The commercial construction industry is one of the biggest parts of the US economy. Underneath the well-oiled machine, equipment, plans, bids, contracts, and technology work in unison to create an industry worth billions of dollars. What does commercial construction entail?
Commercial construction covers all the facets of the development of public and infrastructure projects. The worksites vary in size from one project to another. Each project can employ dozens or thousands of contractors depending on scope, guided by binding contracts.
This guide takes a dive into the basics of commercial construction. You’ll learn more about the industry, how it differs from the residential sector, the stages in commercial construction project management, contracts, the bidding process, and more.
What Is Commercial Construction?
Commercial construction refers to the business of building large spaces in the private or public (government) sector. The final construction might be for sale, lease, or just built for the client’s use based on their specifications.
Commercial construction projects vary in size as it can cover everything from medical centers and retail outlets to manufacturing plants and sports complexes. The businesses that undertake commercial construction projects are known as General Contractors or Constructors.
Examples of Common Commercial Construction Projects
Some examples of commercial construction projects include:
- Institutional buildings (e.g., Universities and Courts)
- Business structures (e.g., Factories and Warehouses)
- Hospitality and tourism (e.g., Hotels and Apartments)
- Sports facilities
- Shopping malls
- Retail stores
- Corporate high-rise
- Medical facilities
The type of construction that can be allowed on any site will be dependent on the land purchased and the local zonal codes within the area.
The Scales of Commercial Construction Explained
The quote you’ll receive on a project and how it will be executed will come down to the scale of construction it falls under. Most projects will fall under one of the following three categories:
Small-Scale Commercial Construction Projects
Small projects like structure updates, building repairs, office space revamp, and more fall under the umbrella of small-scale commercial construction. It also includes new builds of small-size versions of schools, retail outlets, etc. These projects are generally the least costly and will require only a few personnel to execute.
Medium-Scale Commercial Construction Projects
Medium-scale construction projects are the next step up from smaller scale construction. It typically includes all building restructures, property expansions, etc. The difference between these projects and the small-scale ones is the length of time and the number of personnel required to get the job done on schedule.
Large-Scale Commercial Construction Projects
With these projects, the General Contractor has to start from scratch. There’s no skeleton to complete or an existing building to improve on. An architect or developer will create a plan for the structure in line with the client’s goals, and the construction crew will execute the plan.It takes a lot of preparation, time, personnel, and material to complete a large-scale commercial project successfully. Once the land and zoning codes have been sorted, construction can begin. The zoning code will give the general contractor a better perspective on the type of construction a client is looking to complete.
The Differences Between Commercial and Residential Construction
As we mentioned above, the construction industry is a massive one made up of different entities, all working to provide solutions to individuals, businesses, organizations, and the government. Lumping all facets of construction together is, therefore, not a good idea.
There are very clear differences between commercial construction and residential construction, and failing to understand these differences can lead to problems in the planning and execution of important projects.
Below is a look at how they differ:
In this regard, it’s easy to understand what residential construction entails. Most residential construction projects involve building a home or apartment for the owner or their tenants to occupy. With commercial construction, on the other hand, the projects are done for businesses, conglomerates, the government, etc. Even when the project involves building residential quarters, it will involve dozens or hundreds of structures.
The General Contractor on a commercial project sometimes has to cater to the demands of multiple parties with interest in a project. On a standard residential project, however, the client is usually a single-family.
Codes and Permits Required
Regardless of the type of construction, you have to stick to specific codes and get the necessary permits from the city or municipality where the structure is to be cited. In commercial construction, however, additional permits and codes are usually required to ensure that the unique aspects of the construction are not contravening any laws.
The permits and codes are also there to address other things such as the safety of elevators, the adherence to recommended standards in electrical and IT connections, accessibility, space for parking, and more. Most of these concerns won’t exist in a residential construction project, so the codes and permits are a lot laxer in comparison to the commercial aspect.
A typical residential construction can be completed with wood as the main building material. With commercial construction, on the other hand, steel and concrete are commonly used. A typical homeowner can’t afford to use reinforced steel in their building, nor do they need to.
