High Bid, Low Bid, Best Bid?
By Stephen Varone, AIA and Peter Varsalona, PE
I’m on the board of a seven-story cooperative in Forest Hills. We are planning to replace our roof, rebuild sections of parapet walls, and make miscellaneous masonry repairs throughout the exterior. We had three contractors check the conditions and give us quotes: the low bid came in at $215,000, while the other two were at $310,000 and $425,000. The wide gap between the low and the high quotes has us concerned about the accuracy of the figures. The high bidder comes highly recommended by a shareholder, but his price is beyond our budget. What’s the best way to ensure that we’re receiving competitive, yet realistic, bids?
When properly administered, a competitive bidding process on a capital improvement or repair project is the most reliable way to obtain high-quality work at a reasonable price. But when poorly planned and hastily conducted, the bid process can quickly descend into disarray, leaving boards confused and unsure about how to proceed.
While contractors’ prices can vary widely, one reason your board may have received such disparate quotes is that the contractors may not be bidding on exactly the same repair items. The low bidder may have quoted you on a much more limited scope of work than the other firms, or the high bidder may be including extraneous items.
The best way to get an apples-to-apples comparison on your bids is to have a qualified engineering or architectural firm prepare a complete set of construction/bidding documents based on well-defined goals and clear budget guidelines established by the board.
These documents serve as a set of standards on which the bids can be fairly and accurately compared, and the selected contractor will use them as blueprints for performing the repairs. (In addition, the drawings in the documents will be needed to apply for a New York City Department of Buildings work permit, which is necessary for most repair and upgrade projects.)
The Bidders List: Some, Not All
Another pitfall is soliciting too few bidders. The board should compile its list of potential firms from trade publications, industry trade shows, conferences and seminars, construction signs posted at other projects, as well as by asking for recommendations from its management firm, engineer or architect, board members, and shareholders. To keep the process from getting out of hand, the board must establish a deadline after which firms will no longer be considered.
Widely varying quotes may result if contractors aren’t bidding on the exact same repair items.
After putting together the preliminary list, the board will need to whittle it down to about four to six firms. Contractors will prepare their bids more carefully when they feel they will be given more serious consideration against only a few other firms, as opposed to a free-for-all with 10 or more contractors all vying for the same project.
When compiling the final bidders list, more than just the contractor’s reputation should be considered. To check the financial standing of each firm, the board should have potential bidders complete a pre-qualification form such as the standard A-305 document compiled by the American Institute of Architects. The board must also make sure that all elements of the project are within the firm’s expertise. Some high-quality waterproofing firms, for example, may not be certified to install the particular type of roof specification on your project.
Also, each firm on the final list must be available to undertake the project within the board’s required timeframe. Reputable firms with high standards of workmanship are very busy during the height of the construction season, so it’s important to make sure the selected firm gives your project the attention and manpower it requires.
Another factor to consider is whether your building has a labor agreement that requires the exclusive use of union-affiliated firms. A picket line or a gigantic inflatable rat is a sure way to throw off even the best-planned construction schedule. Including both union and non-union firms on a bidders list isn’t practical because the price scales are simply not comparable. If a union firm sees that several non-union firms are bidding, it may decline to submit a bid under the assumption that it doesn’t have a realistic chance of being awarded the project.
Once the final bidders list has been chosen, each bidder should be required to attend a mandatory pre-bid meeting at the site, administered by the board’s engineer or architect, managing agent, and a designated board representative. At this meeting, the engineer or architect will “walk-through” the project with the bidders while reviewing the construction documents, lessening the chance for confusion or misinterpretation of the bidding requirements. With all the bidders together, they all receive the same verbal instructions, and any questions raised by individual bidders are answered in front of all of them.
Don’t Spill The Budget Beans
Even if the board carefully follows all the bid process guidelines, the entire process will fail if one simple rule is neglected: Never let any of the bidders know the anticipated budget for the project. Each bidder must determine the appropriate price to charge without any hints from the engineer or architect, managing agent, board members, or other bidders.
If a bidder hears that a project is expected to come in at $300,000, he may very well put in a bid for that price to win the project. But if during the course of the project the contractor later realizes that the appropriate value of the work was closer to $350,000 or $400,000, he may look for extras and exclusions wherever possible to try and come away with a profit. The result will be messy change-order battles.
