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Topics of importance for people about to build or renovate

Exercise room addition in Orinda, California

Bidding vs. Negotiating

One segment of the design and construction process little understood and appreciated by clients is the Bidding or Negotiating Phase of the work, which occurs after the architect has completed the project’s construction drawings and specifications. The result of the work done in this phase is the awarding of a contract to a general contractor to undertake the construction.

Two major methods are available to you to arrive at the contract award. One option is to ask several contractors to simultaneously review the construction documents, estimate the cost of the work to be done as shown on the documents, and submit a formal bid proposal to complete this work. Alternatively, you may choose to work with one contractor who will review the documents and estimate the cost. If it is outside your target budget, he will work with you and your architect to price adjustments to the project scope of work or the design so that they better fit your budget. Each method has certain advantages and disadvantages of which you should be aware.

Bidding for construction services is the better known process because it is used almost exclusively for well-publicized public construction projects and for a number of large private buildings. The apparent main advantage of this method of awarding the contract is that an owner is given the opportunity to select the contractor who has submitted the lowest estimated cost to do the work. Further, when a variety of estimates is presented to an owner to do the same work, large price differences can be a signal of inadequate or unclear information on the project documents, a problem that can be addressed before signing a contract agreement.

For the bidding process to be of any substantial value to you, its inherent demands and difficulties must be addressed. The first of these is that all the bidders must be given the same detailed information, namely, a complete set of working drawings and specifications that describe exactly what is to be built. If the documents have incomplete or unclear information, each contractor will need to make many more assumptions about how the project is to be constructed. Believe me, every contractor will assume something different! It will then be impossible to compare prices. Further, many contractors feel that they have no obligation to include the cost of work not shown on the drawings in their bid price, even though they believe it will be needed or desired by the owner.

Although the correlation between the amount of construction information provided and estimating accuracy appears obvious, many owners seem to miss it when they ask contractors to estimate the cost of a project for which only minimal drawing and no written information has been provided. This is particularly common on smaller projects. Reputable contractors know that their less-principled competitors will take advantage of missing information and submit artificially low prices based on using the least costly building techniques and materials that will provide a contractually passable building result, if not the owner’s desired one.

A second difficulty inherent in the bidding system is that all the bidders are seldom equal in terms of their organizational size and overhead cost, employee building experience, and the quality of the subcontractors with whom they work. You and your architect must spend the time to carefully develop a list of the most reputable contracting firms that are similar to one another if their bid prices are to be intelligently compared. To be fair to all bidders, project parameters that strongly favor some bidders should be revealed at the start of the process.

The major alternative to bidding to arrive at a contract award is to negotiate the price of the work with one contractor. Because this is a simpler process, with fewer formal procedural requisites and less expense for everyone, I feel it is the better option for most small projects (less than $300,000) and for a number of larger ones . . . on one condition. An owner and his architect must be willing to extend trust to the contractor chosen. Preferably, trust already exists because of past success working together or a strong recommendation from a friend or business colleague in whose judgment one has great confidence.

Because there is a high likelihood that your selected contractor will be awarded the construction contract, he or she can be more open with you about project costs, and can answer questions and address problems or concerns about the information shown on the project drawings and in the specifications. If requested, he may be able to suggest ways to trim construction costs without substantially lowering project quality. Conversely, he may recommend better construction techniques or finishes to achieve the level of quality that you have in mind. Because of the increased openness between you and your contractor about the cost of the work, there is less chance that either of you will find himself in a future financial corner, unable to get out of it without hurting the other party.

The main disadvantage for you in negotiating with one contractor is that you can’t be certain that your contractor’s initial project cost estimate is as low as you think it could be. However, if your contractor has been candid with you about the project’s potential problems and areas of greatest cost uncertainty, there is less likelihood that you will be saddled with as many “unexpected” costs as frequently occurs when bidders make their lowest cost assumptions, rather than more probable or conservative ones, in developing their bid proposals. Whether the final project cost is generally higher when using the negotiated contract option is subject to debate. An open negotiation process can minimize everyone’s project risk, and should be considered by every owner for whom the main project goal is getting the highest quality work for each available dollar.

John McLean AIA
San Francisco
(415) 777-9767