Most residential homeowners can also source the materials needed for a project on their own, while commercial construction clients have to rely on the established supplier-relationships of experienced contractors to get all the necessary materials when they are required.
The equipment required to build the biggest residential homes you’ve seen is almost always dwarfed by what is needed for an average commercial construction project. Excavators, tower cranes, pavers, telehandlers, and other such heavy-duty equipment are needed to pull off most commercial construction jobs. The heavy-duty equipment also has to be handled by highly-trained professionals who are almost never hired for residential construction.
The Pace of the Project
All clients in any construction project want timely completion of their buildings. However, commercial construction clients tend to be more demanding and move at a faster pace when compared to the typical homeowner. They are also able to back up their demands by providing the investment required to bring in all the equipment and personnel required to complete a job.
With the above differences, it’s easy to see why savvy commercial clients look to only work with construction companies with a proven track record of delivery on the type of project they’re looking to achieve or recreate.
Key Stages in Commercial Construction Project Management
The management of any commercial construction project starts long before the first portion of soil is excavated. Below are the various stages and what happens in each one.
The Development Stage
At this stage, the focus is on understanding the client’s needs. What is their vision for the project? Can it be replicated? What is the estimated cost and timeline? The contractor has to rely on knowledge of previous similar projects to provide general estimates. This is the beginning of the partnership, and where the contractor must understand features that are most important to the client, and those that qualify as expendable.
The Initiation and Design Stage
Once the contractor has secured approval on the initial budget, it is time to move forward to this stage, where they have to work on the concept discussed above. They have to juxtapose the initial budget with the ideas to be brought to life. The project contracts are typically signed at this stage.
The client is still involved in this stage as they’ll view 3D walkthroughs and drawings offering opinions where necessary. The contractor will also continue adjusting the budget at this stage, down to the finer details. They’ll only arrive at the final construction budget after a fixed design is in place, and all the elements required to bring the design to life have been considered.
This will include details like the flooring, heating system, elevators, lighting, and more.
The Planning Stage
This is the scheduling stage, which is very important to ensure adherence to the client’s deadline. The General Contractor has to work with subcontractors at each phase of the project to create a schedule that takes inspections and permits into account so as to keep things moving smoothly.
The Construction Stage
This is the most demanding stage of the project as the General Contractor has to work with subs, agencies, and vendors to make sure the commercial project is brought to life quickly. It’s the duty of the General Contractor in charge of the project to control the schedule, budget, scope of the work, as well as the quality of the finishing.
It’s not uncommon for disruptions to arise at this stage, especially as it concerns the budget and schedules. As the structure starts to take shape, the client may have a change of mind on what they need. Such changes will have a ripple effect on the construction as the timeline, materials to be used, and the budget may have to change, sometimes very significantly.
It’s the duty of the contractor to explain to the client the implication of changes, the possibility of succeeding with the change, and how the budget will be affected. While some clients can approve budget tweaks to reflect the changes requested based on estimates, others will require fixed figures first to determine whether to continue with a change or not.
Proper communication is important at this stage to avoid even further delays and make the project even harder to complete.
The Commissioning Stage
When a commercial construction project is close to completion, it is time for the General Contractor to hand over the finished space to the client. An inspection is typically scheduled so the client can go over the different aspects of the project to make sure everything works as it should. They may request cosmetic changes at this point.
The Closing Stage
With all cosmetic changes completed, the project ends with the settlement based on the terms in the original project contract. After payment has been completed, some contractors will maintain contact with the client for up to a year, responding to any requests or taking care of any issues that may arise over that window.
After the agreements documented in the contract as part of the closing stage has been honored, the project file can officially be closed.
Commercial Construction Contracts Explained
A commercial construction contract is an agreement between the client and a general contractor. The best contracts secure and protect the interests of the parties involved in the project and should typically include the following details:
- A description of the project: Also known as scope, this should provide a proper description of what problems have to be solved over the duration of a project. It should include a summary of the project and the purpose of the construction.
