Open-Book Management

In last month’s column I wrote about my approach to converting a prospect into a client by offering him the opportunity to sign and fund a Professional Services Agreement. Steve signed a PSA with my design/build firm for an estimate to build a 6,000-sq.-ft. portfolio home. We showed him the 13-page spreadsheet complete with 20 major phases, 60 minor phases and a total project cost of $195 per sq. ft. Steve agreed to buy a building lot for $1.3 million and asked us to prepare a contract. Our contract with Steve is an agreement to build his house using open-book construction management that includes charging him a builder management fee calculated as a percentage of the total hard and soft costs of his project.

If you would benefit from selling custom-build projects using this approach, then be prepared to answer the following objections that are likely to be raised by most prospects:

PROSPECT: What incentive do you have to get me the best value for every purchase of labor and material?

BUILDER: If we don’t get you the best value, the next time we need the same product or service from that subcontractor and supplier we will also be overcharged. We get multiple bids on major phases and you see all the bids. We want you to be so convinced that you would refer us to your best friends for their custom project. You can talk to any of our clients to confirm that they were convinced that they got the best value.

PROSPECT: How will I know I am getting true costs from your subcontractors and suppliers?

BUILDER: You will be speaking directly to our subs and suppliers who are instructed to quote you the best prices they can. They all are aware that they are competing with others for your business. You will get fax or e-mail copies of their bids at the same time we get them. And (for the skeptic), if you would like to see our paid bill file for any of our prior or current jobs, it’s always open and available to you. And (for the nonbeliever), this will be a relationship based on mutual trust; perhaps this approach to custom building is just not right for you.

PROSPECT: Will you let my cousin Vinnie do the tile work? Will you let me buy the countertops from my wife’s sister’s husband?

BUILDER: We encourage you to use our subs and suppliers because they are the people we have the most influence and control over for quality and service. We are happy to get bids from your contacts providing they have a proven track record, references and are competitively priced. If they meet all these requirements, then we will add them to our regular bid list for other work. Please refer anyone to us you feel will improve your project and our future projects.

PROSPECT: If you use one of my subs or suppliers will you still charge me the builder management fee? If I buy the front door in Europe and have it shipped to the site, will you still charge me your fee for those items?

BUILDER: Absolutely yes. We will still charge you our builder management fee. We will still be responsible for installing it and fixing it if it’s damaged or needs repair.

When these questions arise during a sales meeting, I am generally encouraged because it means the prospect is seriously evaluating my proposal for building their project. One prospect I met summed up open-book construction management by concluding that it “removes the mystery from the financial darkness of building a custom project.”