As one of the largest industries in this country, construction requires company owners to manage billions of dollars and a workforce of millions. Often the skills that are dominant with small contractors are the trade practices that distinguish them as talented practitioners. By far the most critical aspect of the contractor’s business is the one most often disregarded: Sound Business Management Practices. The challenge facing many construction operations is the ability to maintain high levels of communication regarding the manner in which they conduct the business of building with their customers. Every job, every project requires the administration and management of diverse materials and labor resources within the precise environment of an established budget and schedule. The failure to keep the consumer informed of changes and delays is responsible for the high percentage of disputes over the performance of the work. In light of the current climate of customer satisfaction, the Center for Construction Ethics, in cooperation with the Contractors State License Board, developed the following 10 point Contractors Code of Ethics. The Code is a set of guidelines that are completely voluntary. By subscribing to the Code of Ethics, you are telling your customers that integrity is first on your list. It is the ultimate business credential. In addition to delivering integrity to every project, the risk conscious contractor must also have a firm grasp on the control of liability.

Getting Started:

This program was developed to assist you in achieving higher levels of efficiency and customer service in every job you undertake. It assumes that you are currently employing the use of a computer for basic job reporting and administrative functions. Much of the material that we will be sharing with you during this session will demonstrate the use of spreadsheet programs for creating cost breakdowns and estimates, scheduling reports, time , billing and budget reports and more. Further, we will be using word processing programs to create standard forms for change orders, subcontract agreements, prime contracts between owner and general contractor, disclosure forms and much more.

Checklists:

Just as a jetliner pilot goes through a pre-flight checklist before taking off, this program will provide you with several checklists that you can use to make sure that you are always providing the highest level of communication and service to your customers. We encourage you to share the checklists with your customers as a measure of the high level of service that you are committed to providing.

Bill Dexter, Director,

No. 1:

We will always provide a detailed cost breakdown before beginning the work.

The primary concern of consumers entering into a construction project is the ability to account for and justify the total cost of the proposed work. Creating a detailed allocation of costs allows the owner to make informed decisions about specifying the work. It may be a matter of improving the quality of fixtures or reducing the grade of carpeting to accomplish budget constraints. The important factor is that a clear description of costs eliminates many misunderstandings and conflicts between contractor and project owner.

The sample below shows the key ingredients in creating a detailed cost breakdown. They include:

1. Identify the individual tasks that make up the total scope of work.
2. Measure the quantity of each task. This may be a measure of time, square feet, or cubic yards.
3. Assign a unit cost. How much does one square foot of tile cost, installed? This can be the basis for negotiating changes if the owners change their minds. Unit costs do not have the contractor's overhead & profit calculated in. These are direct costs.
4. Compute the total cost based on the product of the number of units and the cost of each unit.

A detailed cost breakdown for a new home may have 60 or 70 different “line item” costs. The result is a high level of communication to the owners regarding the project. When decisions are made, they will be “informed” decisions. Homeowners retain the sense of control that is imperative in achieving and maintaining a solid relationship over the full course of the project.

PROFIT & OVERHEAD:

Let total disclosure be the hallmark of building with integrity.

After reviewing you business expenses, costs and desired net profit, establish a mark-up percentage that, when universally applied to your billing, will keep your company solvent. This should be a constant factor that you use from job to job. The example below demonstrates how you can incorporate this factor into your cost breakdown.

In the example, the contractor has assigned a value of 18% to his mark-up for overhead and profit. When incorporated into a spreadsheet program, any revisions to quantities or unit costs will automatically adjust the P&O amount and, consequently, the total amount.

In addition to forecasting profit and overhead costs, this spreadsheet allows the contractor to build in a contingency factor. In this example that contingency is 7%. It can be any number that your experience tends to predict or a number that the homeowner would like to include for loan purposes.

