How owners should read a commercial construction proposal
Eight things every commercial owner should check before signing a construction proposal. Allowances, exclusions, retainage, schedule logic, and the line items that look small but cost real money.
Most owners read a commercial construction proposal the way they read a restaurant check. They look at the total, scan the line items, and sign. The contractors who underbid the work on purpose count on exactly that.
Here is what we wish every property owner, property manager, and developer would check before they sign anything on the commercial side.
1. Allowances
Allowances are placeholder dollars for items the contractor has not fully specified. Flooring, lighting, hardware, finishes. The proposal will say something like "Flooring allowance: $18,000." That number is the cap on the contractor's exposure, not the cap on yours. If the final flooring selection runs $26,000, the owner pays the $8,000 difference.
Check every allowance against what you actually want. If your tenant's brand standard is a $14-per-square-foot porcelain tile and your contractor allowed $4 per square foot, you have a problem you will not discover until selection time.
2. Exclusions
Read every line in the exclusions section. Twice. Standard exclusions are permit fees, off-site utility extensions, hazardous material remediation, owner-supplied equipment, and certain testing requirements. Those are normal and reasonable.
What should worry you is anything in the construction documents the contractor says they did not price. "Excludes coordination with existing tenant during occupied phasing" on a TI in an occupied building is a scope gap. The owner will pay for it later as change orders.
3. Schedule logic
A real construction schedule tells you the sequence of work, the duration of each phase, and which activities depend on which other activities. A schedule that says "16 weeks from notice to proceed" without a critical path is not a schedule. It is a wish.
Ask for the schedule logic. If the contractor cannot produce a sequenced bar chart or a basic critical-path analysis, the schedule is fiction.
4. Retainage
Retainage is the percentage of each progress payment the owner withholds until substantial completion. Most Texas commercial projects use 5 to 10 percent. The held money releases when the punch list closes. Retainage is the owner's protection against a contractor walking off before the job is finished.
Confirm the retainage percentage in the proposal. Confirm when it releases. Confirm whether there is a separate one-year warranty release tied to a maintenance bond.
5. Change order pricing
Every project will have changes. The question is how they get priced. Ask:
- Is labor change priced at a fixed hourly rate?
- What is the overhead and profit markup on subcontractor change orders?
- Are change orders priced before the work starts, or after?
A proposal that says "Change orders to be priced as they arise" is a blank check. The owner has no leverage once the project is mid-stream.
6. Self-perform vs. subcontracted scopes
Ask the contractor which scopes their own crews will perform and which will be subcontracted out. Self-performed scopes typically cost 8 to 15 percent less than subcontracted equivalents because there is no second markup layer. But self-perform only saves money if the contractor's crews are qualified. Ask for evidence of recent comparable projects.
7. Pay application format
A pay application is the monthly invoice. AIA G702 and G703 are the industry standards. The G703 line items should match the schedule of values the contractor submits at contract execution. If the proposal does not say which pay app format will be used and at what frequency, ask. The format and cadence drive your cash flow.
8. Insurance and bond requirements
The proposal should state what insurance the contractor will carry, what bonds (if any) will be furnished, and what additional-insured endorsements will be issued to the owner and lender. If the project requires a payment and performance bond, the bond cost is usually one to three percent of the contract value and should be a line item in the proposal.
What to do next
If a proposal looks low compared to others, that is usually because it is missing scope. A proposal that prices everything fully, includes a real schedule, names the subs, and lists allowances at realistic levels is almost always the cheapest total cost of the job. Even when the sticker price is higher.
Send us your proposal if you want a second set of eyes on it. We do not charge for review and we will tell you what the gaps are, whether you hire us or not.