Oh No...The Bids Came In Too High! Now What?!
It’s a tale as old as time…you’re all excited about your project, you’ve got preliminary designs in hand, done by an experienced architect, you’ve got three bids from reputable contractors…and…they’re all higher than what you wanted to spend.
Maybe *a lot* higher.
When you ask the contractors, they say stuff like “sub prices supply chain price increases labor shortage blah blah blah” but all you can see is your project disappearing from your future like an ice cube on a hot day.
Is your project dead? Do you just have to pony up 2x what you were hoping to spend? What are your options?
In my two decades in this industry [first on the contracting/estimating side, now as an architect and real estate owner/investor/operator], I’ve never seen a project bid come in *lower* than expected. It’s just not the way things work. But that doesn’t mean you have to accept whatever numbers the contractor throws at you.
Before going further, though, I want to remind you: these are just bids. You haven’t spent the money yet.
What you have in your hands is *information.*
Try not to get emotional, just see it as data - data that will help you make much better decisions about the design and the project.
[In my firm, we aim to get ballpark bids from trusted contractors *very* early in the process, so we can use that cost information to hone the design and ensure that the project will fit the budget. We also use it to compare options, and allow our clients the maximum amount of time to get their financial ducks in a row.]
So let’s dive in….here are five of my favorite pointers for confronting bids that are higher than your expectations, or higher than your budget.
I’m going to assume you’re already working with a reputable and experienced team. If you aren’t, you need to back up and fix that first. Literally any guy with a truck and a toolbelt can give you a price for a project - what you want is a team that will be truthful and honest with you, not just tell you what you want to hear.
Are you being realistic?
Let’s start by taking a look at yourself. In my experience, people are very quick to point to everyone and everything else before taking a hard look at their own decision making. Have you been making decisions that increase the project scope from what you initially brought to the architect? It’s called “scope creep” and it’s real! For every one of those decisions, did you also increase your budget?
As an example, let’s say you’re planning on building a new home, and you initially planned for the basement to be unfinished. During the design phase, you changed your mind, and asked the architect to design the basement as a finished space, with a kitchenette, home gym, a hangout room, and bathroom. Your architect should say to you, “Sure, client, I’m happy to add that to your project. Do you understand that the cost of the project will now increase as well?”
In my experience, many clients gloss over that conversation. “Sure sure, yeah, I get it. And think how cool it will be to have the basement finished!” Then the numbers come in, and that “quick” add becomes a 6-figure addition to the project budget…
In commercial world, this happens in the same way. We might find a way to add another 8 units to a building by some clever space planning, and all the developer thinks of is the additional revenue from those 8 units, not the cost…until the bids come in. Those additional 8 kitchens and 16 bathrooms sure add up!
Also, folks often underestimate the impacts of certain unique aspects of their project, like location. If it’s hard to get to, for example, or in a very tight part of the city with no parking, or historic regulations require the use of certain materials that are more expensive, or it’s on a site with a lot of rock or poor fill…all these things will impact the cost of the project, just because of where it’s located.
[It’s why I’m always saying that the Google results from “construction costs in my area” are pretty much useless, because there are *so* many things that may impact a project on a hyper local or even lot-by-lot basis.]
So while it’s not fun, you’ve got to take a hard look at yourself and make sure you’re being realistic.
Are the bids based on good information?
A bid is only as good as the information the construction estimator was given to work from. Back when I worked for a general contractor, we’d get people that would show up to the office and say “I want to build a house, about 3000-4000 square feet, in a modern style. How much will that cost?”
Um…what?
I’d say to them, well, between $200,000-$2,000,000.
They didn’t really like that answer.
But how was I supposed to know what was included in the house, where it was located, what the design was like…? It’s like asking someone “how much is a cart of groceries?” Well, it depends on what’s in the cart - beans and rice, or caviar and steak?
So, you have to give the contractor more information about what’s in the cart. The best way to do this is by getting a set of schematic drawings and an outline spec from an experienced architect.
If you walk them through your building and point at stuff and say “this is where the commercial kitchen goes, and here is where the bar will be, and here is where we’ll put in some bathrooms, and here is the staff break room, and oh yeah the rest of it is for dining room space” that’s nice but it’s hardly enough information to put together a price.
“Garbage in, garbage out” is a more succinct way to express it - you can only expect the level of specificity from an estimate that’s commensurate with the level of detail you’re able to give the contractor/estimator.
Are you comparing the bids “apples-to-apples?”
First of all, are all of the contractors you’re getting bids from on equal footing? Do they share similar working practices, administration/overhead loads, and expectations for communication and execution?
If you’re comparing the super fancy guy with the best Instagram and a full team of managers, supers, and office people dedicated to your project with the guy who does everything himself, has no team, and can’t use email, you’re not comparing “apples to apples” and the bids will vary widely.
