Guidelines for Landing That First Light Commercial Job
Home builders who are considering diversifying into commercial construction need to know the language of commercial construction and understand the differences between this type of construction and home building.
Home builders who are considering diversifying into the booming commercial market need to understand what they are getting into in order to avoid any missteps when attempting to land that first commercial project.
There are factors, guidelines and vernacular that differ from home building, and understanding them can mean the difference between achieving success in light commercial construction and the inability to pursue or land that first commercial job.
“Commercial construction may be a great opportunity to diversify for the local home builder and may provide counter-cyclical opportunities,” said Wichita, Kan. builder Carl Harris of The Carl Harris Company and a member of NAHB’s National Commercial Builders Council (NCBC), “but you need to be aware of the rules that may be different in the commercial market.”
The First Consideration: Know Your Strengths
Most home builders who have entered the commercial market say that identifying your strengths as a builder should be your first consideration. This includes analyzing licenses, access to land and connections to the market, as well as understanding the strengths and weaknesses of all subcontractors and partners.
“If the builder is short in any of these areas, he may want to develop a plan for strengthening them before taking the leap,” Harris said
Reaching the Market: Two Tips
Experienced commercial builders are continually doing their homework and legwork to come up with creative ways to reach the market. Newcomers to commercial building should be no less diligent.
“One of the first things I do each month is put together a solicitation letter to all the commercial Realtor® agents and architects in my area,” said John Piazza, Sr. of Piazza Construction, Inc. in Mount Vernon, Wash. and an NCBC member.
He keeps his message simple and focused. “In my letter, I simply ask if they or their clients have a commercial project that is stalled for financial reasons and could use a builder or partner to join their deal, please call me,” said Piazza.
This type of solicitation, Piazza said, generally yields from three to five deals to review a month.
“I don’t even try to go after all the deals referred to me this way,” said Piazza. “I just go after the really good ones and only the ones where I can retain a high percentage of ownership.”
Another way to enter the light commercial construction market is to buy some commercial property and "option" it by leasing it to a tenant before the property is built, Piazza said. “That way, you can get a loan from the bank using the tenant as your springboard. It works great and I’ve done it many times in the past.”
Three Market Sectors of Commercial Construction to Consider
There are primarily three different market sectors of commercial construction that home builders need to consider when planning to enter commercial construction. Each of the sectors is distinct, and each has its own advantages and drawbacks, experienced builders say. The three sectors include:
- Bid Work
The bid market offers builders plenty of opportunity simply because of sheer numbers. There generally are a large number of bid projects that can be developed jointly with property or business owners and architects.
However, bid work projects tend to have much lower profit margins. They also attract tough competition from other, potentially more experienced commercial builders in the area.
- Negotiated Work
The negotiated market functions very much like the custom home building market that is so familiar to many home builders. As with custom home building, in negotiated work the builder addresses the particular needs of the owner regarding project location, function and costs. And also similar to custom home building, the builder must work closely with the owner to identify, qualify and satisfy potential projects.
The negotiated commercial market generally translates into much more “hands on” work for the builder per project, but this aspect of commercial building may seem like a natural fit for home builders.
- Working With a Group
Building with a group of partners is the most popular method of diversifying into ligher commercial construction. It is also an effective way to learn more about the business.
In addition, once the commercial building or project is completed, it can provide a stream of revenue for several years or more because the builder and other members of the group are all part-owners of the property.
In general, the number of projects of this type in which a builder can get involved is limited only by the amount of capital he is able to raise.
Learn the Language of Commercial Construction, Scrutinize All Contracts
There are many operational differences between home building and commercial construction that home builders need to learn — including a different construction language.
For example, blueprints are referred to as “contract documents” in commercial construction vernacular. Likewise, commercial builders are generally referred to as “contractors” rather than as “builders.”
According to most experienced commercial contractors, those two terms — contract documents and contractors — and what they mean are vital to understanding the business.
“We have a lot of contracts that we have to deal with on the commercial side,” Harris said. “For instance, the contract between the owner and contractor is overseen by the contract between the owner and architect, not to mention the contracts between the contractor and each of his subcontractors and trade partners.”
Because so many different contracts are at stake in commercial building, Harris offered a word of caution: “Know the contract and what you are agreeing to do,” he said. “Many contracts try to shift responsibility whenever they can to those below them.”
“Be careful of contracts requiring additional insurance, indemnity and costs that you may not wish to take on,” he added.
NAHB National Commercial Builders Council Has Resources Available
Diversifying into commercial construction and landing that first commercial project can seem like a daunting task, but it can prove to be a smart and profitable move and NAHB has resources available through the National Commercial Builders Council to help with the transition.
NCBC helps ease the transition for home builders who diversifying into the light commercial arena by providing and promoting an exchange of industry-related information. NCBC also addresses the regulatory and legislative issues surrounding light commercial construction.
“It’s important to note that the NCBC can be a resource for any builder looking to move into light commercial construction,” said Harris. “Whether it’s by contacting one of our trustees for advice or purchasing our manual, 'Light Commercial Construction for Home Builders,' we can answer any questions you might have. The NCBC continues to provide the tools its members need to make a smoother transition into this market and to aid in their successes.”
For more information, or to join NCBC, visit www.nahb.org/ncbc.
NCBC members also have access to the exclusive NAHB Select Commercial Builders Web Channel which contains information on a wide range of topics, including improving your bottom line, workplace safety and incorporating green building into light commercial projects.
'How-to' Manual About Light Commercial Construction Available Through NCBC
“Light Commercial Construction for Home Builders: A How-to Manual for Diversifying Your Business,” available through The National Commercial Builders Council (NCBC), can help residential builders who are considering diversifying into light commercial construction.
The manual identifies three key areas for home builders who are diversifying into the industry:
- Building for investment (either solo or in partnership with a client)
- Working for a stand-alone client
- Pursuing public construction projects
The manual explains the differences between residential and light commercial construction, methods of contracting, OSHA requirements, building materials, licensing issues and codes and standards. It reviews the common types of light commercial buildings and points out the differences between residential and commercial customers.
For more information about the manual or the NCBC, e-mail Nick Lashinsky at NAHB, or call him at 800-368-5242 x8455.