Another useful addition to the cost breakdown is the identification of foreseeable upgrades. In this example, the contractor is responding to inquiries about adding a back deck, upgrading counter tops and roofing materials. Notice that none of these costs have been included in the forecasted cost of the project. If the owners decide to include them, a line can be added to the cost breakdown form above.

Integrity Note:

This standard establishes “full disclosure” of costs as the hallmark of excellence. Disclosing the exact amount of profit and overhead percentages also eliminates misunderstandings regarding charges. Encourage your customers to research for lower prices for decorative hardware if they are concerned about their budget. They will understand that your “mark-up” will be applied to whatever cost is incurred.

No. 2:

We will always provide a written schedule for the progress of the work.

It is not enough to generally assign a block of time to the entire project. Project owners want the opportunity to follow the roadmap of the progress by being prepared for delivery of materials, waiting time for coatings to dry, scheduling of inspections and all components of the use of time. The schedule document, whether a bar chart or a simple calendar page allows the owners to remain informed about the progress of the work. They can also use the schedule to plan for the delivery of window coverings and furniture. Many contractors also use the schedule of tasks to forecast cash flow requirements by including the costs stipulated in the cost breakdown. Integrating the information describing "Time & Money" gives the owners a great sense of comfort in that the forecasts predict what will actually happen and "when".

A project schedule can take many forms. Perhaps the most popular is the “bar-chart” schedule. With this format, all factors of each event can be easily understood. Homeowners and subcontractors alike can determine “start time, duration and “end time” with a quick glance. The schedule imposes a sense of duty on all participants to take action to accommodate the forward progress. The general contractor must place orders for windows and plumbing fixtures in a timely manner. Owners must be prepared to make decisions and perform any tasks assigned to them in order to keep the schedule on track.

Integrity Note:

Committing to a schedule and completion date instills confidence and projects a high degree of professionalism. The consumer’s impression of a well-scheduled job is building with an eye on business.

No. 3:

We will always secure a building permit if one is required.

Regardless of the size of the project, the building authority should be provided with an opportunity to review the Health, Safety & Welfare issues that are addressed in the building codes. By taking this step, the contractor is assuring the homeowner that the work is being completed under the requirements of the various codes. The critical benefit of this action is that the consumer can make clear and complete disclosures about the remodeled work in the future if they choose to sell their property. The cloud of unpermitted work at the time of a future sale is an obstacle that we can remove by including the permitting process in every job undertaken.

Remember that local building departments have a dollar value limit for any construction work that requires a permit. Quite often that amount is only a few hundred dollars. The building official can issue field permits for minor and incidental work that does not require plans or engineering. For the interest of protecting the owner’s investment, always ask the building authority for an opinion on this issue.

There is also the issue of "Contractor’s Liability" to consider. Imagine that a homeowner was interested in installing the spa that they just purchased at the Home Center. Since you noticed that the circuit for the old electric clothes dryer is close by and the owners have discontinued its use since switching over to a gas dryer, why bother with a permit to just connect the spa to this existing circuit? Later, after the installation of the spa was completed, a short occurred in the air blower and shut down the whole circuit. The concerned owners looking for reassurance that everything is OK, call the building inspector and ask that they inspect it. Even though, all of the failure occurred with the spa and not your work, you now have the issue of performing health & safety work without seeking a permit. With the simple process of securing a permit and inspection for the connection, the building inspector would look no further than the internal failure of the spa. In the long run, this is smart business. It protects your license, your integrity and bolsters your reputation as a "construction professional.""

Integrity Note:

Always consider the interest of your customer first. Applying for a permit should be an automatic procedure within your company even if the homeowner would rather not get one. Imagine if the owner was injured in the example above and the safety investigator concluded that although all of the work was properly executed, except that none of it was permitted.

No. 4:

We will always sign a written contract that includes our cost breakdown, the schedule and the plans.

