During the height of the recession, I wrote a blog on the same topic. Times have changed since then, so circumstances have changed, and it’s worth revisiting. Prices keep increasing, making projects more challenging. As construction activity has increased, the number of trade subcontractors and skilled workers has increased only nominally, and supply and demand are pushing up prices, including for materials. With all the challenges of price increases, owners are asking themselves if they should competitively bid their project to get the best prices.
To best understand this, it is important to look at the underlying processes. Development is a complex endeavor, and risky. Though it is tempting to think that the best price comes from competitively bidding, what is on the drawings is 85%-90% of the cost of a project, so critically important. The key is to understand and control what is on the drawings to reduce and control prices. For us, it has been a good time for a contractor to negotiate work after an owner has competitively bid it, without us. Several of our clients have designed and bid their projects, and they’ve come in 20% or more above budget, and we can often come to the rescue and solve the problem. It’s not necessarily the architect’s fault. Clients want what they want without understanding price. Engineers design in a vacuum for what they think is best without necessarily understanding the most cost-effective ways to put work in the field. And architects are busy, so attention to detail gets more difficult.
Then there is the subcontractor side of it. As busy as subcontractors are, many won’t participate in a competitive bid situation. They want to work with reputable contractors who are sole sourced in order to increase their probability of getting work. So the best and most competitive contractors sometimes won’t participate. But even if they do, the lowest price isn’t always the best. These days of equal importance is who has the availability of the quantity of skilled trades necessary to build a project quickly and well. In a competitive bid situation, a general contractor doesn’t have the luxury of making the right selection here. On bid day prices come flying in at a velocity that makes it difficult to qualify subcontractors, and the general contractor doesn’t have the ability to ensure that the right subcontractors and prices are used in the estimate. This creates issues that impact speed and quality of construction, both of which are factors and have a significant impact for developers of facilities. Further, in a competitive bid, a general contractor does not get all of the best numbers. Each general contractor has preferred subcontractors, and so a general contractor only gets some of the best numbers. When a general contractor is sole-sourced, they get all the best numbers. Lastly, as busy as subcontractors are right now, when project start occurs, often after a complex and slow permitting process, there is a risk that the subcontractors will take other work, not honoring their bid, which may cause the general contractor to not honor his bid. A negotiated GC can control this.
It seems a better solution is a hybrid, working with a reputable, financially stable, and capable general contractor in an open book fashion, who aggressively bids subcontracts and materials, selecting competitive, yet capable subcontractors who will guarantee prices through the difficult permitting and financing processes, while allowing the team to guide the architect and engineers to design a cost-effective project. This allows a developer to control his risks and costs and get the best value.
Peter Douglas, P.E.
The Douglas Company