The Simple Math on Closeout
May 9, 2019
Congratulations, you’ve been awarded a project! Now what? You set up the pre-con meeting, worry about mobilizing, review the drawings and specifications, generate an initial submittal log, begin to buyout the trades, and get to breaking ground. Have you started to think about closing the project out yet? Probably not, but you should be.
The current industry trend is for owners to withhold around 10% of the total project value as the final payment. This retainage money is held until the closeout portion of the project is complete and all associated turnover documentation is delivered to the owner. In an ideal world, a project runs smoothly, everything gets turned in by the substantial completion date, and the general contractor receives those retention funds in a timely manner.
Unfortunately, this only happens once out of every ten projects completed. This means most construction professionals, on average, will have retention funds released in a timely fashion on just three projects they’ve worked on throughout their career. These are not great betting odds, particularly when the ante is the entire profit margin for a project and a decrease in cash flows for the business.
Within the 10% of the funds that are withheld lies the profit for the general contractor, which is usually between 3.5% to 5% of a project’s total construction value. When you add in liquidated damages from failing to close out on time, outstanding change orders, and possible claims; a decent amount of projects are looking at a loss if closeout does not go well. Think about it: you still have to pay the subcontractors, they’ve already paid for materials, they have to pay their team—any amount of that tied up in retention funds starts coming straight out of pocket. At that point, it would have been better financially to have never taken on the project to begin with.
On some level, it makes sense not to worry about the last step of a project while working on every step before that. Yet, it pays to be proactive; in this case quite literally.
- During preconstruction, what if your team captures the closeout requirements while creating the submittal log since they’re working through the specifications anyway?
- Why not set up your project to collect the closeout documentation from each subcontractor as they finish their scope of work?
- Have you thought about collecting and reviewing warranties and O&Ms right after installation so it’s still fresh for the subcontractor and they have some time before their next job?
- What about getting contractually required QA/QC inspections completed and making sure rework is carried out while the subcontractor is still on site?
It’s difficult to keep track of yet another aspect of a project when you’re already herding cats in order to get the actual building done on time and on budget. That’s why we created Pype Closeout—to automate the closeout process and make it easier to keep track of. The software automatically compiles a closeout log, continually emails subcontractors about the outstanding documentation they need to turn in, pings you when it is time to review turned over documentation in order to ensure compliance, and provides a reporting dashboard that gives you a quick overview of your closeout progress. All of this together provides better visibility into your closeout process and helps to assure your stakeholders that you will closeout on time.
The rest of your project could run smoothly, effortlessly, on time and on budget, but an unorganized turnover process puts your project at major financial risk. This leaves your entire profit margin vulnerable and represents a potential loss if not done properly. Because of this, your goal once the notice to proceed has been issued should be to close out properly and within the timeframe specified in the contract. Otherwise, the odds are stacked against you.