The importance of a written contract goes far beyond describing the work and the cost to be paid. Contracts define what action the parties will take when unforeseen events occur. Most conflicts over construction work deal with circumstances that neither party envisioned when the work began. The care taken to draft a complete and detailed agreement is an invaluable step toward the smooth completion of the project and a strong relationship between the contractor and owner. For this reason, short form contracts are discouraged in favor of detailed agreements. The following is a list of topics that should be discussed in your agreement. They could all begin with the sentence: "In the event the following happens, we will…"

1. Parties (Who are we and what are we going to do?)
2. Job Location
3. Description Of Work (Plans and specifications reference)
4. Condition of Material & Equipment (New, Grade, Rating, etc.)
5. Labor & Materials, Items provided by contractor
6. Labor & Materials, Items provided by Owner (What if there is a problem with the owner’s work?)
7. Specifications (Is there a project manual?)
8. Contract Price or Method of Compensation (Include detailed cost breakdown as an exhibit)
9. Contract Documents (Be very specific about what is included in the contract)
10. Time of Commencement and Completion (Include your schedule)
11. Changes & Extra Work (What procedure will you use?)
12. Safety & Clean-up (Establish what level of clean-up will be performed and at what intervals)
13. Insurance Requirements, Limits, Indemnification & Hold Harmless (Include sub’s certificates)
14. Inspection & Testing (Structural & Waterproofing)
15. Fees (Permits, Inspection, etc.)
16. Taxes (Who is responsible for taxes during construction?)
17. Substitution of Materials, Fixtures & Equipment (What procedure will be employed?)
18. Protection of Work (Rain, exposure, other workers, outside storage)
19. Delays (What if the owner delays the work?)
20. Interruption of Work (How will interruptions be handled?)
21. Responsibility for Damage(s)
22. Claims, Demands, Liens & Releases (What lien release procedure will be in effect?)
23. Payment Schedule (When and how much?, Who verifies completion?)
24. Billing Forms, Releases and Procedures. (Invoice & budget report)
25. Acceptance of Work (Payments before completion)
26. Termination & Owner’s Right To Complete Work (What are the rights of the parties?)
27. Attorneys’ Fees (The issue of the prevailing party)
28. Dispute Resolution, Mediation, Arbitration, and Provisional Relief
29. Records, Accounting & Audits (Invoice formats and records)
30. Licensing of Subcontractors (Full list of subs)
31. Notices (State licensing requirements, mechanics lien law, etc)
32. Prior Negotiations (Is everything you ever talked about included in this contract?)
33. Time is of Essence (What duty does this impose on both parties?)
34. Liquidated Damages & Bonuses (Very important limits)
35. Compliance with Laws, Codes, Ordinances, Industry Standards, Manufacturers’ Specs
36. Specific Exclusions (What work, materials or fixtures are not included?)
37. Warranties & Materials Limitations (The laws of defects and physics)
38. Job Closure Procedures (“It’s not over until it’s over”, Yogi Bera)

No. 5:

We will always provide sufficient labor to accomplish the work according to the project schedule.

Perhaps the most frequent complaint of project owners against the contractors is the tendency to not provide workers to the job in a manner to adhere to the schedule. Contractors subscribing to this principal provide the owners with a level of comfort that work is going forward and the schedule is being adhered to. When circumstances such as weather and material deliveries cause delays, the contractor will notify the owner of the delay and the revised completion date. The key element is improved levels of communication regarding the management of the project schedule.

No. 6:

We will always leave the job in a clean and orderly condition.

The value of a clean job site is often underestimated by the work force. Not only is the safety of the project site increased by the elimination of debris and clutter, building inspectors tend to spend their time evaluating the work for its care rather than being critical of the lack of housekeeping. The contractor will make diligent efforts to clean up and sweep out at the end of every day where it is practical to do so. The timely and periodic removal of accumulated trash and scraps will also be included in the scope of work and be accounted for in the cost breakdown as a line-item.

No. 7:

We will provide you with a list of the subcontractors that we intend to hire.

