Pros and Cons of COMPETITIVE BIDDING OR NEGOTIATED CONTRACTS When Selecting a General Contractor

Competitive Bidding in Growth Business Cycles

team negotiations with project manager

Team negotiations with a Project Manager should result in a good balance between price and schedule.

Should we recommend to our clients that we use competitive bidding for a project or should we suggest negotiated work with the general contractor? When the economy is turning towards a growth cycle it is great news of course, but presents the architect and construction / project manager with a problem we don’t see every business cycle. This issue does not face us during a downturn economy because everything is done using competitive bidding, as clients are eager to squeeze every nickel possible out of motivated contractors. Pent up demand for new space causes scheduling issues, as well as the always-present budget issues. Negotiated work can reduce a construction schedule by perhaps 4 to 8 weeks, which can be life-or-death in certain business situations. The balance between obtaining the fastest schedule and best price causes a decision to be made between competitive bidding and negotiated work.

Who’s responsible in Competitive Bidding?

Often the architect or construction / project manager is asked to give opinion on competitive bid or negotiated contract with a general contractor. Actually, it is a very easy question to answer, based on facts and logic. However, due to suspicion of collusion frequently evident in the general contracting industry, this question can elicit a very emotional and political discussion.
project management decisions

Who will take responsibility for the tough project management decisions?

The importance of understanding the differences between competitive bidding and negotiating work can hit an architect or construction / project manager close to home – in the pocket book. One of the phases of the project of which the architect has almost no control, is the construction process, also called construction administration (CA). Some architects include this level of management in their standard fees, some include it as an hourly extra, and some exclude it. CA includes interpretation of the architect’s drawings, and the architect typically allows adequate fee to respond to RFI’s, Submittals, etc. However, CA is also about relationship management. If the general contractor and the owner do not trust each other, the architect or project manager will be brought into many phone calls or meetings to resolve conflicts between the two. If these extra time is not consider when the architect is developing his CA fee, or if it is excluded, the architect may be required to assist with resolution of various issues without being able to charge. While it sounds logical to say “That’s not included, I cannot attend that meeting” in reality the architect will either be bullied into participating, or will voluntarily participate because they want the project to be successful so she can obtain a good referral. In this way, the architect may end up spending many hours at no charge to get the relationship conflicts resolved. In addition, the architect or project manager may end up jeopardizing relationships by siding one way or another, so there are future consequences as well. Therefore, it is critical to understand the issues so your client can make the best decision possible.

The issues in Competitive Bidding vs. Negotiated Work

To understand the issues, you must first understand the two processes and more importantly, the differences between the two processes we are studying – competitive bid versus negotiated. First, in a competitive bid, the plans must be accurate and expansive. “Apples to apples” is the only legitimate way to competitively bid contractors. And the fact of the matter is that accurate plans with sufficient detail to bid are difficult to achieve and more expensive to produce. Second, it is very important to understand that competitive bidding deals only with financial aspect of the project. Intangible facets such as personality, schedule, opportunities for value engineering, etc. are not included in the analysis, as they are subjective issues. Most people who have completed a multitude of projects will agree that while cost is an extremely important issue, the other subjective issues can have a big impact on whether or not a project is completed successfully or not. Third, competitive bidding takes longer. In competitive bidding, the general contractor needs at least 2 weeks to bid a standard “vanilla” tenant improvement project – 4 or 5 weeks to bid a complicated large project. Evaluation of the bids will take 1 to 2 weeks. And Contractor Interviews, which are a good way to attempt to uncover strengths or weaknesses in the subjective issues and intangible criteria, can take another 1 to 2 weeks to complete. These time frames span 4 to 10 weeks for a full competitive bid. Sometimes the amount of time required for competitive bid is time that cannot be spent building, due to the plancheck process, so the critical path layering schedule affords the client the time to complete a lengthy bid.

