Bidding is the bane of the custom home builder’s existence. When a prospect drops off a set of architect plans and asks you to bid, your proposal will be one of several competing for that project. If one of the other bidders is selected, you’ll have wasted all that time and energy crunching numbers without ever getting the chance to show the prospect the value your company can bring to the project.
But what if you were paid for estimating? Indeed, what if you, the builder—rather than the client, architect, or interior designer—controlled the progression of the project from inquiry to contract signing? And what if, in doing so, you sidelined your competition because prospects would be working with you rather than shopping around?
A decade ago, Paul Magleby, founder of Lindon, Utah-based Magleby Construction, had had enough of preparing bids and losing work to the lowest bidder. So he collaborated with fellow builders from his NAHB Builder 20 group and, through trial and error, developed an approach for charging clients for estimates. Bradley Simons, now the company’s vice president and CFO, knew Magleby then and did some consulting work for the custom builder before joining full time seven years ago, so he has observed the evolution of this preconstruction process both as an outsider and as an insider.
“As I watched meeting after meeting [with prospects],” Simons says, “I saw laughter, smiles, handshakes, hugs. Through this lengthy process, there’s this development of a relationship whereby at the end of it, it’s not about price at all, and honestly, that’s where every builder wants to get to.”
Builder Tactics for Holding on to the Reins
Why should it be the builder that controls the project? Bob Peterson, owner and founder of Associates in Building + Design (ABD), says it’s because he is a control freak. He has to be because ABD warranties its work for five years, which, he says, is virtually unheard of. “Guess who is responsible for a project before, during, and after it?” Peterson says. “The builder. If a window falls apart, the homeowner isn’t going to call the architect or the designer, they’re going to call the builder.”
Three tactics builders use to steer the process from estimating through construction:
• Magleby Construction’s preconstruction process stipulates that bills from third parties, such as architects and interior designers, should be submitted directly to the builder, rather than the client, for payment. Magleby uses ClearBuild Portal proprietary billing and payment software, which allows clients to see all bills, time cards, receipts, trade invoices, bids, and worksheets for total transparency.
“We get the bills because we have control, and we want the clients to get used to our billing process even though we’re not getting the money,” says Bradley Simons, Magleby vice president and CFO.
• Typically, draw payments to the builder are tied to the completion of a construction phase and passing inspection. In contrast, Legal Eagle Contractors ties its payments to the beginning of those phases.
“Builders will tell you there are clients who are never done with drywall installation and will hold your draw. We don’t play that game,” says Dan Bawden, Legal Eagle’s owner and president. “With every pay point I have, I say 10% is due at the start of drywall installation and at the start of electrical rough-in. We can all go to a house and see whether the crew is hanging drywall or not. Reasonable minds won’t differ about the beginning of events.”
• One goal of a preconstruction agreement is to keep your clients from shopping around for other builders while you’re working on their estimate. Peterson uses a Friday afternoon email to stay in front of his clients during those 60 to 90 days of working through selections and estimates. The entire ABD staff is required to have input on those emails, which summarize what was accomplished during the week and include reminders about upcoming meetings and what the builder’s team will be working on next. The emails sign off with a message to have a great weekend, and for any questions, to call on Monday.
“What we did by that is eliminate the weekend calls,” Peterson says. “That’s when owners are at home thinking about the project, and then you walk in on Monday with 16 voicemails from clients. My staff fought me when I came up with that two years ago, but they love it now.”
Simons’ office used to be near the front desk, so when prospects walked in looking for an estimate, he was the one who would explain that the builder’s preconstruction process includes getting paid for preparing the estimate. If that early mention of payment discouraged a prospect, they probably wouldn’t have been a good fit for the builder anyway. Simons reckons that since he’s been with Magleby, only one new-home client and 20% of remodeling clients have dropped out.
Rather than estimating from a set of plans or giving the prospect a dollar-per-square-foot number for their dream home, Bob Peterson, owner and founder of Associates in Building + Design (ABD), in Fort Collins, Colo., looks at their plans and asks if they have a scope of work.
“Plans aren’t as definitive as a scope of work,” Peterson points out. “I will ask them what are their goals in procuring the three to five bids they’re looking for. That is a [qualifying the client] question. If it’s price, then they’re probably not [suited to be] my client because I’m not selling on price, I’m selling on relationship. Then I’ll ask what they’re doing when it comes to cabinets, countertops, floor coverings, interior finishes, windows, doors, roofing. Very few people draw a set of plans that you can get the entire scope of work off of. You can get the construction scope of work and know you’re building 2x6 walls, a truss roof with 8:12 pitch, and so forth, but you can’t actually get the details that make the difference in cost.”
