensuring contractors list clear, manageable line items, companies may start to reduce shared waste.
But it's hard to change invoicing practices after a contract has been signed.
Instead, invoicing and reporting templates should be built into the contract's terms, so that they are discussed during the negotiation and fully accepted by the parties.
Each contract renegotiation is a new opportunity to establish consistent reporting and invoicing ground rules for all suppliers.
Checking invoices against negotiated rates
Even if a procurement team negotiates a fantastic contract, companies can still lose value because of inconsistent adherence to contract terms.
Effective contractor managers fully understand the terms and conditions of the contracts they manage and ensure that each invoice reflects the contractual agreement that the procurement teams went to great lengths to negotiate.
Digital tools help automate this process.
Sometimes the rates contractors charge on invoices vary from the contractually specified terms—occasionally on purpose, or by mistake.
One large manufacturing company, for example, discovered that it had been charged well over $1 million for ladder rentals when the contract wording stipulated that there would be no additional charges for ladders or other tools.
This may sound like a simple issue, and that it should be rare. But in the complexity of the day-to-day operations of an industrial site, often significant savings are seen just by ensuring that you pay what you agreed to every time.
When a client invests the time and effort to review invoices for accuracy, the contractor is may do likewise.
Letting contractors get to work
Ensures that the contractor's team is able to spend as much time as possible on value-added work.
As basic as that sounds, contractors may waste hours at facility gates waiting for the client's staff to process the paperwork needed to get on-site and start work.
And it isn't limited to getting identity badges or work permits: it's also in redundant briefings, limited facility access, and delays while other work is completed.
All of this drives up costs for *no added benefit*.
It's maybe a reason contractors are reluctant to accept fixed-price terms.
As a result, the client company almost always ends up paying for the wasted time, which is either billed directly as hours "worked," or is baked into higher overall job rates.
For example, having a security system that only reviews accesses once per day, may mean contractors having to limit themselves to one job per day - though having resources for more!
Record and monitor deviations from agreements
Besides collecting detailed invoices and agreeing on the scope of the work in advance, the best contractor managers will also keep records of any deviations from earlier agreements.
For example, if a building was supposed to be painted with one grade of paint, but in the end, a higher grade was used, they'll specifically note that this was a change in the original plan.
That lets the contractor manager better understand each contractor's performance—information that can improve future contracting decisions.
For example, when choosing among bids, the company may avoid a contractor that consistently underestimates the work or tools needed for a job.
It also helps the company to better understand the true requirements of work, so to make better decisions in the future about whether and how to outsource.
Avoid Delays (and Delay Claims)
Avoiding delays may very well be on your list of priorities anyway, but now you have another reason!
Any delay may mean a big increase in costs for you or your client - just for the delay itself.
This isn't including any delay claims that may come through this and the resulting consultant or legal fees that may come along with it.
To protect you and your client from this you should make sure to thoroughly go over ever schedule submitted to you by the contractor.
In the past, this might have meant having to bill out for a consultant (still a very good investment if you can afford this, but we are well into the age of Intelligent Tech now.
There are so many software out there now to help you with this and the best is our Claim Cracker software.
Simply open the schedule file given to you by the contractor and let the AI (Artificial Intelligence) software run a complete check for issues that may harm you sooner or later in the project.
There are also automatic Expert Advice and Recommended Actions based on over 27 years of Project Planning and Claims experience.
This way, not only may you see a short term reduction in costs from keeping the contractor on best practices - but also avoid delay claims that may add millions to your project!
How to Spend Less on Contractors?
Each of these practices may help contractor managers avoid waste.
Organizations find it go without formal contractor management roles to reduce their fixed costs, but over the course of a few years, saving may be overshadowed by increased contractor spend.
Organizations willing to take action now may save 30-50% on their contractor spend, (often meaning millions of dollars!)
And because contractors spend is a cash cost, those savings may be realized fairly quickly!
Thanks a lot for reading everyone and take care!
The Project Cracker Team