COMPETITIVE BIDDING DOESN'T WORK
Many people believe the traditional "competitive bid" method is the best approach to selecting a competent homebuilder. In fact, this method is flawed and leads Owners into a quagmire of misunderstanding, doubt and confusion.
Let's assume an Owner has a professionally drawn set of building plans and a complete set of specifications. One might expect that bids from three or four qualified custom home builders would be almost equal.
In fact, competitive bids in these circumstances usually have a twenty or thirty percent, or even greater, spread between the highest and lowest bids - all based on the same set of construction documents. As a prospective customer for a custom builder the fact that the competitive bids typically have that much of a spread should indicate that, as a process, competitive bidding doesn't work and is a poor way to choose a homebuilder.
What Accounts for the Difference?
The builder's bid to construct a new home is based upon the cost of subcontractors,
materials, labor, overhead, profit margin and any "fudge factor" or contingency that the builder believes is necessary.
Assuming competent supervision by the builder, quality differences between newly constructed homes come from two factors - differences in workmanship of subcontractors and differences in specifications for the finishes in the home.
Custom homebuilders have little or no competitive advantage over one another for either cost to construct their homes or building methods. Many builders would like you to think otherwise.
Custom builders cannot purchase building materials any less expensively than any of their competitors. Lumber companies, concrete suppliers, roofing materials suppliers charge all wholesale customers the same. Subcontractors price their services based on costs and their profit margins are the same to all builders. There are no hidden tricks to building homes, no special method, and no special knowledge that is not generally available to all experienced builders.
Therefore, differences between bids from custom builders on the same set of construction documents can be accounted for only by differences in profit margins, contingencies, overhead and errors.
Faced with bids that have a spread from lowest to highest of twenty or thirty percent, there is no way to judge which is the proper price.
Given the competitive nature of our business, most builders cannot even add fifteen percent of the cost of the home as profit and overhead. Clearly, profit margins alone cannot account for a spread of twenty or thirty percent.
Why so Large a Spread?
It's very time consuming and expensive to properly prepare a bid. Prices must be gathered from over 60 separate cost categories of subcontractors, materials, labor and equipment. Many of these categories involve more than one portion of the work resulting in over 120 separate line items on a typical custom home estimate.
It's a lot of work. Many builders are too busy and prefer to base their prices on a "cost per square foot" basis, guessing, and aggressive negotiation with the Owner.
Builders know that most Owners are inclined to choose either the lowest bidder or next to the lowest bidder. Some builders, therefore, consider the whole process a negotiation rather than a firm "bid." By bidding low, they eliminate the other builders from consideration and can then negotiate the Owner into a higher final cost by extracting "extras" and "change orders" during construction to make up for a low initial bid.
Owners do not usually have a set of construction documents that are complete and transmit the Owner's requirements in complete detail. It is very rare that a set of construction documents is that specific. This fact allows builders to substitute materials of lower quality and assume specifications that are less demanding. By the time the Owner realizes that the builder does not intend to provide what the Owner thought was specified, the home is under construction and the Owner is forced to pay whatever the builder quotes.
The solution which avoids confusion and disappointment associated with competitive bidding is called "Design/Build." In this approach, the builder is selected early in the planning process to assist and advise the Owner and design team. The decision is based on trust, good communication and a secure feeling of compatibility between Owner and builder.
As an integral part of the team, the builder bids the project to his subcontractors and suppliers and discloses the bids and budget to the Owner. The budget is then used as a basis for a "fixed price" or a "cost plus a fee" contract. Anything less is pure guesswork for everyone.