How does Negotiated Work differ from Competitive Bidding

Contrast the above information against negotiated work. First, in negotiated work, plans can be less detailed and less accurate, since there is only one bidder. That one bidder will not be afraid to ask questions about the plans, make alternative suggestions, and explain their assumptions, since the specter of competitive bidding advantages from one contractor to another has been eliminated. Assumptions by either the architect or the contractor are less dangerous, because by the very definition of negotiated work, there is a good line of communication. In fact, often the general contractor provides valuable input during the design phase. The general contractor becomes an integral part of the team from the onset, rather than an implementation entity. Second, during the give and take of the design phase, with the contractor participating, it is possible to develop the rapport and communication protocol that will be integral to the successful completion of the project. The subjective issues and intangible criteria needed to decide if a certain contractor is right for the job can be explored early on. In fact, the level of advocacy from the contractor in favor of the owner increases tremendously. When contractors competitively bid against each other, they tend to be quite secretive about a lot of valuable information, as they do not want to share it and give away their ideas that might make their competitors more desirable. Third, the amount of time needed to transition from drawing completion to start of construction can be days, rather than weeks or months. If certain financial arrangements are agreed to while the plans are being drawn, and the issue of plancheck and permitting is dealt with adequately, then the general contractor literally can start building once the plans are completed. For example, if the general contractor has a good relationship with the City, or if there is considerable amount of demo, or if there is a considerably amount of walls to build, there is a very good chance the general contractor can start the project while in plancheck with no negative consequences. This is the first step of a fast-track project. This can shorten the construction schedule by a month or more.

Competitive Bidding and Negotiated Work each have their places

As you can see from the description of the two processes, the negotiated process has some advantages – less money spent on detailed plans, less risk entering into contracts with people whom the client may not like or trust, and a greater opportunity for fast-track scheduling. The negotiated process has a significant drawback, however. Without the competitive bids derived the actual competitive bidding process, it will be virtually impossible to PROVE that the client has selected the lowest, qualified bid. Many large companies have policies that require this proof. Competitive bidding has advantages, too. A properly prepared spreadsheet, comparing each contractor’s cost to another’s, trade by trade, is the bench-mark of construction management – a time-tested, traditional method to determine the lowest qualified bid. Competitive bidding is used by many large firms and by governmental agencies to allow for diversity in bidding. Comparing costs trade-by-trade is also a valuable way to uncover discrepancies in the plans. On the downside, however, competitive bidding can be confusing and fraught with salesmanship. If competitive bidding is not done properly, it can lead to accusations of unfair bid practices and distortions of the costs. The bottom line is that agreeing to a negotiated arrangement between a client and a general contractor requires a great deal of trust between the two parties. The client has eliminated the step of verification by eliminating the step of comparing bids. And since there is traditionally a great deal of distrust in the construction industry, one must ask – how can the high level of trust be developed? There are several ways this trust can be developed or identified. First, trust is developed after the parties know each other. Therefore, if the client and contractor have successfully completed a similar project in the recent past, this is the best indicator of a good outcome for the proposed project. Second, if the architect or project manager knows the contractor and can recommend the contractor specifically for a negotiated arrangement, this achieves part of the trust needed but probably not enough. Perhaps with a modified bid (see below – GC & Fee Bid) or with an aggressive period of reference checking, site visits, and interviewing, the trust may be developed. Third, reward and/or punishment may be resorted to develop the trust. For example, if a contractor is told there are 3 projects, and if he does a great job on the 1st, he will get the 2nd and 3rd, then that will most likely motivate him to perform his role excellently. Conversely, if there are penalties written into the contract that punishes the contractor if he fails to perform, this is another way to motivate him to perform his role excellently. In my experience, unless there is overwhelming evidence that a negotiated arrangement will result in the desired outcome, projects are most likely to use competitive bidding. The best candidate for negotiated work would be a client and contractor, who have completed several projects successfully in the recent past, like each other and complement each other’s strengths and weaknesses, and there is a good likelihood of future work. In this scenario, there is tremendous motivation for a positive outcome. If the existing relationship is less than optimum, then certain protective devices or steps can be put in place to increase the chances of a positive outcome. The Client may hire a construction manager to provide oversight on the entire process and especially the contractor. The Client may implement a GC & Fee bid (see below) as a high-level comparison factor. The Client may invite 3 or 4 prospective contractors in for lengthy meetings and interviews, with the purpose of asking each contractor why the client should negotiate with them and not another contractor. The Client may also insist upon an Open Book cost format, where the Client has the right to review all cost documents at any time, without notice, including paid checks and bank statements. Copyright Mary C. J. Roberts of Project Management Advisors, Inc. 951-340-9000