5 Questions About Preconstruction Service Agreements Answered

A lot of work goes into a residential construction project even before a contract is signed and any payments begin. For some home building businesses, this can turn into a costly gamble where hours are sunk into a custom estimate for a client only to see the project fizzle out. A builder may invest 10, 20, or 30-plus hours preparing an estimate, only to find that the lead wasn’t qualified or wasn't prepared to sign a contract.

In a business where time means money, you can protect your most valuable asset by using preconstruction service agreements to ensure you get paid for estimates.

1. What are preconstruction service agreements?

Preconstruction service agreements are formal contracts between contractors and their clients detailing the services to be performed and the associated costs. Like any service agreement, the preconstruction agreement helps to create transparency between the two parties.

Let's answer the most common questions about preconstruction service agreements ...

2. What are the most significant benefits of a preconstruction service agreement?

Many of the worst profit bleeds builders and remodelers deal with on their projects can be traced back to “free estimates.” These profit bleeds include rework, doing work you aren’t paid for, schedule overruns, lost productivity, and more.

The cause of these problems is often a result of gaps in the agreed scope of work, as well as allowances, unforeseen conditions, and other items missed during the estimating process.

Preconstruction agreements force you to thoroughly plan and properly estimate your projects to avoid these profit bleeds. There is no better way to filter out time wasters, price checkers, tire kickers, and unqualified leads than to have those prospects write you a check.

Using a preconstruction service agreement in your sales process frees you up to spend more time with your qualified leads and paying customers.

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3. What's typically included in a preconstruction service agreement?

There are five parts to a solid preconstruction services agreement:

1. Deliverables: This is a checklist of the services you’ll provide as part of the agreement, including needs assessment, design, selections, and preconstruction and estimating services.
2. Time frame: Defines when the customer should expect to receive the agreed deliverables.
3. Compensation: Your fee for services rendered and delivered.
4. Qualifications and exclusions: A detailed scope of the work you’re performing ... and what's not included.
5. Legal stuff: You’ll want to include some basic language about indemnification, dispute resolution, and termination of the agreement.

4. How should I charge for preconstruction service agreements?

I recommend charging a lump sum fee and collecting at least 50% upon signing the agreement. This best practice pushes all of the price negotiation to the front end of the process before you do any work and it mitigates haggling over time and materials invoices and hourly rates after you’ve done the work.

If you have to or are more comfortable working at an hourly rate, set a budget for the effort, collect a retainer up front, and get approval from the client before exceeding the budget amount.

5. Is there a standard preconstruction service agreement template?

Most home builders and remodelers that use preconstruction service agreements have developed their own basic template and continue to tweak their process, pricing, and documents through trial and error.

Many have fine-tuned their agreement by sharing ideas and best practices with other like-minded builders and remodelers.

To get an in-depth understanding of preconstruction service agreements to maintain revenue and profitability, enroll in a FREE Get Paid for Estimates masterclass at constructionleadingedge.com/start