See Also Fixed-Price Model Contract
The most common approach to bidding is to provide the same plans and specs to two or more contractors (typically three or four on a large project) and ask them for a fixed-price bid. Each then submits a price and proposal and you select the winner. In most cases, the owner selects the low bidder, but in some instances you would be wise to choose another bidder. You might choose one of the middle bids if you believe you will get better quality, a better schedule and completion date, or perhaps a better overall experience based on what you learn from talking with references and your gut instincts.
You goal should be to find the lowest bidder that you trust will do the job to your standards. Remember, the bid price is really just a starting point and the actual cost of the project will almost always be higher. So saving 1 or 2 percent at the outset by going with the low bidder can sometimes be false economy. The money is important, but should not be your sole criteria.
In most things in life, we are willing to pay a little more for a better product or service. On a big project, you will be working closely with the contractor over a period of months to turn your vision into a real building. There are no guarantees here, but the promise a smooth, stress-free project that comes out the way you want it may be work paying a modest premium for.
WHO SHOULD BID?
If you are working with an architect of designer, he or she will probably suggest names of contractors they think would be a good fit for this project. Presumably, they are recommending someone they have confidence in and have a good working relationship with, which can prove very valuable during the project. So they should go on your bidders’ list. You can find other contractors through friends, relatives, lumberyards, or just driving around town (see Choosing a Contractor).
I’d suggest getting a bid from at least one well-established company with multiple crews and a lot of similar projects under its belt, and at least one smaller, one-crew company where the owner works on the job site at least part-time. Smaller companies often have less overhead and do more of the work with their own crew – which can sometimes translate into lower prices and better quality (assuming the boss is a conscientious craftsman). Depending on the size of the job, you should get anywhere from two to four or five bids.
It’s in everyone’s interests to get apples-to-apples bids so there are no misunderstandings and disputes down the line about what was or was not included in the bid. To avoid problems, it’s critical to start out with complete drawings and specs (the Scope of Work), and an organized method to keep track of bids. In a formal “sealed-bid” competition overseen by an architect or construction manager, bidders are generally given two weeks, are able to see the list of other bidders, and will meet together with the owner when the bids are unsealed.
If you are handling the process yourself, you can be less formal and review the bids in private. However, roughly following the format of a formal bidding process can help you keep things organized and professional, and provide you with better information. A formal bidding package typically includes:
Scope of work summary: A brief description of the project – for example, an 800 sq. ft., two-story addition with full concrete foundation, built on the west side of the existing house, at 100 Main St., Anytown, USA.
Administrative requirements: This describes the bid process in detail: where to pick up plans, when bids are due, how long the bid must hold, insurance requirements, bonding requirements (if any), the proposed job schedule, and if late penalties (liquidated damages) will be assessed if the job is overdue. Also include how to best contact you, and when to schedule site visits.
Selection criteria: Formal bid packages typically specify that the contract will go to the “lowest and best bidder,” which legally allows the owner to choose someone other than the low bidder. Perhaps you discover that the low bidder is embroiled in a lawsuit, is so busy that he cannot complete the job in your time-frame, or just says all the wrong things during the bidding process. You should also state whether you will reveal all bids after you’ve made a selection. This is an expectation in formal bidding and provides valuable information to all the bidders. My suggestion is to review the bids in private, but agree to reveal all bids to any bidder upon request. Think of this as some small compensation to the losing bidders for all the time they put into preparing your bid.
Construction drawings: The drawings and specs should work together to provide a highly detailed description of the work to be done – the “scope of work.” The drawings should show what the finished project will look like, and how the pieces fit together, with precise dimensions for all key components. Any missing details should be clarified in the specification.
The specifications. These focus on the materials to be used and their installation. Material specs describe the type of materials to be used and, where relevant, their quality levels and installation requirements. Performance specs provide criteria that a component, such as the heating system, must meet, but allow the contractor to propose the specific equipment. Specifications may also detail special measures required due to difficult access, adverse weather, environmental concerns, very steep sites, etc. More on specifications.
Errors and omissions: Bidders are instructed to immediately report any conflicts, ambiguities, or errors in the plans or specs. A contractor may also suggest a less expensive way to get something done. The designer or owner should send out any necessary revisions to all bidders, so that everyone is bidding the same plans. It is critical to maintain one Master Set of plans, which will become the “As-Built” set to follow during construction. Otherwise, things can get pretty confusing. Note: A less-than-conscientious bidder can keep omissions in the plans to himself, win the job on low bid, and then spring a pile of expensive change orders on the owner during the course of the job.
