Which Construction Bid Option is Best for Your Business?

When it comes to managing construction projects, business owners and project managers often face a critical decision: should they opt for Construction Management or General Contracting? This choice can significantly impact the budget, timeline, and overall success of a project. At Pearson Construction Company, we’ve worked extensively with both approaches, and through our experience, we’ve uncovered some important insights about the true costs involved in each. Learn more in this video with Pearson Construction President, Burt Pearson II, and keep reading our blog article below.

Understanding the True Costs

When it comes to managing construction projects, business owners and project managers often face a critical decision: should they opt for Construction Management or General Contracting? This choice can significantly impact the budget, timeline, and overall success of a project. At Pearson Construction Company, we’ve worked extensively with both approaches, and through our experience, we’ve uncovered some important insights about the true costs involved in each.

In this article, we’ll dive deep into the nuances of Construction Management and General Contracting , breaking down what each method entails, how their fees are structured, and why one might appear cheaper upfront but could end up costing more in the long run. Whether you’re a seasoned professional or new to construction projects, understanding these distinctions can save you from unexpected expenses and help you make informed decisions tailored to your project’s needs.

What is Construction Management?

Construction Management (CM) is a project delivery method where the construction manager acts as a consultant to the owner during the design and construction phases. The CM does not perform physical construction work but rather oversees the project, coordinating various subcontractors and ensuring everything runs smoothly.

The key feature of Construction Management is its fee structure and how overhead costs are handled. Typically, the CM charges a fee of about one and a half percent (1.5%) of the total project cost. However, the overall overhead expenses—the costs related to project management tools, site facilities, administrative support, and other resources—are billed separately as reimbursable items.

For example, everything the construction manager puts on the job site, from water coolers to computers, is accounted for as a direct cost to the owner. These reimbursable costs cover the actual expenses incurred by the CM to manage the project effectively. The owner pays for these items directly, in addition to the CM’s fixed fee.

How Overhead is Managed in Construction Management

One of the most misunderstood aspects of Construction Management is how overhead is applied. Unlike traditional bidding, where overhead might be embedded in a lump sum bid, in CM, overhead costs are transparent and itemized throughout the project.

This means that while the CM’s fee might seem low at 1.5%, the owner is still responsible for all overhead costs as reimbursable expenses. These can include:

• Project management staff salaries
• Equipment and technology used onsite
• Temporary facilities like trailers and water coolers
• Insurance and bonding costs
• Office and administrative expenses related to the project

Since these costs are charged as they occur, the final tally might be higher than initially anticipated. This transparency is beneficial for owners who want detailed insight into where their money is going, but it can also lead to surprises if not carefully monitored.

What is General Contracting?

General Contracting (GC), on the other hand, is a more traditional method where the contractor takes full responsibility for the construction work. The GC provides a bid or lump sum price that includes all costs — labor, materials, overhead, profit, and contingencies.

In this setup, the contractor’s overhead and profit are embedded in the bid price and are not billed separately. The GC manages subcontractors, schedules the work, and ensures project completion within the agreed budget and timeline.

How Overhead is Managed in General Contracting

Unlike Construction Management, General Contracting includes overhead in the bid itself. This means that the owner sees one comprehensive number upfront. The GC absorbs the overhead costs internally, which includes:

• Office expenses
• Project management salaries
• Equipment and administrative costs
• Profit margin

This approach can make budgeting simpler for the owner since the bid price is more predictable. However, the contractor must carefully estimate all costs to avoid losses, and sometimes contingencies are built in to cover unforeseen expenses.

Comparing Costs: Construction Management vs. General Contracting

At first glance, many business owners believe that Construction Management is the cheaper option due to the relatively low fee percentage. However, this perception can be misleading.

Let’s break down the cost dynamics:

Fee Structure and Overhead Transparency

Construction Management’s fee of approximately 1.5% might sound appealing, but remember that all overhead is billed as reimbursable during the project. This means the owner pays for every management-related expense as it happens, which can add up significantly.

General Contracting typically includes overhead within a higher bid percentage, often around 7%. While this seems more expensive upfront, it consolidates costs and reduces the risk of unexpected reimbursable charges.

Example Scenario

Imagine a $10 million project:

•  Construction Management: The CM charges a 1.5% fee, which is $150,000. However, overhead costs such as management staff, equipment, and site facilities are reimbursed separately. If these overhead costs total $600,000 throughout the project, the owner pays $750,000 in total.
•  General Contracting: The GC bids $10.7 million, which includes overhead and profit. There are no separate reimbursable overhead costs, so the owner pays the lump sum of $10.7 million.

While the CM option appears cheaper at first glance, the reimbursable overhead can push the cost closer to the GC bid. The key difference lies in how transparent and itemized these costs are presented.

Why Do Owners Perceive Construction Management as Cheaper?