A good architect should be able to advise you on how to thread the needle on getting contractors who fit you, your project, and your expectations - sometimes you need the fancy guy, sometimes the down-n-dirty guy will be just fine.
[Hot tip: during bidding, reassure the contractors you’re talking to that they’ll be fairly compared with comparable guys. They don’t want to waste time being stacked up against guys who aren’t apples to apples, and they appreciate knowing that.]
Second of all, you need to compare the bids in an “apples to apples” manner. This takes a lot of experience, and an experienced architect should be helping you through this process.
I have a “bid normalization” spreadsheet I created, for example, that helps me compare bids, discover discrepancies, find stuff the contractors missed, etc. I normally ask the contractors to send me the bids first, and I’ll review and make sure there’s nothing glaringly wrong or missing before showing the client. I want the contractors to be putting their best foot forward - it doesn’t help anyone if there are mistakes!
To do that, I need a cost breakdown from the contractor. They should be providing you the bids according to the CSI Divisions - in residential, we typically call it a “16 division breakdown,” while in commercial world we’d expect to see more than 16 divisions.
If it’s a bid early in the process, it likely won’t include many “hard bids,” and will likely be based on the contractor’s historical knowledge of similar projects. Once he has the job, he’ll “hard bid” the job, meaning get three bids for each trade to make sure he’s got competitive numbers. He won’t want to bug his subs early in the process, though, and certainly not before he has the job and is under contract.
The important thing here is to ensure the bids are as close to each other as possible. If one bid is half the cost of the others, but that guy forgot something major, then…you want to know that *before* you make all your decisions based on the cheapest guy’s price.
What levers are available to pull on, that can have the most impact on changing the cost of the project?
Now that you’ve answered the previous 3 questions, it’s time to take a look at the costs and see what are the biggest drivers. Sometimes it’s obvious - a house with an interior swimming pool? Yep, that’s going to be one of the most expensive elements. But some things may be surprising.
For example, on a renovation, the utilities may need to be upgraded. On older homes and commercial buildings, the electrical service is often not sufficient for modern demands. Updating that service can be costly, and take a very, very long time [electrical meters and switchgear are some items that have famously still not recovered from pandemic supply chain issues].
Or, perhaps the design calls for large clear spans, and if some columns were added, the structural members could be much smaller [read: cheaper to buy and easier to install]. The contractor can alert the client and design team to stuff like that, and the team can make adjustments that may have very little impact on the design, but have a big impact on the cost of the project.
This is where getting a contractor onboard early is so helpful! It’s pretty common on large projects to hire a contractor for “precon” [pre-construction services], and it’s becoming more common on residential projects as well. The contractor can be on call to answer the architect’s questions and provide pricing feedback on decisions quickly, saving time and money as the project goes through design.
I like to directly ask contractors this question, about their own bids: “In your opinion and experience, when you look at this project, what is really driving the costs here?” They’ve always got interesting insights - but take them with a grain of salt - some design elements that may *seem* expensive to a contractor may not be, once he really understands what they are and how to do it. So don’t go cutting all the cool stuff out of the project in the first meeting :)
The biggest driver of costs, every single time?
Scope, aka amount of project.
The easiest way to cut project costs is to make the project smaller. If you’re trying to cut a large amount of money out of the cost of a project, you’re not going to get there by changing the tile spec. You have to make real, serious cuts to the size of the overall project.
What is your time horizon for the project?
If you’re looking to do this project and flip it [aka sell] right away, your time horizon is very short, and you can’t afford big cost overruns. If you’re in a long-term hold situation - if it’s your personal “forever home” or it’s a long term investment - you have more time to make up for a more expensive project.
Most of my residential clients, for example, want to phase their projects, thinking it will save them money. Nope, it just means you’re under construction for many, many years, with one project right after the other. Think of it like buying 10 years’ worth of shampoo in travel size bottles…not cost effective! You want to buy in bulk, so your cost per ounce of shampoo is lowest.
But, you don’t want to buy the bulk shampoo if you’re not really sure you like that kind of shampoo - you want to make sure it’s your “forever shampoo” before investing that much, and then the extra up-front costs will be worth it.
I’ve never had a client regret doing more work on their house, but I’ve had plenty get to the end and say “we should have just done this or that while we were at it.”
Institutional owners [municipalities, universities, etc] have the longest time horizon - they are thinking of ownership in 50 year increments, and not about making every dollar back tomorrow. They want to have buildings that are very well built, easy to maintain, and have lower operating costs. That means a much more expensive building today, but a much cheaper building in the long run.
Conclusion
Ok, there you have it - five of my favorite things to consider when the bids come back to high. Just remember - it’s just information - and armed with it, you can make even better decisions moving forward!
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