Who Is Really the Low Bidder?


Why it matters

It does no good to get a low price with lots of things left out, either acknowledged in the bidder’s clarifications or only discovered later.  The other extreme is a bigger price that includes unnecessary items, perhaps duplication of scope covered somewhere else — “we always do it this way” — or just overly conservative estimating.  While that bid is seldom accepted, it might turn out to be the best bid if you could wash out those items.

So, lack of clarity about what is expected and what is offered can obscure the best deal.  One approach is to ask for lots of detail with bids.  What you receive will seldom be decipherable to a layperson, perhaps even deliberately so.  Bidders are worried about cherry picking by the customer, leaving them with only the undesirable work.  Even with years of experience in reviewing subcontractor bids, I still find it difficult at times to figure out the best one without post-bid conversations.  That is even truer with general contractor estimates on complex projects.

Be aware of the risks

Assuming risk costs somebody money.  The insurance business does just that.  In a fixed-price bid, you are asking the builder/contractor to take a significant risk: They are pricing something that has never been built before on a unique site.  The only guidance is a small-scale, two-dimensional representation with perhaps a simulated 3D image on a screen.  Anyone who knows MC Escher is skeptical about images.  The tools used to arrive at their price are to calculate the lengths, areas, and volumes of the many components, using past experience to assign unit prices to those measurements, asking subcontractors to take on pieces of the risk, and finally adding a fudge factor to protect them from the unknowns.  That factor has traditionally been called profit, fee, or markup.  In reality, it is not guaranteed and could more properly be called the “Risk.”

Understand what contingency means

In more sophisticated discussions, there is another way to allow for risk.  It is usually called “contingency.”  It may be clearly identified in an estimate or dispersed in many different numbers, but it is there.  Contractors, subcontractors, and suppliers in Sonoma or Napa County may or may not explicitly call it contingency, but every one of their prices must include a factor for the things they can’t control like weather, bad timing, labor productivity, poor supervision and planning, defective materials, etc.  It is actually in the owner’s interest for it to be there.  Otherwise, every small setback would have the potential to bring their project to a complete halt while blame gets placed.  Contingency gives people the option to keep going while responsibility is being allocated.

Next, the starting price is seldom the final price.  There are many reasons for prices to change: hidden conditions, government and utility requirements, document errors, and owner selections and scope changes.  How those are handled can muddy the situation and quickly make the starting point moot.

Even allowances for unselected items can obscure the right price.  Is the dollar amount in each bid the same? Does everyone make the same assumption about whether the allowance covers materials only or also possibly covers tax, labor, and markups?

How low is too low?

It may sound counterintuitive, but you don’t want too low of a price.  The most expensive, long, and stressful projects are ones where some contractor has underbid their costs.  It is not just a sign of poor business savvy if someone does not know their cost of doing business.  Too low of a bid can start a cascade of corner cutting, slow response, delayed orders, liens, begging, and bankruptcy.  All those shortcomings will cost an owner time, frustration, and probably money.

In the end, you should hope everyone makes some profit on your project—they will be eager to work on it so they can reap their expected reward; they can afford to cooperate with others, and they will be around to support you after your job is finished.

To answer the question posed at the outset, you will never know who the low bidder was.  For all the reasons above, it ends up not really mattering.  The best question is:  Is this a fair price?  The answer to that is left for another day.  As a custom homebuilder in Sonoma and Napa County, it is our pleasure to answer any questions you may have. Please feel free to call us at 707-576-7337.
