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Bidding Projects in a Slow Economy

At the risk of sounding like a salesman, now is a terrific time to build or renovate because prices are low and the value of each construction dollar can be higher than it has been in years. However, each time I have met with a group of general contractors recently, most have complained about the conditions under which they are being asked to bid residential or small commercial renovation projects in this slow economic period. They feel that many owners and architects are naive in their use of the bid process as the major tool to lower project cost while ignoring the negative impact that bidding can have on the quality of the construction work, the level of service provided, and the development of the trust needed among all parties to complete a project successfully for each of them.

Two earlier commentaries in this series (No. 4, “Bidding vs. Negotiating” and No. 13, “Beware the Low Price”) touched on various aspects of the bid process. It is helpful to restate some basics about bidding before offering a few observations on current practices. Should you consider bidding an upcoming project, knowledge of the conditions under which the process works best can be helpful.

The Basics

  • For bidding to be an effective pricing tool, every bidder has to have the same detailed information upon which to base a price. This information has to be (1) plentiful, (2) accurate, and (3) documented (drawn and written) to minimize the number of different design and construction assumptions that bidders will be forced to make in order to develop a bid price.

    In practical terms, this means that owners need a complete set of architectural drawings and specifications. Sketchy or schematic drawings lacking construction details, and undocumented verbal requests, do not work in a bid process. With every assumption a bidder makes because design information is incomplete, the owner and the architect lose some design control of the expected building outcome and have more difficulty comparing bid prices.

  • Even with thorough drawings and specifications, the bid process will not be useful if the bidders are quite different. Contractors should be similar in (1) size (overhead cost), (2) capacity (employee skill level and work experience) and (3) culture (the company’s values as reflected by its standard of workmanship and the manner it treats its customers and employees).

    For example, no comparable price information is gained if one bidder works from his home, has two inexperienced employees to whom he pays only an hourly wage, and doesn't take the time to return customer calls promptly or clean the construction site at the end of each day, while another bidder has an office with 3 people managing projects and 12 skilled field employees, responds to all requests right away, and shows respect for an owner’s property by taking 15 minutes at the end of each day to make certain the construction area is clean and safe to walk around. (Note: It should not be implied that larger companies are better. They simply need to operate differently than do very small companies.)

  • Developing an accurate price for renovation projects takes a lot of time. For modestly sized projects, 2–3 weeks of effort may be d to compile a bid. In addition to the research and estimating time taken by the bidder’s staff, many subcontractors and suppliers must be asked to provide detailed competitive price information for various portions of the work.

    The cost of this effort is significant, prompting responsible contractors to be selective about the projects and conditions under which they are willing to bid. Favored projects are those that have the most profit potential, are well documented, and are for owners and / or architects who they believe are fair people with realistic expectations for the construction work and its cost.

Recent Observations and Common Bidding Problems

  • Inadequate information on the bid documents (construction drawings and specifications)

    This is the most frequent complaint I hear. There is no one standard for the proper amount of information that should be provided on bid drawings for every project. The architect is expected to make a prudent judgment about the information needed to compile accurate project prices. Since he has mentally “built” the project while doing its design, he should be aware of the parts of the work that will be the most difficult to build and require much more drawing detail.

    For most architects, this judgment is influenced by (1) the amount of the architectural fee the owner has agreed to pay and (2) the level of professional thoroughness to which the architect is committed when producing his work. One should not expect the second factor to trump the first in most cases. Ultimately, the experienced architect sows the seeds for an effective bid process by requesting an adequate fee to produce thorough bid documents, and the owner acknowledges their value by agreeing to pay that fee.

    Incomplete bid drawings and specifications lead to a high number of reasonable change order requests from a builder that a contractually bound owner, with few practical options, must accept.

  • An excessive number of bidders

    As noted earlier, developing a comprehensive bid s a large investment of money. Small residential and commercial renovation projects are usually done by small contracting firms with limited cash reserves. These builders are unwilling to take the time d to produce a thorough bid for a project they have little chance of getting because the number of bidders is high. Most feel that 3 bidders is a reasonable number. (On occasion, I have suggested that clients get 4 bids because of the increased confidence I have that an attractive low figure quite different from each of the three others deserves much scrutiny.)

  • Bidders that are not comparable

    Owners or inexperienced architects may include one company in a group of bidders that has a distinct operating cost advantage over its competitors. It is frequently a smaller, less well-known contractor without an extensive record of project work. The owner or the architect may believe that this company’s bid will be a useful reference for what the project should cost, and may even want to use this figure to leverage a lower price from the most desirable contractor, presumably via a reduced markup on the project’s direct costs.

    While this idea may appear sound, if the preferred company feels pressure to retain its markup and elects to lower its prudently developed bid by substituting more expeditious and less careful ways of building than it had planned, in the long term, more construction problems are likely to surface. It should also be clear that any bidder asked to spend time and money to develop a thoughtful bid is treated unjustly when an owner or an architect knows that he will not select this bidder to do the work, regardless of its bid, and simply seek one more cost figure for the work.

Remodeling / renovation is a service business, not a commodity business. In a slow economy, owners and architects are well advised to remember this when selecting contractors. If used intelligently, adhering closely to its procedural requirements, the bid process can work well. Whether it is the best method of selecting a contractor to be assured of getting high construction quality remains debatable.

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