Allowances: This is an estimated dollar value for materials not yet chosen such as flooring or kitchen cabinets. Allowances may include materials only, labor only, or both. Make sure the allowances are large enough to cover the choices you have in mind. (Sometimes contractors put in unrealistically low allowances to keep bids low). Read more on allowances.
Unit pricing: This is way to get bids when the quantity of an item is unknown at the time of bidding. In new construction, it may be a price per cubic yard to remove ledge that you know is in the ground, but cannot tell how much. In well drilling, it might be a charge per foot of depth. In remodeling, unit pricing may cover the linear feet of siding that needs to be replaced, or the square feet of plaster that needs repair. Sometimes a little investigation will give bidders enough information to provide a fixed bid, but if this is not feasible, unit pricing is the next best thing.
Alternates: If you’re not sure about vinyl siding vs. wood siding, ask for an alternate bid for the wood. Then you can upgrade to wood later in the job without executing a change order. These give you some price flexibility when the final bids come in.
Schedule of values: Ask for a breakdown of costs by major cost categories (see schedule of values). This will help you evaluate the variance in the bids and may alert you to bidding errors and omissions. If one bidder is way below the rest of the pack, there has to be an explanation: either his company is working for a lot less money, has much lower overhead, is using inferior materials, or made an estimating error (or some combination of these).
Subcontractor list: Since much of the work will be done by subcontractors (with some companies, all of the work), you’ll want to know who they are.
Change order procedure: Hopefully your project won’t involve many change orders, but they can easily drive a project over-budget. Find out how they will be priced, including labor rates and mark up – for both add and deduct change orders. For example, if you choose a more expensive bathtub, but the installation is the same, do you just pay the difference in material cost – or additional labor and material markup as well? What if you downgrade to a cheaper tub (a deduct change order) – do they keep their original markup or lower it for the cheaper product?
TO BID OR NOT
If invited to bid, contractors have to decide if it’s worth their while to spend a week or more working up a detailed bid. In general, contractors are not big fans of spending 40 or more hours bidding on a large job they probably won’t get. Just as you are sizing up the contractors, they are sizing up you and your job. First there are practical concerns such as:
- Do they have the time to do a thorough bid?
- Do they have time in their schedule for the job?
- Is this the type of job they prefer and feel they can do profitably?
- Are the plans and specs complete enough to bid properly?
- Do the owners have a realistic budget in mind and can they afford the project?
Then there are strategic bidding issues: Who are they bidding against and what is their chance of landing the job at a price where they can still make a reasonable profit. Although you are not obligated to reveal the other bidders, it is normal in formal bidding procedures. One bidder may see a company name known for making low-ball bids, and making up the losses in change orders – fortunately a more common scenario in commercial and government work. Or he may see a company on the list that has much lower overhead and is willing to work on thinner margins. Also, how honest is the bidding process – do they really have a shot at winning? Issues include:
- Is anyone bidding on the job who they know they cannot compete with?
- Are they being used as a price check for pie-in-the-sky plans that may never get built?
- Are they being used to price-check a company that has already been more-or-less selected?
Finally, there are intangibles such as their feelings about the designer and owner. Will they be easy to work with or a source of ongoing problems? Can they expect full and timely payment from you as the owner? Are there any red flags that suggest greater than normal risk such as
- An owner or architect who seems difficult to work with
- Uncertainty that the contractor will be paid promptly and fully
- Novel materials or building systems that are untested or unfamiliar, making them difficult to bid, slower to install, and possibly unreliable
- Unusual design ideas that were easy to draw but challenging to bid and build
- Structural, code, or zoning problems with the design that are not easily resolved
Incomplete plans. Incomplete plans are a red flag for many builders, unless they are design-builders who welcome the opportunity to complete the design themselves. Incomplete plans could indicate an indecisive owner, a job that the owner or designer fears is running over budget, or a rush job where the owner wants to start building before the plans are complete. In some cases, the problem is with the designer who is inexperienced or more interested creating an artistic design than the nitty-gritty of getting it built.
Depending on the reason for incomplete plans, the contractor may agree to bid the job, but on a cost-plus basis only, or may agree to submit (for free or for a fee) a non-binding “budgetary estimate” to help the designer and owner complete the design. If you do get a fixed bid on a set of incomplete plans and specs, your don’t really know what is included in the bid and what isn’t, and may be unpleasantly surprised when you get hit with a pile of costly change orders.
All the factors above will be taken into account and weighed against the company’s need for work. If they decide to bid, they will review the plans, visit the site, contact the designer with questions, and work up a detailed estimate.
