Residential Construction Contracts: Competitive Bid

Bob Borson —  August 8, 2013 — 27 Comments

Let’s say you are going to be building a house, doing a remodel, an addition – whatever – and it’s time to start thinking about the contractor. There are a few things that have changed over the last couple of years that I thought I would cover today because they come up all the time with our clients and in the emails I receive. The two most common contractor related questions I hear and discuss are:

“What sort of contract should I have with the contractor?” and “What sort of contract should I have with the contractor?”

It’s a really good question and it has a pretty simple answer once you get to the heart of the matter (even though it won’t really seem that way, but that’s what makes me a professional). I am going to break this article up in to two parts. Today is Part One and I’m going to talk about the competitive bid contracts and the competitive bid process. Part Two should come shortly thereafter and will cover using a “Construction Cost + Contractor Fee” type of contract and that process.

Construction site desk

What sort of contract should I have with the Contractor?
This question is really about how the contractor will charge you for his services and how they get paid – but not the literal “does the contractor want cash, bank draft, personal check” type of question. The two most common contract types that we discuss with our clients is Competitive Bid and the second is a Cost + Contractor’s Fee. Most of our clients are familiar with the competitive bid contract but let me walk you through it in case you’re not:

Competitive Bid Contracts
Once the architect has completed the construction documents, we (the architects) will assemble a list of contractors that we think are a suitable fit to your project. We generally have a sizable list of contractors to choose from for each project because, whether the contractors like hearing it or not, contractors are “categorized” in our office based on a number of different things. This categorization isn’t necessarily a bad thing for the contractor, but the truth of the matter is that contractors are a picky bunch and typically have requirements for the types of projects they will accept. Some contractors only do new houses, some are particularly skilled at addition/ renovation projects, and some contractors won’t work on a project if the clients want to live in the house during the renovation. In addition to these considerations, there are also some contractors that are better at building modern projects while others more suited for traditional style projects. Last, but certainly not least, is that some contractors are simply more skilled and attentive to details than others – some contractors are better at thinking 10 steps ahead versus 3 steps ahead. Like I said, it’s not a matter of good and bad, it’s more like “better” and “more better”. Sometimes our clients will bring in a name of someone they want to include in the bid process – which is normally fine and not a problem. Since we are always looking to add to our pool of contractors, working with a new contractor that comes recommended can be terrific.

Once we have selected between 2 and 4 contractors who we think have the appropriate skill set for your project, we distribute the construction documents and give the contractors 3 weeks to prepare their bids. Normally a bid sheet is included in the construction documents and we ask the contractors to submit their bids in a particular format – it makes it easier to evaluate the various numbers once the bids have been received. If a contractor doesn’t want to use our form, or if they simply don’t do it, that tells us something about that contractor and it personally raises a red flag for me as an indicator of how they might be when working in a team environment. We allow all contractors to submit a supplementary bid if they choose in their own format, but they need to use the form we provide as well.

At this point, we will build a spreadsheet that compares all the numbers and then follow-up with the contractors if something looks out of sorts. We don’t want the contractor to make a casual error on bid day and then hold their feet to the fire when the error is discovered months down the road – everybody losses in that situation. Once all the bids have been reviewed and vetted, we present the bids to the owner and make our recommendations – the owner makes the final decision. We normally recommend that the owner interview the contractors so that they can gauge the personalities of the people they might be working with – you want to be able to communicate well and get along with one another.

My Take on the Competitive Bid Process
In short, I don’t particularly care for them. The nature of the competitive bid process creates a working atmosphere where everyone has something to gain on the other parties. The contractor wants to make money (which is completely reasonable) but knows that if they’ve made a mistake, it will personally cost them. I’m not talking about “installing a window crooked” type of mistake, it’s more about making a mistake estimating the actual cost of the project. As a result, the contractor will try to build into the various subcontractor bids some financial padding to take possible errors and omissions into consideration. Since it’s a competitive bid, this “padding” is generally quite low and for some contractors, this means that one possible financial course correction is that they either hide mistakes where they can, maybe hope nobody notices, or they come to the owner with a bill for every single possible thing.