Once he has sowed doubt in prospects’ minds about using price as the metric for picking a builder, Peterson introduces them to a better way, using his expertise to walk them through the process of building their home.
“After that, I feel like we have the beginnings of establishing a relationship,” he says. “I can explain who we are, what we do, and how we can help you put this together. However, we will put 60 to 80 hours of time into this and we need to get paid for it. Even if prospects have a set of blueprints, the project still needs to be developed. Once we get it developed, we will provide a guaranteed price.”
When prospects walk into the Bellaire, Texas, offices of Legal Eagle Contractors with architect plans and request an estimate, owner and president Dan Bawden asks if their architect has a favorite builder. The prospects may be kicking tires with other builders just to see how their bids compare with the architect’s preferred builder. Bawden explains to prospects that he charges for estimates—although he will provide a ballpark amount, noting that the figure is preliminary because he hasn’t looked at the plans yet. He doesn’t just send prospects away, in case his preliminary number is lower than the preferred builder’s price. Then, for prospects with plans and for those who come in without drawings seeking estimates as well, he takes them to the next step.
“I tell them we have this fabulous [process], and I’ve been doing it for many years, and it really works for the client. I’m not saying we do something completely differently ... but I say we have something that is newer and better than what you’re thinking of doing; let me tell you about it,” Bawden says.
If the prospect agrees, planning and feasibility studies ensue, and the Legal Eagle staff gathers information about selections and square footage and calculates cost assumptions. The planning and feasibility charge for a 3,000-square-foot home could be about $6,000.
“You don’t want to start construction on any project unless it’s properly planned,” Bawden says. “We go through the process as partners rather than bidding against other builders, which is sort of an adversarial process.
We’re working with you as a consulting partnership, as a team. Clients like that, and we do a fixed fee.”
Magleby’s estimate is called a “cost forecast.” Rather than offering a cost-per-square-foot figure for the whole house, the builder pulls cost data from previously built homes and calculates the per-square-foot cost by line item, so the forecast includes a per-square-foot figure for heating, framing, and so forth.
“I spent 17 years in the production world where builders start out with all of the features and selections figured out and they charge an arm and a leg for processing change orders,” Simons says. “In the custom world, we let people pick things all along the way, and it causes problems. One advantage of this preconstruction process is we’re talking about these things. So maybe your [client] hasn’t picked the exact appliance, but if they want, say, a Bosch, a Thermador, or a JennAir, you know you can talk to your team and ask what kind of a circuit does this require because a Bosch microwave convection oven requires a 220-volt circuit. If you didn’t know that until a couple of weeks before move-in and you put in a 110-volt circuit, you’re tearing out a wall and cabinets just to run a line in there.”
The plan is sketched and the forecast refined three or four times as builder and prospect work out layout, size, and selections. Eventually the forecast estimate becomes the contract estimate. Prospects who buy a
Magleby home get a 50% credit on the first construction bill—which could be as much as $10,000 to $20,000 and isn’t passed through on the final charge for the house.
“It’s kind of like the contract is done and they’re ready to sign,” Simons says. “It’s not a process where we have to ask, ‘Are you ready to sign now?’ It’s more like a natural flow. By the time we get to this point, the clients are excited to get going.”
Small builders with just a handful of annual closings and full-time employees may retort that they don’t have the resources for a preconstruction process and can’t afford to lose business from prospects turned off by having to pay for an estimate. Besides, Magleby Construction is much bigger, with about $100 million a year in revenue from its building, millwork, and other divisions, and so are ABD with 14 employees and about 35 projects annually, and Legal Eagle with eight employees and about 45 projects a year.
But Magleby started his system when his was a $7 million company. Peterson was charging for bids from the beginning, and the process has worked well since then for his 3,800 customers. Bawden doesn’t have an architect on staff, so he pays a designer proficient with Chief Architect software to come into the office and draw the plans even as the clients watch.
“You can do it as a small business by bringing in the right partners to handle the parts you don’t have the technology or expertise to do,” Bawden says. “It works just as well. Actually, it works better because they’re 1099ers, not employees, so if you’re slow, you’re not writing checks.”
In instances where the prospect has an architect or the architect comes calling seeking a bid, all three builders say they vet the designer to see if they’re amenable to participating in the builder’s preconstruction process and open to letting the builder take the reins (see sidebar, left). Sometimes personalities are strong and the relationship never meshes. But as far as small builders being able to charge for estimates and controlling preconstruction, company size doesn’t matter.
“It goes back to the relationship,” Peterson says. “You have to find that architect or draftsperson to do plans. It doesn’t have to be an employee, but it has to be the kind of relationship where they’re on board. It’s not that hard to do because they get fed regularly.”