- Project cost: This part of the contract should clearly outline the projected cost of the project, with notes of additional payments and how changes to the cost have to be handled.
- Schedule of payment: This is an outline of terms of payment and the payment due-dates. It should also contain details of late payment penalties, the process for invoicing, and more.
- Project document list: This is a record of all the documents guiding the project, such as specs, blueprints, exhibits, and more.
- Construction laws/contractor and client responsibilities: This part of the contract will explain the responsibility of all parties involved in the process.
Going into a commercial construction without a professional contract drawn up can be detrimental for both the client and the contractor. Legal problems may arise, with both parties unable to defend themselves properly and receive protection.
It’s also important to avoid using a blanket contract when working on commercial projects. Such contracts may not contain all the specifics about the project. Being specific about the scope of the project, the responsibilities of the contractor to the owner, and vice versa will be highly beneficial for all parties involved in the project.
Such detail also eliminates questions and also reduces the chances of a dispute in the middle of the project.
Differentiating Between Design-Build and Traditional Building Commercial Contracts
Building and design-build commercial contracts are two of the most popular types of commercial construction contracts you’ll find in the industry today. The contract type being used will come down to the client’s preferences and whether or not they want to deal with multiple contracts.In a design-build contract, the client chooses the same company to undertake the design and building of the property. The same contract binds the owner, the contractor, and the designer, and all parties are responsible for their end of the bargain and have legal obligations to each other.
A traditional construction contract is the best option when the client prefers to work with different companies on the design and construction of the commercial construction project.
A different contract is written for the contractor and the owner, and another one is written for the designer and the property owner. In this type of contract, the designer and the contractor have no legal obligations to each other, and thus, disputes may arise, stalling the progress of the project.
Experienced commercial construction clients typically tend to choose a qualified company and go with a properly written design-build contract.
The Commercial Construction Bidding Process Explained
When a commercial client is about to embark on a project, they request for estimates from multiple companies or contractors. These contractors and developers submit their estimates, projected timelines as they try to get selected for the project. This is known as the bidding process. The estimates and proposals are created using templates or construction estimation software.
The proposal will cover elements like building blueprints, budgets, projected timelines, materials, and more.
Construction Bidding Template vs. Construction Bidding Software
Construction bidding templates can be found online for free, with some businesses creating bespoke/paid templates for different companies. The templates generally include the scope of work documents and line item spreadsheets. The documents make it easy to outline timetables, projected material costs, budgets, etc.
The line item sheets are further broken down to incorporate specifics. So, with an electrical line item sheet, for example, there’ll be a further breakdown describing the number of light fittings, the length of the wiring, etc. Bidding software, on the other hand, will streamline the proposal development process in a way templates can’t. With such software, you can manage payment tracking, calculate job costs, create schedules, and calculate inspection costs, etc. — all in one place. This makes it easy for contractors to create bids at a faster rate.
Some of the software solutions come with added benefits like getting regular updates on the daily changes to the cost of local materials.
A contractor’s choice will come down to what they feel most comfortable with. Some contractors have in-house staff that can create proposals for bids without using third-party software and templates. The goal is to present the details of the project in such a way that the client will choose the contractor’s brand over the competition.
Commercial Construction Loans Explained
Commercial construction loans are used to cover costs such as materials, labor, land development, and equipment rentals. Once a company’s loan application is approved, the funds are disbursed incrementally over the course of the project. Commercial construction loans can either be long-term or short-term.
The Small Business Association (SBA) has developed two popular types of construction loans typically used by construction companies. These are the SBA 540 Loan and the SBA 7 (a) Loan Guarantee Program.The SBA 540 is meant for smaller businesses and brands new in the commercial construction space. Borrowers are required to put down around 10% of the loan amount, and the duration of the loan is typically ten years. The SBA 7(a) also provides a 10-year loan and allows borrowers to take up to $5 million. Borrowers have to use equity, asset, or collateral to back the loan.
Why Do Commercial Construction Companies Need Loans?
