McNellis on Developers and Contractors: General Relativity

December 13, 2011

By John McNellis

With major construction about to blossom all over the Bay Area—campuses for Salesforce, Google and Apple, the Transbay Transit Center and an armada of other projects—this may be just the moment to consider the general contractor and the contractor’s role in real estate. Few professions are as badly mischaracterized in our world as contractors, particularly by owners with adverse economic interests.

To some, general contractors are bookies with a toolbox. If bookies take as many bets on Stanford as on Cal, the bets offset one another and the bookies keep their juice. If a general subcontracts out 100 percent of the actual construction work—let’s face it, that’s what they do—and just slaps on overhead and profit, some envious developers think the contractor can’t lose. The developers acknowledge the troops—in this case, the subs—may get slaughtered, but view the wily general as safely behind the lines, idling at the wheel of his favorite yacht, Change Order.

Forgetting the thousand ways a contractor can go broke, developers all too often jump into the construction business. They forget it’s not as simple as real estate’s other professions: If your doodling is easier to decipher than a Rorschach test, you’re an architect; if you can stack Legos at right angles, you’re an engineer; if you can exaggerate convincingly, you’re a broker; if you can pontificate while keeping track of your hours, you’re a lawyer; and, if you can take over your father-in-law’s portfolio, you’re a respected developer.

They fail to consider all the talents a general must possess. Although not strictly a requirement, the conscientious general will actually know a little about construction, keeping one step ahead of the suspicious client. To instill confidence, a general must be able to stride across a muddy, obstacle-strewn construction site without seeming to care about Gucci loafers or looking too much like a wuss when side-stepping barriers. And because they make more money at it than most touring pros, generals must be clever enough at golf to be widely considered good players, yet somehow consistently lose to clients.

To succeed in this rough and tumble world, a general must speak fluent “subcontractor,” a dialect in which that word that rhymes with duck is used—to the exclusion of almost all others—as subject, verb and predicate, often in the same sentence.

Generals must know that the most important critical path in construction is the one from their own front doors to the local bank and will have an uncanny sense as to when to drop a change order on a client’s desk. The general destined to wear the tool belt once again is likely to capitalize on the slightest mistake in the building plans. “Oh, you wanted nails with that? Where do the plans say anything about nails?” The enduring general, on the other hand, will concoct a story more compelling than “Lassie Come Home” to sell a proposed change order.

Since there’s about a pinch of truth in the foregoing, there’s nothing intrinsically wrong with requiring that a contractor who has built a dozen projects for you to still bid every job. It sometimes happens, however, that developers will take advantage of the inevitable frantic eleventh-hour nature of the bidding process and accept a bid containing a glaring error in their favor (e.g. three bids are within nickels of one another at $10 million while one lone bid is at $8 million), figuring that, at a minimum, this will give them huge leverage during the course of construction.

For what it’s worth, we have long since figured out that a contract as thick as a cornerstone won’t help with a crooked or inept general and that a handshake suffices 90 percent of the time with an honest, competent one—the contract simply reminding everyone of what they agreed to do. We stopped putting our projects out to bid nearly 20 years ago, relying instead on a couple top-flight contractors with whom we do business nearly every year, making them part of our team. Our generals work with us from day one—long before anyone knows whether a project will ever be built. They happily provide us value-engineering and cost estimating on one plan iteration after another, all without charge because they know that, if the project proceeds, the work is theirs. This, we believe, is the right way to relate to general contractors.

If contractors are bookies, then we’re gamblers. And there’s a time-honored place in the world for honest bookies, and, hopefully, for those of us gambling.

For more about John McNellis or McNellis Partners, please visit mcnellis.com.