Many owners see the low percentage fee of Construction Management and assume it means lower overall costs. This is because the fee is often quoted without the reimbursable overhead expenses, which can be substantial.

Additionally, because reimbursables are billed as they occur, owners might not immediately recognize the full financial impact during the project. This can lead to surprises when overhead expenses accumulate.

In contrast, General Contracting’s all-in bid makes it easier to forecast total costs, even if the initial number looks higher.

When is Construction Management the Right Choice?

Construction Management is ideal for projects where the owner wants maximum transparency and control over costs. It also works well when the project scope is complex or evolving, and the owner prefers to be involved in selecting and managing subcontractors.

Some advantages of Construction Management include:

• Greater insight into individual cost components
• Flexibility to make changes during construction
• Direct involvement in subcontractor selection
• Potential to reduce markups on subcontractor work

However, owners should be prepared for the administrative effort and the need to monitor reimbursable costs closely.

When is General Contracting the Best Option?

General Contracting suits projects where owners prefer a fixed price and less involvement in day-to-day construction management. It’s a straightforward approach where the contractor takes on the risk of managing costs and schedules.

Benefits of General Contracting include:

• Clear, upfront pricing
• Reduced owner involvement in subcontractor management
• Contractor assumes responsibility for cost overruns
• Potentially faster project delivery with streamlined communication

Owners should ensure the bid is comprehensive and account for contingencies within the lump sum to avoid surprises.

Understanding Overhead and Its Impact on Project Costs

Overhead is often misunderstood in construction projects. It represents the indirect costs necessary to support the work but not directly tied to a specific construction activity.

Examples of overhead include:

• Project management and supervisory staff salaries
• Office rent and utilities
• Equipment maintenance and depreciation
• Insurance and bonding
• Safety programs and compliance

In Construction Management, these costs are billed directly to the project as reimbursable expenses, making them highly visible but sometimes surprising. In General Contracting, they’re built into the bid, making them less obvious but still present.

Understanding how overhead is applied helps owners interpret bids more accurately and make informed decisions.

How Pearson Construction Approaches Construction Management and General Contracting

At Pearson Construction Company, Inc., we offer both Construction Management and General Contracting services tailored to your project’s needs. Our President, Burt Pearson II, emphasizes transparency and collaboration to help you understand the true costs involved.

We also provide pre-construction services that allow you to estimate your costs before the project even begins. This helps you decide which delivery method fits best with your budget, timeline, and level of involvement.

Our approach includes:

• Detailed cost breakdowns for both CM and GC options
• Clear explanation of fees and reimbursable expenses
• Customized project management based on your preferences
• Ongoing communication to keep you informed throughout construction

By choosing Pearson Construction, you gain a partner who prioritizes your project’s success and financial clarity.

Frequently Asked Questions (FAQ)

Q1: Which is cheaper, Construction Management or General Contracting?

A1: It depends on how costs are structured and managed. Construction Management has a lower fee percentage but reimburses overhead expenses separately, which can add up. General Contracting includes overhead in a lump sum bid, making it appear more expensive upfront but often more predictable.

Q2: What are reimbursable costs in Construction Management?

A2: Reimbursable costs are expenses the construction manager incurs to support the project, such as management staff salaries, equipment, site facilities, and administrative costs. These are billed directly to the owner as line items throughout the project.

Q3: Can I switch from Construction Management to General Contracting mid-project?

A3: Switching delivery methods mid-project is complex and generally not recommended as it can lead to contractual and logistical challenges. It’s best to decide on the method during the planning phase.

Q4: How can pre-construction services help me decide between CM and GC?

A4: Pre-construction services provide detailed cost estimates and project planning, helping you understand the financial and operational implications of each delivery method before committing.

Q5: Does Construction Management offer more control over subcontractors?

A5: Yes, Construction Management often allows owners more involvement in selecting and managing subcontractors, which can lead to tailored project execution but requires more owner participation.

Conclusion

Choosing between Construction Management and General Contracting is a significant decision that affects your project’s budget, schedule, and management style. While Construction Management offers transparency and flexibility with a lower fee percentage, the reimbursable overhead costs can lead to higher overall expenses. General Contracting provides a fixed price that includes all overhead, offering predictability but less owner control.

Understanding how overhead and fees are structured in each delivery method is crucial for accurate budgeting and avoiding surprises. At Pearson Construction Company, Inc., we’re committed to helping you navigate these choices with clear communication and expert guidance.

Whether you prefer the detailed transparency of Construction Management or the simplicity of General Contracting, our team is ready to support your project from pre-construction through completion. Reach out to us to learn more about which method suits your project best and how we can help you build with confidence.

For more information, contact our business development team at: https://pearsonconstruction.com/contact/

 

We offer General Contracting, Construction Management and can even help you determine your costs before your project even begins through our pre-construction service. Contact our Team for details, and to learn which option is best for your business.