It may feel counterintuitive, but the clients in a commercial construction project are generally not responsible for the contractor’s cash flow. The contractor, therefore, often needs the loan to secure equipment, cover payroll, pay for insurance, and other such expenses when working on large-scale commercial projects.
However, it’s also possible to find a commercial contract where the client provides funding and ensures constant cash injection in phases over the course of a project. These are details that will be hashed out at the beginning of the conversations.
What Are Other Sources of Funding for Commercial Construction?
Apart from the SBA loans, contractors can also get funding from their existing financiers, venture capitalists, and crowdsourcing. They typically stand the best chance of success with lenders and financiers they’ve worked with in the past.
Top Factors Commercial Construction Customers Watch Out For
Below are some of the top factors customers watch out for when hiring a commercial construction contractor:
By hiring a licensed commercial contractor, a client can be reasonably assured of the success of a project. In many states, commercial contractors only become licensed after meeting some stringent requirements.
Savvy customers will check a contractor’s license against data from the state construction licensing department. So they typically ask for proof of the license, in addition to other details like the insurance policy certificate and bond. The insurance policy has to be comprehensive enough, covering injuries, property damage, and other problems that may arise in the middle of the construction.
Clarity of Communication
The success of any commercial construction project hinges heavily on the contractor’s ability to communicate with the client. Most clients, therefore, will only hire a contractor that can communicate in a manner they can understand and on schedule. Some owners will require daily or weekly updates in person or online.
Thoroughness of the Proposal
One of the differentiating factors for commercial contractors is the thoroughness of the proposal submitted by various contractors. The best bid is one that covers every blade of grass in terms of the finer details of a project covering everything from schedules to a breakdown of the budget. Being able to point out details that may have been missed by the property owner is a plus.
Clients know that they have to spend a lot of time with their chosen contractor. Therefore, it’s no surprise that they often choose contractors that they perceive as hardworking, friendly, responsive, and ambitious—one they will feel very comfortable working with.Owners use the development stage to ask questions that will help them decide if the contractor is on the same page. Once the interaction is comfortable, the chances of choosing them for the project increase a great deal.
This is why the best commercial construction companies choose highly knowledgeable business development managers with excellent interpersonal skills to lead all communications with clients. The best managers are also great at managing conflicts between sub-contractors, vendors, and everyone else involved in the project delivery process.
Failing to handle the inevitable conflicts that will arise in the middle of a project is a sure way to miss deadlines.
The scope of a typical commercial construction project is such that a high level of experience is required to effectively manage the process from start to finish.
Even when a contractor ticks all the right boxes, clients will spend time reviewing the company’s history, especially when it concerns handling the type of project that’s the focus of the discussion. How many of such projects have they completed? Years of experience working in the client’s region is also a plus for any company.
The biggest commercial construction projects will go to contractors that demonstrate a strong track record.
Savvy commercial construction clients also know not to be conned by companies who try to mask inexperience and being a poor fit for the project by offering estimates that are a lot lower than the average offered by other companies.
They also don’t rush the decision of a preferred commercial contractor without shopping around and comparing 3-5 contractors that are qualified for the project. The best option will come down to a combination of the factors we’ve highlighted here thus far, but a contractor that’s able to show past proof of skill in the delivery of the type of project at hand will be high on the list.
The best commercial construction companies have no problem with providing references, and savvy clients include checking out the references as part of their due process. They’ll discuss with each reference to get a general feel of what the experience was like to work with the contractor. The emphasis is placed on finding out if the contractor was able to deliver, as well as their level of professionalism while handling the process.
The commercial construction niche is a highly competitive one. Clients have to exercise caution in their choice of contractor to ensure maximum value from the often huge expenditure. Contractors, on the other hand, have to compete with other businesses to ensure their bid is the winning one.
In terms of prospects, industry predictions suggest that smart city projects and public transportation upgrades will keep the sector busy over the next few years. The demand for commercial construction will remain fairly stable, and construction companies will continue to break new grounds.
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