"Thoughts and Observations on Architecture and You"

Topics of importance for people about to build or renovate

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Beware the Low Price


You thought it was wise to seek, and have received, four cost estimates to do a renovation project — $108,000, $105,000, $104,600, and $92,500 — without using a bid process and its formal procedural requirements.

The estimates have been based upon a detailed set of architectural plans (drawings and specifications). Each estimate is from a licensed general contractor with a similar size of business, experience level, technical capability, and union / nonunion orientation.


Which contractor should you select if you want to have the best chance of achieving the design and construction quality level described in the plans with the fewest management problems and the lowest cost?

For many people, the choice may seem obvious: the contractor with the lowest cost estimate should be chosen. But in this case, if you do so, you may be taking the first step in setting up conditions that will lead to an arduous working relationship with the contractor and a less than optimal building result. Why?

If the architectural plans have been thoroughly done and if the contractors are similar to one another — two big "ifs" — the cost estimates will probably not vary by more than about 6–8%. This is particularly true when the general contractors are located in the same geographic area because they may ask many of the same subcontractors for price quotations to include in your cost estimate.

In the example above, three of the four prices are close, while the lowest figure is considerably different from the other three. Might this be because the contractor with the lowest estimate discovered a clever, cost-effective way to build your project? Possibly ... but probably not! It is more likely that this contractor has:

  • overlooked some work that was called out on the plans
  • substituted several lower cost products for some of the items specified, hoping that you would agree with these changes later
  • underestimated the time required to perform certain unique tasks, or to achieve the higher quality of workmanship expected
  • emphasized low price over quality when choosing subcontractors
  • failed to include an adequate contingency amount, overhead cost allocation, or profit margin in the estimate, each of which contributes to the project’s financial stability.

Given these possibilities, if a very low price is accepted unquestioned, there is an increased likelihood that you and the general contractor will have a series of cost confrontations throughout the project. If facing major financial problems, your contractor may be forced to delay the completion the work.

Most residential contractors have small businesses with very limited amounts of cash and lines of credit. However, the money needed to purchase materials and rent equipment, pay subcontractor invoices, and handle payroll expenses can be substantial. A significant cost estimating mistake, or a failed gamble, can quickly place a small size contracting company in a financial corner. As is the case with most business people, the contractor will attempt to get out of that corner by any reasonable means to keep his or her business operating. These means may include:

  • increasing project revenue by issuing change order requests for even minor work not clearly shown on the drawings and for every small change in the scope of work that you request
  • speeding the project work beyond the point that a prudent level of care can be used when doing it
  • delaying payments to subcontractors, who then respond by not performing their work in as thorough or timely a manner

This type of project environment will not benefit you and your project, regardless of the strength of the legal position that you believe you have in the contract that you signed with the contractor.

In our example, how then might the selection of the general contractor proceed? After carefully analyzing each of the cost estimates to identify obvious reasons for price differences, you have at least two judicious options. Keeping in mind that you have not used a formal bid process, the first option is that the contractor with the lowest price can be asked to reexamine his or her estimate to make certain that it is accurate. Such a request should alert the contractor that you suspect something important may be amiss.

The second option is to eliminate the lowest cost estimate from serious consideration. You may be reluctant to do this, but the small differences among the other three estimates strongly suggest that, as a group, they represent a more accurate order-of-magnitude cost for your project than does the lowest estimate. As is the case with the first option, your goal should be to make certain that the price basis for your contract agreement with the contractor is accurate and fair to both you and your contractor.

With increasing frequency, the best general contractors are politely declining requests to be one of several contractors they do not know providing time-consuming cost estimates for project work that has not been thoroughly designed and documented. Instead, in exchange for your early selection of them to be the contractor for your project, they offer to work with you and your architect in a partnership spirit to provide cost information and construction advice about items that have been included in the plans — and many that have not — to help you achieve the best project result. It is an intelligent approach to managing the project effort that merits strong consideration.

John McLean, Architect
San Francisco
(415) 777-9767