Want to move an outlet? That will be an additional $125
Want to add a light switch? That will be an additional $125
Want to extend the wood floor into the hall closet? That will be an additional $250

Let’s say that the construction documents weren’t complete at bid time, maybe the owner hadn’t finalized the plumbing fixtures, materials selections, cabinet hardware, kitchen appliances – whatever. We would have had to plug-in allowances for these categories in the previously mentioned bid form. When it came time for the contractor to perform that particular scope of work, you just hope that you are paying “what they cost” and not “what they cost + the cost to correct that window that was set crooked.” As a result of this competitive bid process, the architect has to fight with the contractor to make sure that no costs are being passed along to the owner that should have been absorbed by the contractor or his subcontractors. Meanwhile, the contractor is constantly looking for grey areas in the drawings, possible holes in the documentation to find any money that they might have missed during the bid process, and the owner gets mad at everyone because while they’re getting nickeled and dimed for every little thing, and the architect and contractor are both shrugging their shoulders and pointing at one another. It’s not the most collaborative environment.

I don’t fault the contractor for this, it’s the nature of a competitively bid project (of course, I have illustrated the worst possible scenario). Most of the contractors that we work with have been vetted so if this is how they go about their business, they don’t stay on the contractor list very long. Whenever we are the architects on a competitively bid project, we try to work with the contractor up front and as soon as possible so that they know we are responsive to their questions and we will solve any problems on paper before they show up on the job site. The positive aspect to the client is that the competitive bid process reduces the possibility that the contractor and architect are simply looking out for their own best interests rather than the homeowner’s. It is completely reasonable that the owner would like to make sure that they’ve explored their financial options along multiple paths and have a good understanding of what size bed they are getting into before they have to commit to buying the bed. Competitive bids also can provide the homeowner some comfort in that the contractor is being diligent in preparing a cost-effective bid on the project rather than simply guesstimating or putting all their golfing buddies on the project.

Even though I’ve painted the contractor as the villain so far in this post, there exists the possibility that the architect has done a bad job on the documents which led to an incomplete bid (or so I’ve heard this can happen). There also exists the possibility that the homeowner wants other people to help finance their dream home and will want to competitively bid their project to one contractor after contractor until they find someone who gives them the bid they want. I can’t really speak about the architect producing bad documents (are you surprised?) and I don’t want to tell tales about clients who shop their project endlessly to find someone who will commit to building it for a sum that we know will lead to problems and some sort of legal confrontation.

I’ve been doing this long enough now to be able to design to a budget and my list of capable and honest contractors is long enough that I can generally keep myself out of trouble and avoid disappointing my clients. That doesn’t mean that problems don’t happen and that’s why I always default to maintaining the best possible working atmosphere that could exist between Owner, Architect, and Contractor. When we all have the same goal and sit on the same side of the table, collectively working together, about 95% of all the bad stuff I listed above goes away. Despite my perception that this isn’t rocket science, I still vastly prefer the Construction Cost + Contractor Fee contract and process which I will discuss tomorrow.

Cheers (hope I didn’t make your head explode – I’ll get back to less text and more pictures soon.)

Bob signature

 

  • Pingback: Renovation Education: The Benefits of the Cost Plus Fee Contract | Renovating NYC()

  • lardavis1951

    Darn, my head just exploded. But then, it’s not Friday yet, and the next post may patch the ratty old bean back together.
    I’ve had public jobs with lowest is winner, then jobs where the client pre-selects the general _and_ the subs (banks like to reward depositors this way), and contract mgr-general preselect-competitive subs. It’s all over the place in commercial work.
    Thanks (not really) to the economy, we’ve been getting by on public (school) work and a bit of “contractor & owner go for permit – get told they need a sealed set of plans – sour grapes/tainted relationship, and wonder if will get paid when the plans leave the door” kind of projects. It’s a painful world out there, where everyone thinks if they can buy a computer program, they’re ready to design. But then, it’s Not Yet Friday – and a sweet client may come in, so I guess we’ll unlock the door and turn on the lights again.
    Looking forward (as always) to your next post. You cheer me up every time.

    • http://www.lifeofanarchitect.com Bob Borson

      Thanks Lar(?)

      I appreciate the back story and the time you took to leave a comment. I frequently tell people that the most interesting stuff on this site normally occurs in the comment section – so thank for being a part of that arena.

      Cheers

      • Dilshad

        Hi Bob,
        My name is Dilshad, and I live in Centreville, Virginia. I want to start a private small construction business, an LLC type. I want to hire a construction manager who will manage the business and hire the subcontractors. Can you please advise me? I really need your help, how do I get into the home creation business?

  • jim zack

    Bob,

    I am a Big Fan (and I don’t mean I’m fat), first reply.

    I agree with all you say, anxious to read part two, just had this conversation with a client yesterday, so want to share your ideas with them, and future clients.

