Bidding and Negotiations: Getting Your Money’s Worth

Bidding and Negotiations: Getting Your Money’s Worth

The pressure to control the cost to build a project has never been greater. The ability to forecast the final cost of a building project is not only important to the business plan, but it is absolutely essential to financing a project. Since assets and funding are typically fixed, a change of a few percent of the anticipated cost can mean big problems for a project.

Historically, arriving at a price occurs in the bidding and negotiation phase when the most suitable contractor is chosen at the best possible price. This is done by bidding the project competitively to multiple contractors, or in some cases, negotiating directly with one contractor to arrive at an agreeable final price. A hybrid approach involves signing on the appropriate contractor early in the process, negotiating the terms and then partnering to help finalize the design and build the project.

The traditional design, bid, build method is what most of us are familiar with. Selecting the eventual builder and the corresponding price occurs after the owner hires the architect, the architect designs the project and extensive construction documents are completed so the final product is adequately defined. By getting competitive bids from multiple qualified contractors on a firmly established product, the idea is that the best possible option will win.

This is a perfectly valid approach and has resulted in great projects for centuries. Since the key to this process is the assurance that the estimate for the design will in fact meet the budget, this method works well when the economy is stable and the project has a reasonable budget. However, the fitness industry, traditionally underfunded, has some of the tightest budgets in construction today. Tight budgets not only offer fewer incentives for contractors to make a profit, which can promote lower quality standards, but they also leave little room for error. A small miscalculation can sabotage the whole project. If the bid is off by 10 percent to 15 percent (not rare by any means) in a $5 million project, then the owner must come up with an additional $500,000 to $750,000.

Unfortunately, anything less than careful management of this process can produce bad results, causing delays, cost overruns and, in some cases, lawsuits. Finger-pointing between the contractor and architects for missed items lead to more frustration for the owner. Further, the project will get reworked to meet the budget with value engineering. Value engineering has no true value by this point in the process and only leads to reduced quality of materials and dollar value, often leaving a project looking nothing like the intended design.

On the opposite side of this method is the design/build concept. This method is attractive to owners since the price is fixed before the design starts. The owner hires a builder with an architect working directly in the company to design and build the building. The price is negotiated based on building performance criteria, such as how many rooms it will accommodate, how many plumbing fixtures, etc., and then the architect starts the design. Since the contract is based on a preset square foot price—usually quite low—the aesthetics of the building or space becomes secondary.

Unlike the previous system, where the final building is fully detailed, little detailed information is offered up front. Expectations of what the finishes will be, what the building will ultimately look like, and what the overall experience members will feel, are worked on at the end of the process, and again, due to cost, tend to be fairly utilitarian.

The issues and problems associated with this approach center on differences in final expectations of the space between the owner and the contractor. In the design-bid-build, the owner hires the architect, whose job partly is to protect the project and have legal authority to enforce the standards and expectations. Since the contractor hires the architect in this scenario, no neutral party exists to mediate, enforce or protect the owner should problems arise. Buildings produced with this approach tend to be bland without any true consistent design appeal. Not coincidentally, design/build got its start in warehouse and distribution center type buildings.

A hybrid approach that has gained increased popularity in the last few years is the integrated project delivery method. The problems associated with the other methods, such as managing expectations and third-party quality control, are effectively eliminated. Integration refers to a partnership among the owner, architect and contractor to create and build a high-quality, cost-effective project where accountability and reward are shared by all.

In this method, the owner hires the architect. Based on the program and cost expectations, the architect initiates designs for the building or space. The architect develops just enough design information so everyone can understand the look, feel and quality desired to get a concept budget price. Usually about 25 percent of what’s typically provided in the detailed drawings is provided in this set.

The owner and architect then invite qualified contractors to review the designs and provide an initial cost estimate for the work. During this process, the owner and architect solicit suggestions from the potential contractors for construction techniques and products that can help build the project faster, less expensively or simply better. This process reveals a lot about the contractors, their organizational skills, sense of quality and ability for the team to work together. The owner and the architect then check final contractor references and then invite a contractor to join the team.

Based on a final target price, the contractor advises and participates with the architects as they produce the drawings, helping to continually update the documents to reflect the anticipated price. When the project is fully detailed, the price should be fairly concrete, since it has been adjusted throughout the process. The contractor then signs a construction contract, indicating the final detailed project at an absolute cost and time frame. Sometimes, the contractor asks for a fee instead of an overall price with a share of the savings being passed on to the team if it can be built under budget. The only price changes allowed are for the owner’s changes to the project. This process eliminates the “I didn’t know about” problems, since everyone has been on board from the beginning of the project.

I like to tell my clients that construction is an adventure, not a science, but my experience is that the integrated project delivery system, when mapped out clearly and administered by competent parties, can predict the final outcome in both price and quality as if it were a well-tested math formula.