Commercial, Real Estate Investing »

By Shaun Gray

Residential construction contracting has demonstrated a successful trend in recent years. However, as the trend rises, so does the competition.  This could lead to dwindling profit margins. These traits show a clear contrast to commercial construction contracting which has more lucrative profits.  But just as the rewards are greater, so too are the challenges. Knowing the dos and don’ts prior to embarking on a commercial construction project serves to benefit all parties involved in the project from its inception to completion.

Commercial construction contracting projects seem like a different world as it relates to residential projects. Acronym phrases like ASTM, HAZCOM, OSHA, CSI, etc. pepper the project specification manuals and give the impression of passwords or codes to a secret underworld society even to one experienced in residential projects. The owner needs only to surround themselves with a great supporting cabinet much like the US President in order to receive sound advice for making good decisions. Having been in residential for twenty plus years and commercial for over a decade, I have seen some common mistakes that plague most residential project gurus when trying to jump feet first into the ocean of commercial projects. They believed they were the big fish in the small pond rather than “The Little Engine That Could.” In order to jump into the game, you must know the rules. There are four key factors that require strict attention as one transitions from residential to commercial contracting projects.

The first key is selecting of the right design staff. The architect serves as the quarterback for the design professionals. If the architectural firm is picked correctly, then the architect will have the ability to understand the project’s intent and how to achieve the project goals in the most efficient manner. Some of the responsibilities under the architect’s umbrella are engineering  (civil, structural, mechanical, and electrical), regulatory and building code compliance, zoning laws and covenants,  budgeting, consultations, contract administration, and meetings with local municipalities regarding issues that affect the project. Construction costs of a commercial project are extremely important to the owner and the architect is the owner’s representative who manages costs from every facet. They must design the most cost efficient project based on the owner’s intent for the project. This design cost responsibility does not end at the project’s construction phase- the architect needs to consider the owner’s long term costs.  Predetermining a building’s potential energy usage can allow the architect’s mechanical engineer to have a reasonable calculation of what the owner will pay in utility costs over the life of the project. This helps determine what the design should include with regards to building enclosure materials, mechanical and electrical systems, appliances, etc. As you can see, the importance of selecting the right architectural design firm is as important as picking a partner.

The second key factor is selecting the most qualified contractor.  The architect manages the project on the owner’s behalf in most cases from the very beginning and even refers qualified general contractors to bid competitively on the project by a predetermined bid date and time. This step is just, as if not more, important as the design professional selection. The term “you lose or make money in the field” stems from the importance of the right contractor. After being determined the successful bidder, the entire process for the commercial contractor takes a gargantuan leap from that of a residential contractor. Once selected, the commercial general contractor will need to begin the submittal process. This process involves submitting all product data/cut sheets on materials, samples, shop drawings detailing equipment, and mock-ups of assemblies to the architect to be checked against the specified products as outlined in the plans and specifications. In conjunction with starting these clarifications of requirements with the architect and engineers, the commercial contractor must start the permit process which is a step up from your average everyday checks and balances system. Through the permit process, the local city governing agents ensure that the project meets all local codes and ordinances.  They also verify that all subcontractors are licensed, the required individual permits (such as electrical permits, sewer connection permits, etc.) have been pulled, and city inspectors visit the project site periodically to perform inspections required at particular milestones prior to completing certain portions of work and moving on to subsequent portions. The local government has a responsibility to ensure that construction projects are performed in the safest manner to the public. But the commercial contractor has more involvement with ensuring safety on projects and with some of the most elaborate safety programs they strictly enforce consistent compliance with all aspects of the safety programs requirements. There is clearly nothing more important than keeping a work place environment safe for the workers, neighbors, and the public.  That’s why these precautions are followed closely by professional commercial contractors. The safety concerns last throughout the project all the way to the completion date.

The third critical step is creating the construction schedule.  The construction schedule outlines all construction activities in detail and leads up to the most important activity for the owner- the completion date. Once the right architect and contractor are selected, you will arrive at the one part of the project that the owner is most concerned about, the construction schedule (this leads to return on investment milestones). Commercial contractors’ construction schedules are formal and can be as detailed as listing dollar amounts to the line items making it a cost loaded schedule. Some schedule software programs (Prima Vera, Suretrack, Microsoft Project, etc.) are specifically required in the specifications so the architect, as the owner’s agent, can monitor the project’s progress and ensure completion of the project without delays. With accurate scheduling, the contractor can track productivity and man-hours, update the architect during progress meetings and allow the owner information to help the owner manage the owner-related issues affected by the schedule. Or if the project has been assigned liquidated damages, then the amount associated with any delays on the part of the contractor can be assessed and charged against the contractor’s fee. Any negative impact on a contractor’s fee has the complete and undivided attention of the contractor.  So outside of the normal concern for the schedule, the contractor monitors the schedule activities extremely close to minimize any opportunities for a reduction in profits. This leads back to the making money or losing money in the field concept.

The fourth major factor is comparing the difference between the profit margins.  The thought of losing money gets a commercial contractor’s attention just as much as a residential contractor.  The problem is that profits on commercial projects are generally three times as much so the impact is greater causing more attention. Commercial construction costs are calculated on a different scale and it includes things such as labor rate increases, trade professional rate charges, standard mark up percentages, etc. Because the risks are far greater, the rewards are in line with such large risks. The requirements at each phase of construction have charges and risks that are normally included in the bid of the project or a contingency is established that allows for such unknown expenses. At an average, you will find subcontractor profit margins to be anywhere between 15% and 25%. With profit margins like these, commercial construction projects can attract competition from all corners of the building industry. The thing to remember most with commercial projects is that with great rewards come equal and opposite risks. So it is imperative to ensure all the proper faculties of a project are considered to allow for the maximum profit margin.

With careful management over these factors the potential owner of a commercial construction project is armed with ample support to allow for a successful project and experience maximum profits with minimum delays. The right team and a well devised plan allow you the opportunity to wield a well-oiled tool and produce a wonderful product that will make you proud for years to come.

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Shaun Gray is the President of Three Six Zero, Inc., a General Contractor/Construction Management company.  For more information, he can be reached at (773) 424-8576 or

sgray@threesixzero-inc.com.

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