A General Contractor (GC) is a party to a construction contract that is responsible for overseeing the project’s completion from beginning to end. A general contractor may also be referred to as a prime contractor. While the overall duties of a general contractor can vary by contractor and jurisdiction, a GC’s duties generally include estimating, supervision, and project management. Most general contractors also bear the financial risk of the project, depending on the delivery method.
In most cases, the General Prime contractor and the Prime Contractor are the same. The terms are regularly used interchangeably. A prime contractor is the top contractor on the project who holds the main contract with the project owner. In some cases, a prime contractor and a general contractor may be different. For example, large national companies often work with a national contractor for their projects. However, that “prime contractor” may subcontract a project in a given area to a general contractor with experience or expertise in that area. However, for the purposes of this article, the prime contractor and general contractor are synonymous.
General Contractors and Construction Managers (CMs) are similar in many ways. In fact, many GCs also perform as CMs and vice versa. Distinguishing between the two can be difficult, even for those within the industry. In most cases, the distinction becomes the relationship with the project owner. A general contractor is brought in to build a project for an owner based on a set of plans from a design professional such as an architect or engineer. Alternatively, a construction manager is contracted directly with the owner before design even begins. While this may seem like a minor distinction, it changes the relationship dramatically.
Consider a traditional construction contract that is completed under the design, bid, build method. An owner contracts with an architect to design a building. The architect creates plans and specs and then solicits bids from General Contractors. GCs review the plans, estimate costs and submit a proposal to the Architect. The architect and owner select a winning bidder and construction begins. The GC is responsible for completing the project and submitting pay applications to the architect for approval. Should the GC need to make a change, they have to submit a proposed change order to the architect for approval. While the GC likely has a relationship with the owner, they primarily report to the architect. The GC also bears the risk and reward of performance under these contracts. Should the project come in under budget, the GC’s profit will increase. Should the profit be over budget, the GC bears the extra cost. Many GCs perform some work on the project, though not always. They usually do include costs for supervision and general conditions.
Now consider a construction manager on the same project. The construction manager would be working directly with the owner before design begins. The CM may even help select the designer. The owner and CM agree on a fee up front for the CM’s services. The CM will go out to subcontractors and suppliers and obtain preliminary pricing for the owner so that the owner can set a budget. Owners and CMs may split any savings, or it may benefit the owner, depending on the contract. Some contracts do put the CM “at risk”. In these contracts, the CM provides the owner with a “Gross Maximum Price” plus their fee. Any amount over this price falls back to the CM. CM At Risk Contracts generally split any project savings between the owner and CM.
CMs tend to have a less active on-site role once construction begins. They provide project management and ensure the subcontractors are completing their contracts appropriately. CMs rarely perform any work on a project themselves.
The role of a general contractor largely depends on the contract and type of delivery method. However, the role of general contractor almost always includes the following:
GC responsibilities may include additional activities depending on the project and contract.
When a contractor has skilled labor on staff to complete certain trades, they are referred to as a self-performing GC. Common trades that GCs self perform include framing, excavation and earthwork, concrete, and trim work, although it could be any trade. Performing certain trades gives a contractor several advantages. First, it gives them an opportunity to make more profit on a project. Not only can they obtain profit through the overall project, but they can make additional profit through the trade that they perform.
A second advantage is control. They do not have to rely on a subcontractor for the trades they can self-perform. This significantly reduces their risk. It can also help with scheduling, labor and other challenges the contractor may face when using a subcontractor for that scope.
Self-Performing General Contractors have disadvantages as well. The biggest disadvantage is the overhead the skilled labor presents. Self performing GC’s have to pay their labor regardless of their backlog. This can lead to pressure to take cheap work in order to keep their guys busy and cover their overhead.
Non-Self Performing GCs are often referred to in the industry as “Paper GCs”. This is because they are not directly performing construction work. Instead, they are focused on supervision and project management (i.e. moving paper). The biggest advantage to not self-performing work is that there is little overhead to cover. A company can be nimbler by only maintaining a basic staff. Instead, they focus on finding and executing on the best projects. Lower overhead also may mean that they can be more aggressive in pricing their work.
The downside to not performing any work is the lack of control. A GC that does not self-perform is completely reliant on the subcontractor market. During a good economy, they may find it more difficult to get subcontractors to bid their work or meet their schedule. They may also be less competitive than self-performing GCs who can buy out a sub trade for cheaper.
General contractors can be grouped into different sub categories. These include Commercial, Industrial, Civil and Residential.
Commercial General Contractors - Commercial General Contractors build or remodel buildings for businesses. Common projects include retail shops, restaurants, office buildings and others.
Industrial General Contractors - Industrial General Contractors build or remodel highly specialized facilities used to make products. Common projects include manufacturing facilities, refineries and power generation facilities. These projects tend to require a higher degree of expertise and experience. They also normally involve a lot of equipment and specialized materials.
Civil General Contractors - Civil General Contractors build and repair heavy, public infrastructure projects. Common civil projects include highways, bridges, dams and treatment plants. Civil GCs often work for public owners.
Residential General Contractors - Residential General Contractors build dwellings for individuals and families. Common projects are individual homes or complete subdivisions. Residential builders may also specialize in other small buildings such as barns.