Typically, bids are submitted in a clearly marked sealed envelope to the engineer’s or architect’s office or to the attorney for the Owners Corporation. There should then be a formal bid opening immediately at the bid deadline or soon after.
Next, the engineer or architect conducts a comprehensive bid review to insure that the contractors can properly perform the required work for the stated prices. The bid analysis should break down the bid form into itemized components to enable a more detailed review. For example, if a $300,000 bid is broken down into 15 components, it is easy to confirm that the contractor understands each of the individual work items and can complete them for the stated prices. Itemizing components also simplifies the payment process later on because it reduces the chances of disputes over the value of individual work items.
In contrast, if you merely hand the engineer or architect a $300,000 bid from Contractor A and a $350,000 bid from Contractor B, with no further breakdown of the quotes, all you know for certain is that the $300,000 quote is “lower.”
Some boards might argue that the contractor should be held responsible for standing by a bid, even when it can be shown that the price quoted will result in a net loss to the contractor. This approach invites trouble because it forces the contractor to either take a loss on the project (grumbling all the way); cut corners on material or labor cost wherever possible; and/or “nickel and dime” with extras to try to scrape his way back to an acceptable profit margin. Suffice to say that none of these options will make for a smooth-running project.
Bargaining For Reductions
Keep in mind that, except for publicly bid projects administered by government agencies, the board is not required to accept the lowest bid. It is perfectly legitimate to enter into negotiations with bidders, either directly or through your engineer or architect, to see whether price reductions are possible on any of the quoted items. Of course, your engineer or architect should be responsible for trying to ensure that none of the discounted quotes drop to a level where the work can no longer be properly performed.
It is perfectly legitimate to negotiate with bidders.
Price discounts may be available for several reasons. Perhaps a contractor just lost another job he was counting on and suddenly finds himself with an extra crew or two available. Or maybe one of the bidders has never worked with your engineer or architect and would like the chance to prove itself and become a regular bidder on other projects. Sometimes a bidder learns after submitting a bid on one project that he has been awarded another project literally down the street.
This makes scheduling on both projects easier and could result in a discount. And, of course, in some cases it’s just plain haggling: A bidder may well choose to reduce his $500,000 quote to $490,000 rather than walk away from the project. A 2% discount such as this could still leave plenty of room for profit without the need to sacrifice job quality.
Final Bidder Evaluation
Once the engineer or architect has completed the bid analysis and forwarded a spreadsheet and recommendations to the board, it’s time to conduct a final evaluation of the top choices. First, the board should check independent references supplied directly by the bidders. Board members at other properties where the bidder recently completed a project of similar scope and cost can provide a useful perspective.
Some questions to ask:
- Was the project finished on time?
- Were there poorly explained or imprecise change order requests?
- Was there an engineer or architect involved in the project, and if so, was he or she satisfied with the quality of the work?
- Was the contractor constantly pressuring the board for progress payments before getting the engineer’s or architect’s approval?
- Did the workers wear uniforms and identification badges while on site?
- Was the site left neat and orderly, without loose ends and refuse?
In addition to checking with board members from other properties, it’s recommended that the board conduct face-to-face interviews with all bidders being seriously considered. It’s important to directly meet the principals of the firms so the board can discuss concerns specific to the property and project, get a feel for the contractor’s attitude and approach, and see if there’s a rapport for sustaining a successful relationship. Plus, a face-to-face interview offers a great opportunity to begin final negotiations on the contract price and payment terms.
Once the reference checks and interviews are complete, the board should have all the information needed for making its final selection with confidence. It’s best if the board doesn’t leave that choice up to the engineer/architect or managing agent but instead takes responsibility to ensure that it is fully satisfied with the ability and reputation of the selected contractor.
By following the guidelines provided above and obtaining the suggested documentation, the board can make a more informed selection that will greatly increase the chances for a successful project.
Stephen Varone, AIA is president and Peter Varsalona, PE is principal of RAND Engineering & Architecture, DPC. This column was originally published in the April 2004 issue of Habitat Magazine.