    I have one comment, what you describe is not so much the contract type, but the selection process. We are always pushing for what we call a “Negotiated Contract”, meaning interview 3-5 contractors, and select one to work with, form early estimating, value engineering, etc., through to a final estimate. Competitive bids in residential are a game, the goal is to “Get the Job”, then figure out how to monetize everything to make up for the items “overlooked” in th einitial bid.

    Once a GC is selected there are still options for the actual contract type- Cost Plus, GMP, etc. In the end the most fair to both client and GC is Cost Plus, but no client wants to believe it. A contractor needs some flexibility, no one has a crystal ball to foresee everything that comes up in an 6-14 month project. If the client does not agree to flexibility they will pay more to cover the unforseens and contingency items we all in the industry know exist.

    • http://www.lifeofanarchitect.com Bob Borson

      Flexibility is a good word – I don’t think it get used often enough outside the gym. Providing some areas to be flexible is beyond the financial considerations and it’s these other areas I think creates the most successful team environment.

  • Austin Ag

    As a commercial GC, I have to agree with you completely on the negatives of a competitive bidding process, especially as a GC that can rarely compete in the competitive market due to our own pool of subs that we know and trust to perform a job as expected.
    However, if you can fairly accurately estimate the cost of a project and rely on known quality contractors that bid within a margin of your estimate, I see no issue using the competitive lump sum contract as a means to protect the owner from additional costs. This is assuming the contract documents are truely complete and thought through. Especially if restrictions are in place on change orders (agreed upon fee, adequate support of costs, etc).
    I look forward to your take on the cost plus contract and I’m interested to see how it may function differently in the residential market (GMP’s, cost savings, contingencies, etc.)

    • http://www.lifeofanarchitect.com Bob Borson

      We have had projects in the past that are a slightly hybridized version of the competitively bid projects and the cost plus projects like you describe. We go through the project with a cost plus format and process and use the final documents to create a ledger sheet of expenses that the owner uses for the purposes of securing their loan and for me to use when processing pay applications. We will put a cap on that form and start to introduce change orders when necessary but the contractor is allowed to relocate money from one line item to another as they need to keep things tracking with the actual invoices that are coming in with the pay applications. Usually the only items that generate change orders are fairly significant modifications to the scope of the project – not all the little rinky-dink stuff

  • Mark Mc Swain

    In my time as a cotnract estimator (thank you ‘economy’) a powerful teaching tool about architecture from the other side of things. Also, the perspective from a sub-contractor’s position is completely different than that from the GC.

    It can be easy, from the architect’s perspective, to presumet that the GC has a more universal knowledge, and is of equivalent quality/procedure as the subs employeed.
    Sadly, that is not necessarily the case.
    All of this complicated the competitive bidding process. One never knows from where the GC is generating numbers, and whether they are padding sub’s bids enough (or at all). No client is well-served by GC-Sub CO’s.
    Which, to me, is an additional complication, that an architect’s office needs to also have a file of good subs to “recommend” for getting specific trade results.

    Because, while there is an exciting synergy in collaborative Deisgn-build, the same is not true of those places engaged in Build-design; these latter, sadly, are legion.

    Which, is why our profession is starting to turn to cost-plus and similar strategies instead of the older, design-bid-build method.

    • http://www.lifeofanarchitect.com Bob Borson

      Bingo

      • Mark Mc Swain

        One other thing I’ve learned from my “time in the wilderness” is that it’s better to bid from complete (& consistent) details and specs with an incomplete floor plan, than vice-versa

  • Serge

    Hi Bob,

    I read your article with a lot of interest.

    We’re in the process of completing the architectural design of our future house in Colombia (yes, that’s how far your readership is located :) and we are considering a competitive bidding process for selecting the contractor.

    Part of our due diligence involves talking to 3 or 4 contractors that specialize in new modern houses (steel structure on concrete slab foundation), visit completed and still ongoing projects, as well as request meetings with their customers.

    I very much like your approach to provide a standard form to the contractors in order to make the bid comparison easier. Could you share such a form on your site or would you be willing to explain its main characteristics? That would be most helpful.

