The Residential Bidding Process, From a Homebuilder's Perspective

So you are ready to get going on that remodeling project, or possibly start working on plans for your dream home.  It's an exciting time for you and your family, but it can also be very stressful and demanding.  You will be faced with many decisions throughout the process, and taking the right steps from the beginning is crucial to your project's success. 

Let me begin by stating there isn't one path that necessarily works for every homeowner.  You may have heard of the terms such as traditional procurement (design-bid-build) vs. design-build, or cost plus vs. fixed price.  These are different approaches and can be used in a variety of ways to tailor your project to the way you operate.   Let's take a closer look at the two most popular methods of project delivery.

Traditional Procurement (Design-Bid-Build)
In this process the homeowner hires an architect to design their project and develop a complete set of construction documents for bidding.  The owner then takes these documents to 2 or 3 different potential general contractors who put together bids to deliver the project's construction.  Upon review of the bids, the homeowner selects a contractor.

Flow Chart:

http://en.wikipedia.org/wiki/File:Dbbtimeline.jpg (Pgluckwiki)

Pros:
- Clearly understood process
- Competitive bidding
- Defined project prior to bid

Cons:
- No design input from contractors
- Change orders can be common



Design-Build
In this project delivery method, the designer and contractor are teamed together from the start instead of being hired separately at different stages of the project.  This dynamic approach to building allows for both parties to work collaboratively as a team throughout the entire process. This provides the opportunity for everyone to offer their expertise to develop a project that achieves the design intentions while adhering to the budget and schedule requirements.

Flow Chart:

http://en.wikipedia.org/wiki/File:Aldbtimeline.jpg (Pgluckwiki)

Pros:
- Balance practicality and creative design
- Overall delivery time can be reduced
- Project team adheres to owner established budget

Cons:
- Architect works for contractor, not owner







These are two distinct methods for project delivery, but it is important to determine the one that suits you best.  There are a few tips I would suggest though to help ensure a smooth process regardless of which method you choose:

1. Be upfront about your budget.  Media commonly portrays contractors as corrupt, but the truth is most contractors are not out to take advantage of homeowners.  Being honest about your budget allows for your project team to have realistic goals and set expectations for your project. 
2. Establishing a relationship built on trust.  Just as you should be honest in your budget and requirements, your builder should be honest in regards to their practices and pricing.  We are always transparent with our bids and willing to walk you through the budget.
3. Interview different contractors, and find one who suits you.  Ask potential contractors to provide customer referrals for you to follow up on .  Personalities don't always mesh and you're about to embark on a long term venture with this company.
4. Do your homework. Make sure the builder is licensed and insured, ask to see projects they've completed and definitely check their references.  A good builder relies on their reputation and quality of service.

We've now come to the intention of the article, reviewing bids.  Although I could have started here and gotten right to the point, everything discussed above is just as important as obtaining a quality, accurate bid for your project.   I'm going to review this as if you've chosen the "Traditional Procurement" method of project delivery, but the same principles can be applied to the "Design-Build" method if you're only getting a bid from one contractor.

So you've established a budget, hired an architect and have a set of plans in hand to send out to contractors.  You interview them, ask questions and check references.  At this point you must decide who you want to assemble bids on your project.  We highly recommend limiting yourself to 2 or 3 contractors, for several reasons.  Multiple bids allow you to make sure all of the contractors you chose are in line with each other and will show if one overbid or underbid the project.  Reviewing and comparing bids can be an overwhelming and time consuming process.  By limiting yourself to 2 or 3 trustworthy companies, you have better control to ensure you are comparing "apples to apples" between the bids.  Finally, take into consideration that contractors spend a lot of time preparing your bid to potentially not get the project, typically at no cost to you.  By selectively choosing only 2 or 3 builders, you give each one a respectable opportunity to acquire your business.

What should you be looking for when you review bids?

• Specifications which are clearly outlined.  Contractors should clearly define what you should expect at the price they've presented, especially if it is not outlined in the bid set.
• Allowances for items yet to be selected.  These items include electrical fixtures, plumbing fixtures, flooring, etc.  You should provide your allowance to each contractor or make sure it is accounted for in each contractors bid (hence comparing "apples to apples")
• Contingencies for items which might be unknown.  This is especially important for remodeling in which surprises are inevitable.
• And PLEASE remember!  A contractor's bid is more than just the parts and labor to complete your project.  It covers equipment costs, permit fees, trash removal, customer service and consultant fees as well as overhead costs and profit that allow us to stay in business and provide an excellent service to you!

All of this work and you haven't even started building!  You've selected the project delivery method that works best for you, assembled a team of professionals to complete your dream project and settled on a bid that works for your budget.  The final step is to outline a construction contract with the builder of your choice.  There are two primary approaches: Cost Plus vs Fixed Price.  I'll quickly outline a few pros and cons of each, although an in depth discussion with your builder is probably the best route.

Fixed Price
The majority of our contracts are structured using this method, as it offers a fixed guaranteed price for the project.  Allowances are set up for various selections, and customers only owe more if they overspend an allowance or change the scope of work during construction.  This way they know exactly what the project will cost.

Pros:
- Builder takes risk of cost overruns and estimating variances
- Customer has complete control of final cost

Cons:
- Contingency costs are built in for incidental and unforeseen items

Cost-Plus (Time & Material)
In this arrangement the customer is charged the actual costs of the project, plus either a percentage or fixed fee to the contractor.  This type of contract works for more complex projects or for customers interested in strictly managing their budget.

Pros:
- Transparency of project costs
- Changes are less costly

Cons:
- Customer takes risk of cost overruns and estimating variances

Both of these arrangements offer pros and cons, and should be selected based on what works for your specific needs.  However, I can't stress enough the need to take the time to choose a highly qualified builder with integrity.  Either of the contract arrangements can be manipulated by someone who does not have good intentions, and by partnering with a quality builder you eliminate the concerns presented by either contract option.  Remember, a good contractor will build and grow their business from a longstanding reputation of building quality, honest homes.

Hopefully after reading through this article you have a better understanding of how to get your project off the ground.  If you have any questions, comments or suggestions you can e-mail me here: adam@terranovabuilds.com.  Taking the right steps from the beginning will help make the whole experience fun and rewarding!

Adam Schmitz
Designer/Project Manager

Please visit us at www.TerraNovaBuilds.com!