There is a problem with how most construction contracts are awarded today. In the 11th episode of the Construction Industry Podcast I spoke about this issue with Dr. Jorge Abeid, Ph.D., director of Remontech.
Take a listen by clicking the orange “play” button above.
Listen to the entire episode by clicking the orange “play” button above. Or you can check out the outline of the discussion by clicking here: [spoiler] It is an old policy to award contract to lowest bidder. Today construction companies are much different than when this was established
In the past:
- Contractors had their own crews
- They had many permanent employees
- Through their experience they would get better productivity by learning to work together and using less resources
- Productivity became part of the company’s own culture
- Different companies had different productivity indexes.
- Because of labour disputes, stronger unions and market uncertainties, companies’ own crews are dramatically reduced
- They now have mostly project managers, superintendents and foremen.
- Labour is hired from the unions and as such productivity indexes are leveled across all contractors.
- Productivity is no longer an effective differentiator
- When pricing bids, companies have to rely on productivity indexes from publications like RSMeans, Reed or other publications.
How can owners expect different prices from bidders if all of them are estimating from the same set of documents, using the same indexes, and working with labour from the same unions?
Lowest bid was probably offered by a bidder that is
- Gambling with uncertainty
- Slashing profits
- Mistaken during the estimation process
- A combination of these factors
How do bidders come up with their final price?
- Adding up quantities and multiplying by productivity indexes and subcontractor proposals
- Overhead costs
- Contingencies, usually around 10%
To win the contract, they have to lower their contingencies and/or profit.
- So if there are any small discrepancies in the estimating process, or if the original 10% of contingencies was needed, the contractor is in the red.
- The contractor knows of this possibility from the beginning, and its attitude reflects that.
- They will be ready to jump at any opportunity to find flaws in the design, tendering documents in order to place claims to reverse the risky scenario.
- Change orders are also a great opportunity to profit and mitigate risks.
The construction site becomes a hostile battlefield as a result.
It’s time to rethink the lowest bidder policy and come up with new ways to choose contractors.
In upcoming episodes we will discuss different ways to do so.[/spoiler]