(This article was written by Everett Pollard for the 2009 HBRANH Remodelers Guide, a supplement in the 2/27/09 issue of the New Hampshire Business Review.)
What is the first rule of construction that every homeowner knows? “We need to get three competitive bids.”
Most homeowners are not well educated in the homebuilding or remodeling process and may only do one or two such projects in their entire lifetime. Often they make a poor choice in selecting a contractor when it is based on price alone. The assumption with competitive bidding is that the plans and specifications are so clear and unambiguous that any randomly selected, reasonably competent contractor will be able to do the job exactly as envisioned. While more and more clients are aware that they can’t just hire the lowest bidder, few do a lot of research about which contractors to ask for proposals beyond getting some referrals or references from friends, Realtors or architects.
Some homeowners rationalize that any bids that are over their budget are not due to different interpretations of the plans and specs – which are, after all, perfectly clear – but are the result of sloppy estimating, high overhead or huge profit margins. The fact is that the more thought and research that goes into a bid, the higher it becomes. When checking an estimate, contractors more often find omissions rather than waste and inefficiency that can be taken out. The irony is that estimates that are carelessly prepared tend to be more reasonable (lower) and those that are thoughtfully and carefully researched tend to be less reasonable (higher). Guess which one will result in a better project?
Unfortunately, homeowners often have unrealistic expectations of what their project is really going to cost and in my experience sometimes underestimate the actual final cost by as much as half! This expectation is often set up by the designer and even the contractors themselves with off the cuff and faulty upfront “ball-park” estimates.
There is no such thing as “apples-to-apples” competitive bidding. First, I have never seen 100% completely prepared plans and specifications that are not wide open to interpretation and substitution of products, techniques and materials. Most sets of construction documents that have been given to me over the years are no more than 80% complete and I’m being kind. As a competitive bidder, the understandable tendency would be to use the least expensive products and processes possible to return the lowest bid. Second, every builder and remodeler brings a different set of professional skills to the process, and analyzes a project and its associated costs differently. The differences can be subtle, but they exist and result in an unequal playing field creating confusion and misunderstanding. The competitive bidding process reduces each builder to a number rather than considering his or her skills, professionalism, personality and ability to complete the project on schedule and within budget. The competitive bid process is like dangling a project in front of three or four contractors to see who is the most desperate to get it.
As the housing industry continues to become more sophisticated, the level of professionalism among builders and remodelers continues to reach new heights. Many of the best contractors are now refusing to bid competitively, opting instead for a different approach; the negotiated contract. In this scenario, a homebuilder is selected based on his or her abilities and personality, and how they fit with the client and their project. These are critical considerations considering how closely the builder and client will need to interact with each other during a fairly long and involved construction process. Savvy clients, those that have been through the homebuilding or remodeling process more than once, will usually spend much more time to find a contractor, interviewing as many contractors as it takes to find one that they are really comfortable with.
The clients will then engage the contractor much earlier in the process and negotiate a contract with them. The negotiated contract also takes the guesswork out of the project cost. The owner’s budget is shared upfront with each of the builders being considered based on what the owner can afford not what the builder and his subcontractors think (or guess) it will cost. Sharing the budget not only removes assumptions based on cost alone, it builds trust and enables better communication about what actual costs will be. If necessary (and it usually is) choices can be made to realign the project scope with the amount that the owners are comfortable investing in their project. That’s the negotiated part!
A huge benefit of this process is that the contractor is brought in much earlier and not after the entire design and specifications have been completed. This allows the contractor to review the plans early on and suggest changes that might help to avoid budget and schedule issues. A complete team of architect or designer, owner and contractor makes for a much more efficient process and a successful outcome. The project becomes a collaborative effort, not a competitive one, and saves time, money and ensures a better project. Make no mistake, owners that choose the negotiated contract method don’t always get the ”lowest price”, but they always get the best value and really benefit from the contractor’s full attention throughout the entire process. By sidestepping the bidding process, the contractor is able to spend his or her time exclusively on activities that will be of real service to the owner.
As homebuilding and renovation continue to evolve with ever higher levels of sophistication and professionalism, new and more effective business models are needed. The negotiated contract model has many advantages over the old “low bid” rule and will benefit homeowners in this new era of construction.