The process of becoming a general contractor depends on the state and municipality. Some states require GCs to have formal education, pass a licensing exam and be bonded. Other states may not require anything at all. Most GCs should at least possess knowledge of building and local codes. Many study guides can be purchased to help contractors prepare for licensing or basic education. Trade schools, colleges and experience working for others is how most prepare to become a general contractor.
GCs will also need other basic protections. Most states require GCs to carry general liability insurance and worker’s compensation insurance. General liability insurance protects customers and other parties if the GC or their subcontractor causes property damage or bodily injury. Worker’s compensation insurance provides benefits to workers injured on the project. Some states will allow a GC to waive worker’s compensation if they are the only worker, but most will not. General contractors may also be required to carry other types of insurance, depending on the state, owner or contract. Examples include auto insurance, umbrella insurance, builder’s risk, pollution insurance, professional liability insurance and others. Construction is a litigious industry and it's important to be protected.
Many states will require general contractors to purchase license bonds before performing any work. Additionally, GCs performing commercial, industrial or civil work will likely need to have contract surety bonds at some point.
Another important consideration for becoming a general contractor will be the type of work the GC pursues. Two major categories of work include hard bid or negotiated work.
Hard Bid Work is often referred to as competitive bidding. Hard bid involves a bid letting in which contractors submit bids and the lowest price or lowest responsible bidder is selected. Most public construction work is hard bid. Hard bid work is often the easiest way to get into general contracting. There is little barrier to entry on much public work. In fact, federal and municipal work often encourages bidding from small contractors.
The downside to hard bid work from a GCs perspective is the potential for lower profits and increased risk. The contractor must balance between putting enough profit margin in the bid, while keeping the bid lower than the competitors. Because GCs on hard bid projects are trying hard to win the award, they cut as much cost as they can. This in turn increases the risk. The contractor bears the risk of cost overrun on a hard bid and if they are too aggressive in their pricing, the project could result in lower profits or a project loss.
Negotiated Work involves a general contractor obtaining a project without a competitive bid. The GC and the project owner agree (negotiate) a price for the contract. Negotiated work often comes from developing solid relationships and a track record with owners, architects and other interested parties. However, there are many advantages to negotiated work. Oftentimes, the GC can negotiate higher profit margins or an agreed fee above costs. Negotiated projects are often less risky as well. If costs for a particular trade increases, the GC usually has more power to recoup those costs from the owner.
General Contractors face many risks in operating their businesses. Some of these include:
One of the largest risks a General Contractor can face is non-payment by an owner. Because a General Contractor often incurs costs upfront, the owner’s inability to pay can be devastating. General Contractors can reduce their risk of non-payment by verifying that the project owner has the proper funds or financing in place. It’s better if these funds are set aside for the project. Additionally, GCs should not complete any work outside the scope of the contract without first obtaining a signed change order.
Many things can contribute to cost overruns on a project. Bad estimating, weather, poor production, unforeseen site conditions, etc. However, in many construction contracts, the GC is responsible for those costs. A single bad project can wipe out the profit from any good projects, or even take the GC out of business.
Cash management is crucial to general contractors. Many smaller GCs assume that all profitable projects are good. However, additional projects take cash and resources. Having too much work is one of the main causes of GC failure. GCs should understand cash management and constantly monitor it along with project performance.
Subcontractors are a significant risk to general contractors. Even if a GC does everything else correctly, a subcontractor with labor or cash issues can wreck a project. In some cases, replacing a subcontractor with another can be done easily and inexpensively. However, in most cases, it costs significantly more and can cause project delays.
General contractors typically bear responsibility for the site and project they are overseeing. Injuries or fatalities are devastating to all involved. For a GC, they can be costly in terms of dollars, reputation and the ability to obtain future work. They can also carry OSHA fines and penalties if the GC’s site wasn’t not safe. GC’s need a proper safety plan, insurance and adherence from subcontractors.
Delay damages are contractual damages that the general contractor incurs if a project is not completed on time. Delay Damages can be actual damages which include consequential damages, or liquidated damages. GCs should always prefer liquidated damages. However, all delay damages should be avoided. They can be very expensive and devastating to a GC if the project is significantly delayed.
Disputes are very common in construction. Projects can end up in very costly mediation, arbitration or litigation. These disputes can take years to settle and pose a significant risk to a GC.
Even after a project is complete, GGs face risk from Construction Defect claims. Construction Defect occurs when a part of the building fails or a problem is discovered after the project’s completion. Construction Defect laws vary by state but pose a risk long after a project is complete.
While the risks of being a general contractor are significant, the profits can be also. The average gross profit for commercial building general contractors in our customer base is between 8% -10%. The contract values of construction projects are normally pretty significant. For example, a $10,000,000 project that would have a gross profit of approximately $1,000,000 if all goes well. Keep in mind that these numbers do not separate self-performing from non-self performing GCs or Construction Managers. They also do not include profit margins of residential.
Another consideration is how GCs account for various costs. For example, one GC may include a project manager’s pay into the job cost, while another may include the pay into general and administrative expenses (overhead). While the net profit would be the same, the GC who puts those costs into overhead will have a higher gross profit on each project.
While becoming a general contractor should not be taken likely, it has the potential from large rewards. There will alway be a need to build and repair buildings, infrastructure and homes in the long term. Those who can successfully manage construction projects will have a bright future.
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