    Kind Regards,

    Serge

    • http://www.lifeofanarchitect.com Bob Borson

      These bid forms are custom made for each project but I will try and explain them briefly here:
      They are broken up into the major construction categories
      General Requirements
      Site Construction
      Concrete
      Masonry
      Metal
      Woods & Plastics
      Thermal & Moisture
      Doors & Windows
      Finishes
      Specialties
      Equipment
      Special Construction
      Mechanical
      Electrical
      Site Work
      Owner’s Contingency (a number we provide)
      Contractor’s Fee

      Within each of these categories, we provide sub lists with breakouts for various items and scopes of work within the main category. Here is an example:

      ELECTRICAL:
      – Electrical Labor & Materials
      – Decorative Fixture Allowance
      – Smart House Control System
      – Underground Service
      – Security System
      – Phone/Data Service
      – Audio/Visual Prewire

      As you can probably tell, the list can get as specific or as generic as you want it to be. They are only as good as the effort that goes in to preparing them.

      Hope this helps

      • Serge

        Very useful, many thanks Bob!

  • idarchie

    I tend to agree with this position. We have a hard time getting clients to nail down finish selections and it seems in our part of the world, the bulk of the difference in bids ends up in these allowances and you don’t get a fair bid process. We encourage clients to select a contractor they trust and share a good repoire with as a starting point. Usually one contractor clicks more than the others.

    • http://www.lifeofanarchitect.com Bob Borson

      agree with all of this.

  • Greg Swanson

    Great post. I work on mostly commercial projects but what you describe is how we handle the competitive bidding process for private projects. Unfortunately, government projects that I have worked on usually take the lowest bidder with few questions asked and it sometimes leads to the problems that you described about change orders. I was once told about a competitive bidding process in which the highest and lowest bidders were eliminated and the rest of the bids were averaged. The contractor whom bid was the closet to the average would be award the contract. The thought behind this practice was that the highest bid had lots of padding, the lowest bid had left something out, and the one closet to the average had everything covered. As a standard practice in our office we regularly see how close the bids are together to see how good are the drawings and how competitive are the bids.

    • http://www.lifeofanarchitect.com Bob Borson

      We do the same thing regarding the clustering of contracts. Normally when the bids come in, they are all within 10% of one another (which can still be a pretty large difference). Using the Bid Form allows us to spot where the major difference can be and we frequently see the exact same number for a certain scope of work from all the bidders. Let’s us know that they are all using the same subcontractor’s bid.

  • Sheri Scott Arch

    I look forward to the cost plus article. For now, I disagree with your position. I have been guiding my clients to the bid process so they have some control when it comes to construction costs. I have found cost plus to be fraught with padding and nickel & diming. Maybe you do it differently in TX (they usually do.) :)

    • http://www.lifeofanarchitect.com Bob Borson

      I fully expected to get some push back on my position. I have to admit that I have been afforded the luxury of working on higher end projects that generally have allowed us to hire really talented and capable contractors. It hasn’t gone unnoticed that my perception is guided by my experience. However, hopefully the way I will explain Cost+ projects will show how padding and nickel & diming are drastically reduced, or eliminated all together.

      Thanks Sheri

  • http://www.broadbooksapa.com/ Mark Wilson

    Thanks, Bob. Well written pros and cons spelled out. Looking forward to Cost + . Mark

    • http://www.lifeofanarchitect.com Bob Borson

      Thanks Mark, I hope to get the Cost+ post written today. Originally they were going to be packaged together but as the competitive bid post got longer and longer, I decided that as much as I dislike Part 1 & Part 2 posts, this one would be necessary if I wanted to people to stay awake through the entire article.

      Cheers

  • MarvinOne

    Bob,
    Although I’m an intern with 6 years of experience, it’s experience that’s been spread out between several different firms (thank you economy – said sarcastically of course!). I’ve yet to find a really great mentor and no one has ever really explained this process to me the way you just did. I’m in commercial, but some things work the same there as in residential. Thank you for this article….looking forward to installment 2!

    • http://www.lifeofanarchitect.com Bob Borson

      You are right that there are similarities between commercial and residential construction (which I might get into one day) but since I wanted to keep things simple, I was going to focus on just the one side of the industry. I’m glad you think these articles are of some value. I try and keep them simple but also detailed enough to provide some value.

      Thanks

      • max

        Bob, Can you briefly post something on your preferred Residential- Cost+ process? thx.

        • http://www.lifeofanarchitect.com Bob Borson

          you mean other than the post I’ve written? I’m not sure I understand the question

    • max

      Marvin, I would highly recommend that you make it your priority to find a good Mentor and hang on. Mentorship is all but lost in Architecture, in my 20 yrs. I encountered mabe 2 out of dozens of Architects I have worked with and for. Your knowledge will increase 4x with a Mentor.
      Max