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SHOULD I BID MY PROJECT?
Today we’re going to talk about bidding and negotiation. Should you bid your project or should you negotiate?
I will compare the two so you can make a decision as to which is best for you situation.
I’m your host Marc. I’m your architect with the goal of giving you the knowledge so you can advance your dream of creating the ideal home for your family.
Today is all about project delivery and the method of that delivery. There are three types of project delivery.
Traditional
Design-Build
Negotiated
Each method has its advantages, and some are better than others.
Traditional
The traditional approach looks like this. You hire an Architect. The Architect works with you to complete a design. The design is then sent out to multiple contractors that compete on price. The architect collects the bids and compares them with the owner. The owner selects the contractor that they would like to work with either based on price or price plus other factors. Sounds pretty straight forward.
The goal with this method is to design your ideal home. The perfect home for your family, and then select the lowest price possible to make that happen. Can you tell I’m being a little sarcastic?
Design-Build
The Design-Build approach is a little different but is becoming more common. In this case the Architect is typically hired by the contractor. The contractor and Architect work on the same team to deliver the project to the client. There are more decisions made in the field. This is because the Architect is working with the contractor so they can begin construction much faster because every detail doesn’t need to be complete to get the complete bid.
Because the architect is working for the contractor and the contractor is building for the owner. Who is looking out for the owner. Well, the Architect and contractor are supposed to both be but it’s hard to imagine most scenerios don’t fall in the favor of the contractor.
Negotiated
The Negotiated is my favorite. This is where the owner has selected an Architect as well as a contractor from the start. The Architect and contractor work together, but under separate contracts. While designing the contractor works on pricing the project to ensure it is within budget. Once the drawings are complete the contractor is awarded the job. Up until this point they have been working on a limited contract providing what is called pre-construction services.
The Contractor will typically send the drawings out to multiple subs. So even with the negotiated approach there is some competition for pricing.
Contract types
The project delivery is a little different than the contract you have with your contractor or builder. The contracts determine how the project is priced and how fixed or determined that price is.
In my opinion there are 2 commonly types of contracts. The contract types are some what tied to the project delivery method but can overlap in some instances. There is the lump sum contract and the cost plus. The Lump sum is also known as the competitive bid contract.
Lump sum
The lump sum or the competitive bid is a very traditional type of bid. To break it down even further there is a lump sum with a fixed fee and one with a GMP or Guaranteed Max Price.
The Guaranteed Max Price also typically comes with a Scheduled Contract. This breaks down all the pricing and is relatively apparent to the owner. This method is not entirely open book like the cost plus contract.
Either way the goal from the owners perspective with this contract is to ensure the project is built as shown in the drawings at the price that is agreed upon. This does not necessarily mean that it will finish up at that price in the end and we will get into that more later.
Another thing to note is that with a GMP you are requesting that they contractor meet a certain amount and not to go over. There is some incentive to give a relatively higher price so they can guarantee that they don’t go over. This also does not mean that they can’t go over. Lets say that we are renovating your house and once we remove a wall we find that there is major termite damage. Well, we need to remove the area that the termites have destroyed. This would be added as a change order that would increase the final price.
Competitive Bid Process
Like I mentioned earlier the traditional competitive bid approach works by delivering the drawings and having the lowest bidder give you a price to complete for the project. Of course we do not always select the lowest bidder, but often times it is difficult to focus on anything other than that lowest price.
We are used to shopping around. Finding similar products from store to store and eventually coming to one on sale.
“Yea! I’ll take that one.”
But in this case we are really comparing services as well as the products. There are many more factors to consider. If you focus your attention on price instead of value, you will get just that.
It is highly suggested that you do not select the lowest unless you feel that they have all the bases covered and have not missed an item in their calculations. It is best to bring all this to light during the bid comparison stage. If a number looks really low or off then we ask for more clarification on that number.
The worst thing we could do is let something go unanswered in the beginning so it becomes a problem in the field later. With that said does this not feel kind of off. You have spent you life saving and working hard to be able to eventually afford your dream home. You are investing time in getting it right and will be living in your home for many years.
“Should we give your project to the lowest bidder?”
Race to the bottom
Obviously you can see that this method is a race to the bottom. The person that reaches the bottom of the barrel first wins, right? How do you think this translates to the work in your home?
“I want the best craftsmanship at the absolute lowest price.”
I can tell you that if you select the lowest bidder you will not be getting the highest quality. When I recommend contractors to clients, I typically have a range that I like to recommend. The high, medium, and low.
These contractors pretty much fall in line with price (from high to low) and quality follows.
Results on quality
“How do you maintain quality and consistency with the competitive bid approach?”
It’s a constant struggle. The problem is that in order to stand out and be selected we have asked them to provide us with the lowest price. The contractor with the lowest price is rewarded. So if they miss a detail in the drawings or they leave something off they are held accountable right?
Wrong. They will make it up from some other area of your project. The contractor or sub will find a way to make up the error and your project will suffer because of it.