A typical remodel will involve numerous subcontractors to perform the numerous tasks and provide diverse materials and equipment to the job. By providing a list of all subcontractors and suppliers, the contractor is informing the owners of the characteristics of the team that will be accomplishing the work. This has serious consequences when dealing with the administration of mechanics lien rights and releases. But more important, subcontractors and their suppliers provide valuable insurance for equipment failures and consequential damage. Issuing a list of all subcontractors and suppliers is a valuable component of defining the warranty options available to the owners and provide a quick reference when adjustments or repairs are required.

A suggested format for the lien release report to the owners is to photocopy the subcontractor’s invoice on one side of an 8½ x 11 sheet of paper. On the other side copy the appropriate release form, completed with all of the specific information regarding that payment along with a photocopy of the check that you are paying with. Have the sub sign the release and send that sheet to the owner. The document created is an extremely clear record of the payment and release. It has the invoice, a copy of the check and the signature of the entity providing the release. This is another element of building with integrity.

No. 8:

We will provide a detailed invoice that incorporates a current report of the project budget.

Contractors and owners alike are familiar with the trauma associated with the “final invoice”. The surprises that occur when all of the accounting for changes and upgrades are totaled are generally associated with the last invoice. Contractors have a critical duty to their customers to keep them informed throughout the project regarding revisions to the total budget. Small and seemingly inconsequential upgrades can mount up to a substantial cost if not carefully and faithfully monitored. Experience has shown that even a diligent change order system fails to inform the owners of the total impact of the aggregate changes that have been made. With a budget report, line items created in the initial cost breakdown are accounted for on every invoice. Changes are also reflected on every invoice as soon as the owners elect them. The current invoice for demolition and grading may not be billing for upgrades to countertops, but under this guideline, the invoice reports on all changes that have been decided upon. The revised total of the contract is then reflected on every invoice. The surprise of the final billing can be eliminated by systematically keeping the owner fully informed regarding the changes to the contract budget as they are elected, not as they are installed.

The lower portion of the invoice summarizes all of the changes that have occurred since the beginning of the job. The owners have an opportunity to see graphically and mathematically how every decision they make affects the final costs. This method of billing eliminates the ambiguity that surrounds the ever-changing budget. By reporting changes that will take place in the future, the owners have an opportunity to evaluate whether that decision fits into their capacity to afford the revised work. Notice how the final portion of the invoice completely updates the cost of the new work.

No. 9:

We will compile a booklet of all manufacturers’ warranties for any new equipment we install

Manufacturers of water heaters, furnaces, thermostats, fireplaces, and appliances provide detailed brochures with instruction, warranties and maintenance tips. The contractor will endeavor to gather and bind all of the technical bulletins and brochures and assemble them into a booklet for retention by the owner. Accessibility to manufacturers’ literature is an invaluable tool when adjustments, repairs or warranty information is needed. We consider this compilation similar to the “Owner’s Manual” for the completed construction work. The contractor should also include the contact person for warranty calls and the phone number where they can be reached.

Remember that the ultimate responsibility for warranties rests with the contractor who provided and installed the work. Building with integrity demands that the contractor steps to the front of the line when the homeowner needs help with repairs or adjustments.

No. 10:

We will conduct a “walk through” inspection with you and correct any deficient work prior to final payment.

The final component of building with integrity is reflected in this section of the Code of Ethics. The contractor agrees that no final payment will be made until all unfinished work is completed. The contractor will correct any deficient or damaged work according to the agreement between the parties. Further, since mechanics liens are time sensitive, the contractor will postpone payment of 10% of the contract price for a period of 31 days following the owner’s recordation of a “Notice of Completion”. This ultimately protects the owner’s interest against any subcontractor liens that could be filed during that period. Nothing spells “Integrity” more than the contractor’s willingness to place the homeowner’s interests FIRST.

Attached to this booklet, as an addendum, is a typical “punch list” sheet. After walking through the project with the owner, you should both sign it as a promise to each other that the work will be completed and/or corrected and that final payment will follow after 31 days.