A JOB I DIDN’T BID
When I was starting out as a contractor, I was asked to bid a large, upscale remodeling job. On the first visit, I met the couple – a psychologist and a lawyer – who showed me several sets of plans and a professional 3-D model of the existing house with three additions that roughly doubled the size of the living area.
As we discussed the job, it quickly became clear that the couple were not yet in agreement on the details of what to build and when. As we talked, they mentioned “problems” with the first architect and the second architect, neither of whom were still involved at this point. The two appeared to be at odds with one another and with the two professionals they had hired and fired so far.
As much as I wanted the job, potentially worth over $200,000, my gut told me to turn and run as fast as I could. However, I decided to give them a try on a small bathroom remodel they wanted done right away. Things were going pretty well, when I received a call on a Sunday night complaining that the new sink and vanity I had installed were too noisy in their bedroom and could I do something about it.
Of course, the sink and vanity were no louder than their previous one and they had not asked me to soundproof the wall when it was open. More importantly, they saw nothing wrong in calling me on a Sunday night to express their concerns. Monday morning wasn’t soon enough. I completed the job, got paid, and needless to say, told them that I would not be able to bid their renovation project.
Site visits. On vacant land, they will be looking at site conditions such as slope and drainage, potential access problems for trucks and equipment, and options for material storage and security. In renovations, they will be looking at the condition of the existing structure – sagging rooflines, excessive building settlement, or other structural issues, antiquated mechanical systems or pipes that may not survive the remodel, toxics such as asbestos and lead, and any evidence of water damage or wood decay that might drive up costs or come back to haunt them at the end of the job.
Q&A. Based on the plans and site visits, the bidders will often have questions for you and/or the designer. For example, the plans may call for a raised house elevation – can the required fill be obtained from somewhere on the site or must it be brought in? The skylight shown has a lower pitch than recommended by the manufacturer – do they want it built that way? The screen porch shown with no railing appears to be a code violation – has this been approved? The owner or designer will have to answer these questions promptly and communicate any design changes or material substitutions to all bidders by written addendum. This process protects both the contractor and owner from unpleasant surprises and potential conflicts over what exactly should be built, and whether or not it is included in the bid. Resolving these issues later with change orders can be a source of cost overruns and conflicts over who should pay for the change.
With all the questions answered, the bidders will do a material takeoff, prepare a detailed estimate for labor, materials, and subcontractors, and come up with a number for hard construction costs. Estimates from one company to another will vary due to many factors including:
- different labor rates
- better rates from subs or suppliers
- better equipment
- more experience at this type of job
- different interpretation of plans or specs
- different rates of overhead and profit
The contractor’s final price will take into account a number many of the same variables considered when first agreeing to bid. This part of the bid is more art than science and involves a number of judgement calls. The basic question is how badly do I want this job and how low am I willing to bid to get it. Since the hard costs and overhead are fixed, the contractor’s profit is the only real variable in play.
Considerations may include:
- Who else is bidding?
- Are there more attractive/profitable jobs on the horizon?
- Is this job a good fit for my company?
- Is this the type of job we usually do well on?
- Are there new materials and techniques that I’d like to gain experience with, but could hurt profits?
- Does our company work well with this architect/designer or hope to get more work from him or her?
- Do I feel good about working with this customer?
- Any red flags: incomplete or vague plans, potential problems with the customer, codes, zoning, difficult abutters, or other problems that could delay or derail the job.
In general, the contractor is looking for the lowest price that he thinks can win him the job, and still provide him a fair profit. If he sees the job as fairly unattractive in one way or another, he may still decide to bid the job, but bid high enough to make it financially worth the anticipated hassles.
Lowest and Best. The traditional standard for selection is the “lowest and best bidder,” since you do not want to be obligated to hire the lowest bidder no matter what. In fact, the low bidder may not turn out to a bargain if they cut corners to save money or pile on change order to drive up the cost of the job.
There will always be variations in bids, and it is not uncommon for bids to vary by 10% or more. If one bidder is dramatically lower than the others, however, perhaps he made an estimating error or interpreted the plans differently. If all bidders were asked to submit an itemized schedule of values, you may be able to quickly see where the problem is. Accepting a bid that you think is in error is asking for trouble, as the contractor will either try to make up for the shortfall through change orders, cut corners elsewhere – or possibly not complete the job at all.
If bids are all over the map, there’s good chance that the plans and specs are vague and incomplete, and that different bidders have somewhat different houses or projects in mind. You’ll need to scrutinize the bids to find out what each includes and excludes.
