Building in Bocas
Building in Bocas is a little different from building in other, developed areas. Some
differences are for the better, some for the worse.
One major difference is the increased cost related to building on an island. This holds
true for mainland areas accessible only by water. Materials, equipment, and workers must
be transported over the sea. Weather and high seas can compound this cost in terms of
both time and money. This difference is not unique to Bocas but applies to all island
construction anywhere. Depending on the cost of fuel and distance to building site, about
1/3 or more of the total building cost is attributable to transportation and freight expenses.
The actual building site can impact building costs a great deal. Building sites that were
previously swamps, building over the sea, building on hillsides, building in flood planes,
and building "green" will impact construction costs and time of construction. Bocas has
experienced earthquakes and structures should be designed with earthquakes in mind.
The Bocas area supply chain is not strong. Panama is not a highly developed country
and Latin business practises are not the same as those in the U.S. and Europe. Inventory
levels of most products are very low. Supplier staff often are not aware of their inventory
levels. Product substitutions are often made without communicating to the purchaser in
advance. These facts can delay construction projects months or years. The negative
impact of the supply chain can be overcome by purchasing materials in advance and
storing them until they are needed. Advance purchasing shifts materials purchases to the
front end of the building project.
Building in Bocas is a little different from building in other, developed areas. Some
differences are for the better, some for the worse.
One major difference is the increased cost related to building on an island. This holds
true for mainland areas accessible only by water. Materials, equipment, and workers must
be transported over the sea. Weather and high seas can compound this cost in terms of
both time and money. This difference is not unique to Bocas but applies to all island
construction anywhere. Depending on the cost of fuel and distance to building site, about
1/3 or more of the total building cost is attributable to transportation and freight expenses.
The actual building site can impact building costs a great deal. Building sites that were
previously swamps, building over the sea, building on hillsides, building in flood planes,
and building "green" will impact construction costs and time of construction. Bocas has
experienced earthquakes and structures should be designed with earthquakes in mind.
The Bocas area supply chain is not strong. Panama is not a highly developed country
and Latin business practises are not the same as those in the U.S. and Europe. Inventory
levels of most products are very low. Supplier staff often are not aware of their inventory
levels. Product substitutions are often made without communicating to the purchaser in
advance. These facts can delay construction projects months or years. The negative
impact of the supply chain can be overcome by purchasing materials in advance and
storing them until they are needed. Advance purchasing shifts materials purchases to the
front end of the building project.
Fixed Price vs Cost Plus
Fixed Price contracts work OK in the United States and Canada or anywhere there is
an abundant supply and selection of materials and when the client knows exactly what he
wants. Fixed Price contracts as the name implies focus on price and places the
contractor in control of quality exclusively. An adversarial relationship can be created by
the Fixed Price contract. During construction there is a tug of war between profit and
quality, between the builder's interests and the client's interests. The builder must factor
in all possible contingencies/costs into his price and assume they will all occur or risk a
loss on the project. In short, the client gets charged for contingencies that may not
occur. When costs can not be predetermined and locked in (as is the case in Panama),
the builder must assume the highest costs to insure a profit and protect himself against
losses.
Of course, there is competition. Competition will tend to lower the total contract cost.
Most building disagreements stem from inaccurate estimates or a contingency that
occurred but was not factored into the contract price. A builder cannot stay in business if
he loses money. He will try to find ways to avoid a monetary loss. There are many ways
to save money, none of which are in the best interest of the client. Beware! Some Bocas
contractors will give the client a very low price in order to get the job and then either not
complete the work or add substantially to the original price later.
Change orders. Seldom is there a construction project that does not have changes.
Fixed Price contracts by definition usually do not address the cost of changes. They are
unknown when the contract is executed. Changes orders can be the bread and butter
profit items for the Fixed Price contractor. Many successful government contractors made
a lot of money bidding Fixed Price government contracts at a loss in order to win a
contract, then profit, big time, from the very lucrative change orders that are normally
added on to those contracts.
Cost Plus contracts create a partnership between the builder and the client. Cost Plus
contracts focus on client direction and allow the client to control quality. In order for this
partnership to work, the builder and the client must trust each other. The builder will
advise the client of possible contingencies/costs. These do not become costs and the
client does not pay for the contingencies unless they actually occur. The client saves
money for each contingency that does not occur by assuming the cost risk of each
contingency.
The manner in which the cost is determined can lead to disagreements. Are contractor
discounts passed on to clients? Is there a 'special' arrangement with some vendors that
leads to inflated charges? Contractor discounts should be passed on to the clients. The
client should be allowed to purchase materials directly and specify suppliers when desired.
Change orders are not an issue with the cost plus agreement. Every change is readily
accepted without being detrimental to neither the builder nor the client. The client is free
to make changes during the construction process without fear of severe price increases.
This is a really big deal to most clients. Clients get new ideas and change their mind as
they see their house being built. Cost Plus agreements allow them to include those ideas
and changes into their new home rather than just wish they had asked for something
different.
DANGER! The ease of making changes can get the inexperienced homeowner way in
over their budget. It is very easy to make changes and over look the increased costs that
are being added to the building project. For this reason Cost Plus contracts are not
recommended for inexperienced homeowners.
Combination contracts are a good practical approach to home construction. These are
widely used in the U.S. A Combination contract has a fixed price but also contains
allowances for some areas and contingency clauses for some external factors that can
impact cost. For example, a flooring allowance and a cabinet allowance set maximum
costs in these areas. The home owner is free to choose and change materials but must
pay labor and material costs that exceed the specified allowance amount.
