Design Agreement Surprises

A friend and longtime business associate sent a note asking for my thoughts on how to avoid exposing your markup:

We are designing (under a design agreement) a large sunroom addition with two decks, a full masonry chimney with two fireplaces, etc. It is quite a project and will end up being the most expensive addition our company has built to date. When we got started on the design, we projected $250,000 or so. Due to a few factors (things just costing more and also the owners adding to the design) our final price ended up being $377,000.

The owners certainly had sticker shock, but still really want to build this addition. The whole issue of how to set a budget on a project like this and avoid this sticker shock is certainly an area where I am open to advice. However, my main question has to do with how to avoid giving away your markup amount when the owners start substituting features? . . .

In our follow up meeting as I presented options, and they were disappointed that they did not save more and began to ask, “how much was this? How much was that?” and it is hard to answer questions like that without giving away information as to our company’s mark-up.

I did some quick math in my head and said, “around this much…give or take.” Our documents (design agreement and contract) say we either charge for itemization or reserve the right to refuse to do it. But, nonetheless, these tricky conversations end up coming up.

It’s a tough spot to be in and most of us have been there. However, an ounce of prevention is worth a pound of cure, as Ben Franklin used to say. There are a few things that led to this.

Not Knowing the Budget

It’s important to establish the budget for a project at the very beginning. It’s one of the four basic questions that needs to be asked and answered before a design agreement is even discussed. It appears $377,000 was beyond their budget. If you’d known that before you presented the final price, you’d have been able to present options that brought the project price back down into their budget.

Setting the Target Budget Range

The projected cost in a design agreement is also called the target budget range. It’s the target for the design, based on their budget. It needs to be a range, not a fixed number, for example: $250,000 – $325,000. Your target budget range needs to be within 10% of the final price, so if you aren’t confident of the cost, do your homework before writing the agreement. That would have prevented the surprise you both experienced when things cost more than expected.

Not Communicating Price Changes

When the design changes, the price changes. When your client starts adding to the design, it’s your responsibility to tell the price just went up. If it went up beyond their budget, everything stops until they understand you won’t be able to meet their budget with that design change. If it’s impossible to build what they want with their budget, you want to know that before you spend time on the design.

Negotiating is never easy, but most contractors make it more difficult than it needs to be by doing design work and estimating before they get the customers budget set. That is the main reason you hear, “Your price is too high” or “We want to think about it” or any one of a dozen or more statements they make to keep from making a buying decision.

Asking and getting answers to the four basic questions of a sales call makes it easier to know if your client has the desire and money to build the job they think they want. This is covered in-depth in Profitable Sales, A Contractor’s Guide. Once you know the client’s budget, you can set up the design agreement and begin designing the project to match their budget. When you deviate from that approach, you leave yourself wide open to all kinds of questions and scenarios that you just don’t need.

“Never look back unless you are planning to go that way.” — Henry David Thoreau

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