“If you hold someones feet to the fire, expect to get your hands burned”
The bottom line is you don’t get the best quality at the lowest price. You can’t.
Change orders
Are you someone that likes to change your mind? Are you planning on making some slight changes during construction? Maybe move a light switch over or change this door swing. Whatever it might be, You want to move a light thats $150. You want to switch a door around thats another $150. It goes on and on.
This constant markup on small revisions and adjustments is often a surprise to the homeowner in the end. If the paperwork was not properly kept then the owner might be stuck with a bunch of change orders in the end that they did not know were coming.
One piece of advice. If you have bid your project even if you are in a negotiated contract and you believe you are all buddy buddy with the contractor. You will be on site and you’ll say can we move this over here. They will say sure. Of course we can. I will have Tommy do that for you. It will be done tomorrow. In your mind your thinking.
“Awesome. That will be so much better over there. Glad I took care of that.”
Always. Always ask how much the change is going to cost before you direct to make the change. I assure you there is always a cost to every change in the field. Every single one.
A lot of people feel that they are there and whatever it takes to get the job done they are going to do. And that is true to a certain extent. But they are also there to make money. So don’t forget that.
Think about it. You have asked them for the absolute lowest price. You have made them compete with who knows who and in order to get the job they have very slim margins. Actually some take on the project knowing they might lose money and will make it up with change orders. I’m not saying all, but some.
Every time a change is made someone is being paid to make that change. So the contractor has to call Tommy. Tommy says that will be 100 dollars to move that over there. The contractor marks it up to 150 dollars to cover all his time on it and he says to Tommy.
“That’s fine the owner really wants us to move it.”
Because the money is so tight on the project they have to charge it back to you. It’s just the way it works. If you decide to go through the competitive bid process and expect to not have change orders you are in for a surprise.
For the Architect it is a constant fight with the contractor to make sure no cost are being passed to the owner that should be covered by the bid. All this leads to pointing fingers as well. The contractor will start bad mouthing the architects drawings. The architect will start getting frustrated with the contractor over the details. And the owner is stuck in the middle.
Cost Plus
So lets look at another pricing method. This is the cost plus and is more common with experienced clients. Clients that have gone through the competitive bid process and found it challenging and frustrating often times turn to the cost plus approach the second time.
The cost plus is pretty much exactly what it sounds like. Your contractor hires subcontractors to perform a job and then they add a set percentage fee on top. That is the plus. That fee could be a fixed fee or it could be a percentage of what it cost.
We will use an example here. We are going to pave your driveway. It is the end of the project and getting ready to finish some of the exterior work. Things have been going very smoothly. The contractor reaches out to 2–3 concrete paving companies and selects the best for this particular job. They give him a price of $5,000. He will then mark it up usually 20%. So your driveway will end up costing you $6,000.
Team
The real advantage of working with a cost plus contract is that the contractor will be involved from a much earlier stage in the design process. They will help to assist the architect and work through some of the challenging design issues. This would help to resolve issues during design as opposed to during construction.
Like I mentioned earlier with the concrete driveway, the costs are all open book with the cost plus contract. The contractor is required to submit a bill for every part of the project. It makes tracking the expenses very extensive. You will see everything that gets purchased. If you don’t see the receipt then you don’t get invoiced.
With the cost plus you will likely make out a lot better with changes to the construction. You are paying for someone to be there and do the work plus materials. If they make a slight modification then they just make it. If they move something it might cost them a couple of minutes, but because they are there and working it is usually not a big deal that comes back with a huge change order.
For example you want to move a fixture, they just move it. It will probably not even raise the cost of the project. If it was a bid project, each change comes with a cost.
The reason that the cost plus contract works so well is because it involves everyone. Everyone is on the same team. We are all working together to get the job done. No one is trying to undermine the other. The contractor is not in the constant battle or stress that he is going to be shafted or put in a corner with the project.
Because of this he or she is more likely to fix honest mistakes rather than try to conceal them. If someone makes an honest mistake and they try to correct it, they should not be penalized for making it right. You might say, “That is tough, they made the mistake? It’s not my problem.” I know that you might not like that they made a mistake, but things happen and it is no way to work with people if you treat them that way.
Now if they are constantly making mistakes, that is a different story. Another interesting and I believe useful element to a cost plus contract. You are given all the receipt and all the documents. You have a record of everything that went into your project. You also have a record of every person that worked on the project. So couple of years from now you need to get your garage door repaired. Who do you call. Reference your book. Call the person that installed it. That alone is very valuable.
The last thing I wanted to say is:
“You will need to decide which process that you want to use for your home. Just remember if you want quality then you can’t expect to get it by asking someone to reach for the bottom of the barrel. Approaching your construction with a team mindset will make a world of difference from a quality perspective.”
I hope that you are having great success with the planning and construction of your home. If you want to get in touch with me please reach out to me on twitter or google plus.