A contingency clause for such events as spiralling fuel costs or materials inflation can be
triggered when described conditions occur. These clauses protect the contractor from
unforeseen risks by transferring excess risk to the homeowner. The homeowner saves by
way of a lower contract price when the external events do not occur and has more project
control when they do occur.
Appropriate contracts
Fixed Price contracts are appropriate for 'cookie cutter' construction projects and for
government projects. Cost Plus contracts are appropriate for experienced homeowners,
for custom construction, and for best building practices. Combination contracts are
appropriate for inexperienced homeowners and for limited custom construction.
Words of Wisdom
When I was a young man, a very successful business man hired me to oversee and
remodel a large building in Boston for a Mercedes and Rolls Royce auto dealership. Lutz
said to me "Leonard never take the low bidder unless he can show you how he will make a
30% profit. If he doesn't make 30% he will find some way of cheating us." Sometimes
Lutz appeared to pay a little more, but he always saved money in the end and got exactly
what he wanted.
My father's response when I asked him why we didn't have several builders bidding on our
new home: "Son, when you build a home, you find the best builder. Then you ask him
what it will cost to build. Then you ask him when he can build. Then you let him build."
My father built several homes this way. He only worked with builders he trusted. We
always got a good deal and a well built house.
Fixed Price contracts work OK in the United States and Canada or anywhere there is
an abundant supply and selection of materials and when the client knows exactly what he
wants. Fixed Price contracts as the name implies focus on price and places the
contractor in control of quality exclusively. An adversarial relationship can be created by
the Fixed Price contract. During construction there is a tug of war between profit and
quality, between the builder's interests and the client's interests. The builder must factor
in all possible contingencies/costs into his price and assume they will all occur or risk a
loss on the project. In short, the client gets charged for contingencies that may not
occur. When costs can not be predetermined and locked in (as is the case in Panama),
the builder must assume the highest costs to insure a profit and protect himself against
losses.
Of course, there is competition. Competition will tend to lower the total contract cost.
Most building disagreements stem from inaccurate estimates or a contingency that
occurred but was not factored into the contract price. A builder cannot stay in business if
he loses money. He will try to find ways to avoid a monetary loss. There are many ways
to save money, none of which are in the best interest of the client. Beware! Some Bocas
contractors will give the client a very low price in order to get the job and then either not
complete the work or add substantially to the original price later.
Change orders. Seldom is there a construction project that does not have changes.
Fixed Price contracts by definition usually do not address the cost of changes. They are
unknown when the contract is executed. Changes orders can be the bread and butter
profit items for the Fixed Price contractor. Many successful government contractors made
a lot of money bidding Fixed Price government contracts at a loss in order to win a
contract, then profit, big time, from the very lucrative change orders that are normally
added on to those contracts.
Cost Plus contracts create a partnership between the builder and the client. Cost Plus
contracts focus on client direction and allow the client to control quality. In order for this
partnership to work, the builder and the client must trust each other. The builder will
advise the client of possible contingencies/costs. These do not become costs and the
client does not pay for the contingencies unless they actually occur. The client saves
money for each contingency that does not occur by assuming the cost risk of each
contingency.
The manner in which the cost is determined can lead to disagreements. Are contractor
discounts passed on to clients? Is there a 'special' arrangement with some vendors that
leads to inflated charges? Contractor discounts should be passed on to the clients. The
client should be allowed to purchase materials directly and specify suppliers when desired.
Change orders are not an issue with the cost plus agreement. Every change is readily
accepted without being detrimental to neither the builder nor the client. The client is free
to make changes during the construction process without fear of severe price increases.
This is a really big deal to most clients. Clients get new ideas and change their mind as
they see their house being built. Cost Plus agreements allow them to include those ideas
and changes into their new home rather than just wish they had asked for something
different.
DANGER! The ease of making changes can get the inexperienced homeowner way in
over their budget. It is very easy to make changes and over look the increased costs that
are being added to the building project. For this reason Cost Plus contracts are not
recommended for inexperienced homeowners.
Combination contracts are a good practical approach to home construction. These are
widely used in the U.S. A Combination contract has a fixed price but also contains
allowances for some areas and contingency clauses for some external factors that can
impact cost. For example, a flooring allowance and a cabinet allowance set maximum
costs in these areas. The home owner is free to choose and change materials but must
pay labor and material costs that exceed the specified allowance amount.
A contingency clause for such events as spiralling fuel costs or materials inflation can be
triggered when described conditions occur. These clauses protect the contractor from
unforeseen risks by transferring excess risk to the homeowner. The homeowner saves by
way of a lower contract price when the external events do not occur and has more project
control when they do occur.
Appropriate contracts
Fixed Price contracts are appropriate for 'cookie cutter' construction projects and for
government projects. Cost Plus contracts are appropriate for experienced homeowners,
for custom construction, and for best building practices. Combination contracts are
appropriate for inexperienced homeowners and for limited custom construction.
Words of Wisdom
When I was a young man, a very successful business man hired me to oversee and
remodel a large building in Boston for a Mercedes and Rolls Royce auto dealership. Lutz
said to me "Leonard never take the low bidder unless he can show you how he will make a
30% profit. If he doesn't make 30% he will find some way of cheating us." Sometimes
Lutz appeared to pay a little more, but he always saved money in the end and got exactly
what he wanted.
My father's response when I asked him why we didn't have several builders bidding on our
new home: "Son, when you build a home, you find the best builder. Then you ask him
what it will cost to build. Then you ask him when he can build. Then you let him build."
My father built several homes this way. He only worked with builders he trusted. We
always got a good deal and a well built house.
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