I often recommend design agreement contracts for anyone who needs to spend time designing a project before it can be estimated. A design agreement allows you to get paid for your work. All too often, design efforts are either given away or end up being a waste of time. That’s what happened to this contractor:
Recently, went on a 3rd visit with a prospect, I arrived with a second round of concept drawings for the addition project and presented them on my tablet (nothing in print). The prospect’s reaction was quite favorable and we moved on to discuss some of the details and finishes.
However, during the course of the meeting, my client took it upon herself to photograph the main floor plan image on the tablet. I was so stunned I didn’t open my mouth.
Not surprisingly, I received a text message on my cell phone a few days later saying they were going to shop the project.
If this contractor had a design agreement in place, they would’ve been paid for those concept drawings that their former prospect is now shopping.
A design agreement says I (the contractor) will work with you (the client) to design the work you want done on your home or building, incorporating your ideas and selections and making the design fit your budget. When you’re satisfied with the design, I’ll give you a fixed price quotation for that design and I’ll write an agreement to build the job and bring it all back to you for review and approval. The fee for this work is $X, with a deposit of $Y and the final payment $Z due on presentation of the package as outlined above for this job.
That’s a simple explanation of the design agreement.
A letter of intent is different than a design agreement. A letter of intent is used when they already have their design and are simply looking for someone to build the job for them. The letter of intent tells your potential clients that you will do three things:
- Prepare a Construction Agreement
- Place their project on your production schedule; and
- Schedule and hold crews for their project.
Keep in mind, they already have the design but there is still much to be done. You have to get the estimate complete, write up the construction agreement, complete all the selections, set up the job schedule and make it all blend with your existing work load.
You must decide for yourself if you want to give your design, estimating, and document production work away for free or if you want to be paid for that time and effort. Let’s take a look at some issues that come up on both of these that you need to keep your eye on.
Design agreements are much easier to sell than the whole job. The proper presentation of a design agreement comes AFTER you’ve asked the four basic questions, received positive feedback from the potential client and decided they are someone you want to work with. When you’ve agreed on their budget, present the idea of a design agreement. Your design agreement should range between 4% and 8% of the projected sales price of the job. It’s far easier to sell a potential client on the idea of a $2,595 design agreement than a $65,000 or more kitchen remodel.
You can’t get in a big hurry when presenting the idea of using a design agreement. You must take them through the steps of how it will get them to the finished kitchen remodel they want, in less time, providing a far more accurate estimate, with far fewer chances of something going wrong during the job or the end product not being what they want. Explain how the design agreement takes the unknowns out of the process. Once you get the hang of using the design agreement as a sales tool, you’ll see your sales to leads ratio go up.
Is there a downside to a design agreement? You bet. You need to know your numbers well enough to be able to help them set a realistic budget for their job. This is all explained in detail in Profitable Sales; A Contractor’s Guide. You should be able to set the price range within 10% of what the job will cost. If you can’t do that, then do your homework before you set the budget so when you talk numbers you can get in that range.
If you get in a big hurry, throw some numbers out, and the final price for the job comes in much higher than what you quoted, you have no one but yourself to blame when they tell you that your price is too high and they go looking for someone else to build their job.
Is there a downside to a letter of intent? You bet. You need to make sure that your potential client’s plans are NOT conceptual drawings, drawings made to get quotes, or any other designs, drawings or plans that you can’t get a permit with. If they don’t have a good set of plans, offer to finish up the plans they have (going back to the design agreement). If they won’t do that, then I wouldn’t go any farther with them. I’d give them a wide, rough price range, get on my horse and head for the barn. You’re wasting your time with these folks, and you’ll seldom get a profitable job when you’re asked to work with incomplete drawings.
Contrary to what I’ve had architects, designers and some worldly wise contractors tell me, a good estimator can’t look at a conceptual drawings and give an accurate quote. Conceptual drawings never turn into the job that the client expects the contractor to build. There are too many changes. That’s just reality.
Sample agreements and details are in the Profitable Sales book. Using a design agreement or a letter of intent gets you paid for the work you do.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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