General Contracting vs. Construction Management: How to Choose

By BURT PEARSON

Which Construction Bid Option is Best for Your Business?

When it comes to managing construction projects, business owners and project managers often face a critical decision: should they opt for construction management or general contracting?

This choice can significantly impact the budget, timeline and overall success of a project. We’ve worked extensively with both approaches, and through our experience, we’ve uncovered some important insights about the true costs involved in each.

Understanding the True Costs

Understanding these distinctions can save you from unexpected expenses and help you make informed decisions tailored to your project’s needs.

What is Construction Management?

Construction management is a project delivery method where the construction manager acts as a consultant to the owner during the design and construction phases. The CM does not perform physical construction work but rather oversees the project, coordinating various subcontractors and ensuring everything runs smoothly.

The key feature of CM is its fee structure and how overhead costs are handled. Typically, the CM charges a fee of about 1.5 percent of the total project cost. However, the overall overhead expenses – the costs related to project management tools, site facilities, administrative support and other resources – are billed separately as reimbursable items.

For example, everything the construction manager puts on the jobsite – from water coolers to computers – is accounted for as a direct cost to the owner. These reimbursable costs cover the actual expenses incurred by the CM to manage the project effectively. The owner pays for these items directly, in addition to the CM’s fixed fee.

How Overhead is Managed in Construction Management

One of the most misunderstood aspects of CM is how overhead is applied. Unlike traditional bidding where overhead might be embedded in a lump sum bid, in CM, overhead costs are transparent and itemized throughout the project.

This means that while the CM’s fee might seem low at 1.5 percent, the owner is still responsible for all overhead costs as reimbursable expenses. These can include:

• Project management staff salaries
• Equipment and technology used onsite
• Temporary facilities like trailers and water coolers
• Insurance and bonding costs
• Office and administrative expenses related to the project

Since these costs are charged as they occur, the final tally might be higher than initially anticipated. This transparency is beneficial for owners who want detailed insight into where their money is going, but it can also lead to surprises if not carefully monitored.

What is General Contracting?

GC, on the other hand, is a more traditional method where the contractor takes full responsibility for the construction work. The GC provides a bid or lump sum price that includes all costs – labor, materials, overhead, profit and contingencies.

In this setup, the contractor’s overhead and profit are embedded in the bid price and are not billed separately. The GC manages subcontractors, schedules the work, and ensures project completion within the agreed budget and timeline.

How Overhead is Managed in General Contracting

Unlike CM, GC includes overhead in the bid itself. This means that the owner sees one comprehensive number upfront. The GC absorbs the overhead costs internally, which include:

• Office expenses
• Project management salaries
• Equipment and administrative costs
• Profit margin

This approach can make budgeting simpler for the owner since the bid price is more predictable. However, the contractor must carefully estimate all costs to avoid losses, and sometimes contingencies are built in to cover unforeseen expenses.

Comparing Costs: Construction Management vs. General Contracting

At first glance, many business owners believe that CM is the cheaper option due to the relatively low fee percentage. However, this perception can be misleading.

Let’s break down the cost dynamics:

Fee Structure and Overhead Transparency

CM’s fee of approximately 1.5 percent might sound appealing, but remember that all overhead is billed as reimbursable during the project. This means the owner pays for every management-related expense as it happens, which can add up significantly.

GC typically includes overhead within a higher bid percentage, often around 7 percent. While this seems more expensive upfront, it consolidates costs and reduces the risk of unexpected reimbursable charges.

Example Scenario

Imagine a $10 million project:

•  Construction Management: The CM charges a 1.5 percent fee, which is $150,000. However, overhead costs such as management staff, equipment and site facilities are reimbursed separately. If these overhead costs total $600,000 throughout the project, the owner pays $750,000 in total.
•  General Contracting: The GC bids $10.7 million, which includes overhead and profit. There are no separate reimbursable overhead costs, so the owner pays the lump sum of $10.7 million.

While the CM option appears cheaper at first glance, the reimbursable overhead can push the cost closer to the GC bid. The key difference lies in how transparent and itemized these costs are presented.

Why Do Owners Perceive Construction Management as Cheaper?

Many owners see the low percentage fee of CM and assume it means lower overall costs. This is because the fee is often quoted without the reimbursable overhead expenses, which can be substantial.

Additionally, because reimbursables are billed as they occur, owners might not immediately recognize the full financial impact during the project. This can lead to surprises when overhead expenses accumulate.

In contrast, GC’s all-in bid makes it easier to forecast total costs, even if the initial number looks higher.

When is Construction Management the Right Choice?

CM is ideal for projects where the owner wants maximum transparency and control over costs. It also works well when the project scope is complex or evolving, and the owner prefers to be involved in selecting and managing subcontractors.

Some advantages of Construction Management include:

• Greater insight into individual cost components
• Flexibility to make changes during construction
• Direct involvement in subcontractor selection
• Potential to reduce markups on subcontractor work

However, owners should be prepared for the administrative effort and the need to monitor reimbursable costs closely.

When is General Contracting the Best Option?

GC suits projects where owners prefer a fixed price and less involvement in day-to-day construction management. It’s a straightforward approach where the contractor takes on the risk of managing costs and schedules.

Benefits of General Contracting include:

• Clear, upfront pricing
• Reduced owner involvement in subcontractor management
• Contractor assumes responsibility for cost overruns
• Potentially faster project delivery with streamlined communication

Owners should ensure the bid is comprehensive and account for contingencies within the lump sum to avoid surprises.

Understanding Overhead and Its Impact on Project Costs

Overhead is often misunderstood in construction projects. It represents the indirect costs necessary to support the work but not directly tied to a specific construction activity.

Examples of overhead include:

• Project management and supervisory staff salaries
• Office rent and utilities
• Equipment maintenance and depreciation
• Insurance and bonding
• Safety programs and compliance

In CM, these costs are billed directly to the project as reimbursable expenses, making them highly visible but sometimes surprising. In GC, they’re built into the bid, making them less obvious but still present.

Understanding how overhead is applied helps owners interpret bids more accurately and make informed decisions.

Burt Pearson is president at Pearson Construction.