Incomplete or Inconsistent Bids. Despite your best efforts to provide all the bidders with the same, complete plans and specifications, you may still get bids that do not exactly match. Since specs can never cover every single material and detail, one builder may be using better, more expensive products or installation techniques than another. One may have interpreted the plans a little differently than another. One bid may have items marked NIC (not in contract) that they excluded from the bid and want to handle with allowances or change orders.
The difference in price between two bids can quickly disappear when the lower bid is examined more closely. Don’t make any assumptions. If anything is unclear in a bid, ask for clarification. Make sure you are making an apples-to-apples comparison. If you get an incomplete bid or vague answers to your questions, these are red flags that you will get hit with additional costs and change orders down the road. Despite the lure of a very low bid, walk away!
Call references. A good place to start is to call the references of the low bidder and any other bidder you are strongly considering. Prepare a written set of questions to ask each reference and write down their answers. Important questions are:
- What type of project was completed?
- Are you satisfied with the project overall?
- What went well and what didn’t?
- Was the project finished on time and on budget?
- If not, what caused the delays or cost overruns?
- How did you get along with the contractor? Was he receptive to your ideas and input?
- Was the contractor on the site regularly? If not, who ran the job?
- Was the job site kept safe and free of debris? Did they clean up daily?
- Remodeling only: Did the contractor keep dust and debris out of the main house? Were workers polite? Any loud music or other problems?
- Would you recommend this contractor to others?
- Anything to add?
Naturally, a contractor will give you names of customers who he thinks will recommend him. If you know of any other jobs he has completed, you can sometimes learn a lot by calling these unnamed references as well.
Get the builder’s input. Narrow your focus to the one or two lowest bidders who appear to meet your qualifications. In addition to the site visit, you can arrange to meet with each to review the plans. Ask if they see anything missing from the plans or have any suggestions for improving the plan or saving money. It’s better to identify missing items now and price them in, rather than to argue about change orders later.
As for the contractor’s suggestions for saving money –sometimes called “value engineering,” each builder will want to build things the way he is accustomed to. Using materials and techniques he is familiar with will make the work more efficient, the outcome more predictable (as in no callbacks), and the cost lower. The final product might not be exactly what the designer had envisioned, but the savings can be substantial.
|When the Contractor Knows Best Some architects are very receptive to suggestions from contractors – some less so. On two occasions, I was hired to work at the home of an architect. On each job, the architect was very receptive to my suggestions for how he could save thousands of dollars by tweaking the design a bit.On one job, we changed a curved kitchen partition with curved cabinets into to a straight wall. On another we moved an island bar over a couple of feet to provide structural support and eliminate the need for a lot of steel work. The moral of this story: Most people are open to a small change of plan if they can put a few thousand dollars in their pocket.|
Communicate what’s important to you. You’ll have time later at a pre-construction meeting to go over the plans in detail and discuss housekeeping issues. But now is a good time to communicate any big-picture concerns you have about the job. In new construction, this may be about site conditions such as saving trees and other natural site features. On renovation projects, you may want to discuss your concerns about site access, toxic exposure (lead and asbestos), and how the work will affect living conditions during the project.
If saving trees on the job site is important to you, volunteer to help – by clearly marking a do-not-drive zone around the trees that you want to save (vehicle traffic can compress the soil and kill the roots). Excavation contractors aren’t always the most sensitive and precise craftsmen!
Similarly, discuss any major concerns you have about the renovation process and discuss solutions. If keeping all renovation work isolated from the main living areas is important, or your family has special sensitivities to dust or other materials, now is the time to discuss this. Talk about your concerns regarding pets, children, safety, and security. Look for cooperative solutions. In discussing these issues, you’ll get a sense for whether the contractor is sensitive your concerns. You will also discover whether their solutions are already included in the bid or would involve “extras.” If so, better to know now.
Give and take. A large building project is more a partnership than a typical vendor/customer relationship. You really need to work together to make it work. In a large renovation, the contractor and crew will become like extended family for several months – roaming around your house from breakfast till dinner most days. On a new home, there is less personal interaction, but still a great deal of communication and trust are required for a favorable outcome.
At some level, you will need to trust the contractor to do things right, as much of the important work is buried behind walls or underground. Plans and specs only go so far – there’s always room for interpretation on the part of the builder. And the contractor must trust that you will be reasonable in your expectations, will make decisions as needed to prevent delays, and will pay your bills on time.
