Before you hire a contractor to carry out building or refurbishment, you must make sure you have finalised your design, and you choose the correct type of contract, or your costs could escalate. David Johnson explains.
THE PROBLEM
My wife and I have been made redundant and we have decided to pool our redundancy money to buy and refurbish a small 15-bedroom hotel. We have different ideas on decor and style, and have decided to approach the project on a room-by-room basis. We are just about to appoint a contractor to do the work for us. Is there anything we should do or know?
THE LAW
The refurbishment of a 15-bedroom hotel will be a substantial project for you in cost terms and it is essential that a properly-worded building contract is entered into, for the protection of both you and the contractor. It is normal for this to be one of the standard form contracts produced by the Joint Contracts Tribunal (JCT), with amendments to suit the job.
In payment terms, building contracts fall into two broad types: those where the work to be carried out is identified at the outset and a fixed price is agreed, and those where the work cannot be identified at the outset and thus a fixed price cannot be agreed.
In the first instance, the work to be carried out can be varied by instruction, but this will almost inevitably entitle the contractor to extensions of time and to additional payment. In any event, you are not in a position to identify the precise scope of work, and a standard fixed-price contract will not be suitable for your proposed room-by-room approach.
In the second case, the contract usually provides that the contractor is entitled to be paid the actual cost of the works, plus an agreed percentage for its overheads and profit. Although it is suited to a room-by-room approach, this method of contracting - commonly known as "cost plus" - does not provide cost certainty and is very prone to escalation over an indicative budget.
EXPERT ADVICE
You are pooling redundancy money to fund both the purchase and the refurbishment, so it will be important for you to keep costs down. A room-by-room approach is probably the most expensive way of going about a project such as this: a piecemeal, stop/go approach will prevent the contractor from achieving an efficient method of working and will prevent any economies of scale. It will demand a high degree of project management on your part or, alternatively, from a consultant. In short, it will be expensive and slow and, under a "cost plus" contract, you, as the employer, will have to bear the cost of this.
Have you considered consulting a professional designer? This can be very helpful as regards developing your design ideas, and can identify areas that will not work in a hotel context.
You should also consider appointing a contractor to carry out the refurbishment of two rooms on a sample basis; one based on your wife's ideas and the other on yours. This would enable you to fine tune the designs for the remaining rooms.
Even if you decide to proceed on a two-design track, the sample rooms would enable the scope of the remaining work to be identified and made the subject of a fixed-price contract.
CHECK LIST
- Consider consulting a professional designer
- Consider preparing sample rooms
- Finalise one - or two - designs
- Enter into a fixed-price contract
- Don't change your mind halfway through!
BEWARE
Many building contract problems occur because the design for the project has not been sufficiently developed when the price is agreed, leading to design development and changes during the works. This will delay and disrupt the contractor, leading to time and cost overruns. Ensure your design is finalised before you hire a contractor, and stick with it.
CONTACT
David Johnson is a partner specialising in construction at Boodle Hatfield.