Renovation Education: The Competitive Bid Contract
One of my favorite blogs is from architect Bob Borson in Texas called Life of An Architect. In addition to his insight into the profession, he shares some thoughts on his process and experiences. Recently, he shared his opinion on the two types of construction contracts for homeowners which I thought would be great information for those of you interested in hiring a contractor to perform renovation and remodeling work. Here, Bob shares his thoughts on the competitive bid contract, otherwise known as a lump sum contract. In short, this type of contract is recommended if the scope of work is clearly defined in writing as well as drawings. This requires a lot of trust in the architect, designer, or other professional to clearly define the owner’s expectations.
Bob does a great job of explaining it here:
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.
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.)