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This is a terrific time to get great construction prices for your senior living, skilled nursing, or multi family project. Material prices are down, subcontractors are aggressive in their pricing, only the most productive workers remain employed, and general contractors are anxious to start work. One of our clients recently decided to take advantage of this by competitively bidding his project. Will he get a deal, or not?

To best understand this, it’s important to look at the underlying process and numbers. On bid day prices come flying in. The velocity is so incredible, it’s difficult to qualify these subcontractors, and (at times) to know whether the prices are adequate to perform the work. A number of subcontractors are ridiculously low (40%+) – admittedly desperate. We do our best to convince them they have a bad number, but they persist in desperation. In many cases these happen to be subcontractors that we know and that were unreliable, had poor quality and undercapitalized in good times. What kind of shape are they in now? We have to evaluate whether to take these numbers, knowing that our competitors who may or may not know these subcontractors, are likely to use these numbers. The end number to the client will appear to be a good deal, but is it? Some of the questions that come to mind are as follows:

• Will the subcontractor be around to start the job? If not, will the general contractor adjust his price? A bid bond can be obtained that assures that he won’t, but how long are these good for? And can you start your project in these difficult financing times quickly enough to assure protection? A prominent member of the surety community has projected that 50% of all contractors will go out of business by 2011. And we are already seeing large sub and general contractors closing their doors.
• If the general contractor honors his price and loses money, what good does it do the project? Will they be trying to make it up by cutting corners? Or by charging the owner significant Change Orders (no set of plans is perfect). Do you want to live with 8 – 12 months of hassles dealing with all of this? What level of supervision of this low quality work can you expect from your general contractor, and can that overcome all the things that a poor quality subcontractor can screw up? Will the subcontractor finish the project? What if he doesn’t? What kind of mess will he leave on your new significant investment? How will it impact completion time and reputation?
• Let’s assume the best case and the subcontractor stays in business and honors his price. As an owner, you have a large investment in a significant project, often with personal guarantees. You may have everything on the line. What level of reliability and quality will you get from these significantly and unrealistically low subcontractors, and can your general contractor control this?
  A thought may be to collect damages from your contractor for these delays, but presuming you can, damages clauses never can cover all of the costs to a project, including reputation, ongoing quality and warranty issues, staffing and other lost start-up costs, loss of revenue, loss of the opportunities of early completion, difficulties in relationship with your investors and financial institutions, the time value of money, and hassle to get through all of these issues.
• What if your general contractor can’t sustain the losses in his business? You can buy a performance and payment bond – will it help? Not much. Sureties stay in business by not paying claims until and if necessary, and construction claims are complicated messes. We tried to collect on a bond after spending a significant amount to finish a subcontractor’s work. After nearly three years of litigation, we settled for fifty cents on the dollar, half of which had already been paid to our attorney. We had invested all of this money over a long period of time, and it was impossible to get back with any certainty through litigation.

It seems a better solution is a hybrid – working with a reputable, financially stable, and capable general contractor in an open book fashion, aggressively bidding subcontracts and materials and selecting mutually agreeable companies who will complete the project and are committed to the quality and safety of your important investment. This allows you to take advantage of the current state of the economy yet control your risk and give you the opportunity to do what you do best, run a successful facility.