No building project is perfect, so it will be important that there is communication and give-and-take. You, the owner, will need to communicate what is most important to you (a dust-free work site? perfectly lined up ceramic tiles?) and let go of some other things, for example, that the color of the roofing isn’t exactly what you had in mind. Give a little on the items that aren’t that important to you, but hold your ground on the big stuff.
Both you and the bidders will be sizing each other up at this point. It’s best to establish a spirit of mutual trust and cooperation at the outset. And if you don’t feel it is going to work out, now is the time to part ways. If the contractor’s goal is to maximize his profit by cutting corners and pushing change orders, and the customers goal is get a “steak house on a hamburger budget” and drive the contractor into bankruptcy, things are not going to go well. So look for an honest, reputable contractor you trust to do a good job, and don’t begrudge him a reasonable profit. For your part, act ethically and responsibly, ask how you can help out, clearly communicate your concerns, and the project should proceed smoothly.
At the end of this process, you should have a good feeling for whom you want to spend the next three to six months with on your building project. Hopefully it is the low bidder or one not far off, but even spending an extra few percentage points for what you believe will be an excellent job that truly meets your goals, it will be money well spent. With clear plans and specs, and a good attitude of give-and-take, the project will be a success. You’ll get something close to what you imagined, the contractor will make a reasonable profit, and he’ll be able to use you as a reference to expand his business
PROS AND CONS OF COMPETITIVE BIDDING
Competitive bidding remains the most common approach to awarding construction contracts. It usually achieves its goal of getting the owner the most work for the least money. However, what starts out as the lowest bid may not end up the lowest final cost. In the worst cases, the low bidder tries to make up for his low bid by squeezing the maximum amount out of change orders for work that another contractor may have included in his bid. Or the low bidder may use inferior materials and cut corners to make up his losses. He may also cut costs by not carrying the proper insurances, thereby increasing your risk. And if there are problems after the job is complete, he may be nowhere to be found.
Few people would you use the low bidder for dental work, heart surgery, or legal advice. So why would you hire the low bidder to build your dream house?
The assumption is that a plan is a plan – and that whomever you hire is going to build you essentially the same house. To some extent that is true, but never completely. No two builders will build exactly the same house from a set of plans and specs. The more complete the plans and specs, and the greater the professional oversight (such as an architect or construction manager supervising the work), the less variability there should be in the final product. But at the end of the day, the quality of the job, much of which is hidden from view, relies heavily on the integrity of the contractor – which is why you should hire a company with a good reputation and a reason for your trust.
Pros of Competitive Bidding
- Allows owner to shop around for best combination of price and quality
- Generally gets you the most work for the lowest price
- Contractor assumes most of the risk of cost overruns
Cons of Competitive Bidding
- Low bidder has the incentive to cut corners and rely on change orders to increase revenues.
- Limited opportunity for contractor to cut costs by “value engineering” (compared to design-build)
- Adversarial relationship between contractor, owner, and designer.
- Without builder input into design, all bids may come in over budget
Start out with a detailed set of plans and specifications, so that you get apples-to-apples bids. Only put the house out to bid to companies with a good reputation for quality and integrity. Try one or two larger, more established companies with multiple crews and one or two smaller craft-oriented builders, who work at least part of the time swinging a hammer on the job site. You may get a better rate from the smaller company because they probably have less overhead, and the owner is earning money out of direct building costs as well as from the company’s profit.
If you get one bid that is dramatically below the rest, perhaps they have made an estimating error, or they are saving money in dubious ways: no liability insurance, no workers’ comp, paying employees under the table or paying employees as “subs” (with no labor burden). Maybe they are starting out and don’t understand their real costs or they are willing to work for wages with no “profit” to speak of. If there are problems after the project is complete — and there often are — will they return to fix the sticking door or window, nail pops, or a flashing leak? Probably not. Hiring a fly-by-night company carries real risks – and the bigger the job, the bigger the risk.
If the bid is low due to a mistake, the contractor may never complete the job or may try to renegotiate during the job. In either case, the job will not end well so it’s best not to go down this road.
After reviewing your bids, meeting with the leading bidders, and asking lots of questions, choose the lowest bidder who inspires your trust. Spending an extra 3% on a $300,000 project for peace of mind and better quality is well worth it. A lot of the “quality” work you will never see as it is buried in the walls and under the ground, but will have a big impact on the durability and performance of your house over time. There’s a reason that a Lexus costs more than a Kia.
Conversely, if someone is many thousands of dollars below the other bidders, they have probably made an estimating mistake or do not know their real costs. You can probably save a bundle on their learning experience, but you can expect a host of problems, loose ends, and potential conflicts when the job is “complete.” The choice is yours.