Tag Archives: Ethics

August 13, 2014

Patterns, Pitfalls, and Practicality

Looking back over the years I think the most important things I’ve learned about estimating come down to reading the situation and responding accordingly.

If estimating is only about containing risk, the pursuit of a risk free job will all but guarantee that you’ll never be competitive. There must be some balancing point between acceptable risk and staying competitive. Really often this balancing point rests on the design teams alignment with owner requirements.

Whoa! That’s expensive!

There are a host of reasons why a design team would choose an especially expensive product or assembly. Some are more valid than others. The American Institute of Architects position is quite clear; Architects should never be responsible for cost outcomes. In reality, if the budget is blown by an inefficient design something needs to change to make the project happen. In my experience, weak design teams blow their clients budgets regularly.

Breakout till you break down.

Here’s where we get to some pitfalls. Lots of General Contractors will attempt to demand breakout pricing of the project from their subs. On the surface this seems like a decent first step since you might find some big numbers that could be trimmed.

In reality it’s much harder to just lop off a section of the project free and clear. Engineering concerns, aesthetic issues, and final usability all come into play.

I suppose some GC’s are hoping to get enough information from their subcontract bids to drive down the subs overhead and profit. This is a game they won’t win because it’s cheating. Market value was established by competitive bidding. As hard as it may be to accept, it doesn’t matter if the low bidders markup is obscenely high because they proved they are the best value.

Lots of times GC’s will push out a laundry list of “what if’s”. Often these are generated by a frantic client during a meeting with the GC, and Architect.

Here’s the thing: as an estimator it’s on you to know what will and won’t make the budget overrun disappear. Putting your subs through endless exercises that you know can’t/won’t achieve that end is a waste of your time.

Poorly crafted or worded “what if’s” all but guarantee that you’ll be arguing about scope inclusions for ages. Be especially careful about What-if’s that hinge upon engineering input. Architects rarely seek their consultants input at the negotiating stage. It’s incredibly common for weak design teams to put a GC through several rounds of pricing before issuing a final “construction set” that includes a new and costly engineering necessity.

Most subcontractors view the “what if” stage as a risk generator. I’ve seen some who seek to exploit the confusion hoping to gain profit, and I’ve seen others who fall victim to their own honesty when a GC uses the information to strip the value out of the job. It’s very important to maintain perspective here. These subs got you into the winners circle. Exploiting subcontractors for information to “close the deal” is not your birthright. Threats, cajoling, or short deadlines are the tools of the foolish and shortsighted.

Sure Mikey, I’ll get RIGHT on that for you…

If your client really needed to move forward with their project, they’d have taken steps to ensure their design team would perform within budget before the bid.

None of which is to say that it’s not reasonable to pursue a job that’s over budget. The main aspect that makes an approach successful is sound strategy. Simply put, if you don’t know how far off they were, you can’t really help them. The AIA advises its members to conduct extensive interviews with potential clients. These interviews go deep into the client’s budget, the approval process, advocates and opponents relevant to funding, and so on. The design team knows far more than they will let on about the job budget. Traditionally the Architect serves as owners rep for the project duration. They’re cagey about the budget to protect the client’s interests. Generally the project budget will have a contingency fund which the Architect must be cautious to protect since it pays for unexpected issues, design problems, and so on.

Find out the budget over-run and REALLY consider that information. We hear a lot of inspired speeches about the importance of optimism but the reason that GC’s even exist is because a client can’t reasonably expect to hand the plans to subcontractors and have the job built on time and within budget.

Building on the assumption that the budget over-run is achievable it’s time to review your options to generate an effective strategy. Looking at the subcontractor bids, are there any that seem higher than a similar project would call for? Build a rough tally of what these differences might be. Work your way through all the bids and figure out what you could reasonably carve out. Bear in mind that decorative items have wildly varying prices. If one trade in particular strikes you as profoundly expensive, then it’s worth having a conversation with that bidder to determine what’s driving their costs. Asking for rough numbers in a conversational manner keeps things from becoming a brainstorming session. If you find that a major cost center is due to a sole specification you should try to get a handle on what a competing product would save you.

I’ve seen some bids drop by over half via simple product substitution.

Seven lamp octolights with custom ink-stained shades don’t come cheap…

Corruption is expensive and complex. Don’t think you can simply cut it out of your project without repercussion. It bears mentioning that incompetence is more common than malice. A great deal of specification data is generated “for free” by vendors courting the design team. These vendors put a lot of effort into “helping” the design team with the “nuts and bolts” of their project. This much akin to lobbyists writing sections of proposed laws for congress.

They get their compensation via sole-specification and the outcome is often expensive. The design team will protect their vendors on whatever grounds they see fit. They’ve invested considerable time addressing each issue of the project and it’s their role to ensure that the integrity of their design is built. The client is paying for a level of quality that the design team ensures is provided.

Many GC’s are afraid to anger the design team with Value Engineering suggestions which leads to the aforementioned practice of bombarding them with a myriad of “What if” scenarios.

Really often the client has no idea of the extent to which a sole specification is driving the budget. I bid a project where the square foot cost of a single trade was greater than the total built square foot cost of a similar adjacent property!

That level of brazen price gouging is only possible when the vendors are VERY sure that the design team will protect them. The game is rigged and you’re in a pickle so what do you do? That’s a tough question. Obviously you’re the low bidder if you’re in front of the owner so you’ve gone quite a ways to proving you’re market value.

Personally I think it’s time for a sidebar conversation with the client. Their design team has brought a certain level of corruption into the project but they still work for the client. Clients rarely demand that their design team prove their due diligence with respect to the project budget. The AIA specifically advises its members to avoid any contractual responsibility for the final project budget which might explain why it doesn’t happen much. Nevertheless, the client has options. They can direct the design team to accept performance based alternate equals via a published addendum. They can also opt to establish a “National Account”. More on that in a moment. I purposely stipulated a “published addendum”. Supply chain relationships are very insular. A distributor’s relationship with a rep is far more significant than a single job. Some reps won’t step up and offer an alternate if the design team is notorious for corruption/refusing alternates. By issuing a drawings set with clearly requested value engineering, the design team is forced to acknowledge that “the game is up”. It also clarifies what the design team considers relevant performance data. Again, sometimes a specific product is unique and has a valid reason for inclusion in the design. One pitfall to this is the fairly standard practice of requiring all alternate materials to be approved prior to the bid. Depending on the amount of time from bid letting to deadline, this can often mean it’s not feasible to get alternate materials approved before the deadline. Don’t forget that the design team is invested in their project so they’re not looking to have the design changed by subcontractor suggestions. If they were interested in lowest common denominator materials, they’d list performance specifications to start with.

National Accounts are commonplace among chain restaurants, banks, and some stores. The client establishes an account with a material distributor who publishes the unit costs of each item. This gives the client a chance to scrutinize the design team’s choices and it ensures that all trade bidders get the same material price. National Accounts solve a lot of problems inherit to local corruption however they introduce their own idiosyncrasies as well. First off National Accounts rarely offer best value on everything they include. If the client elects to have subcontractors purchase the materials through national accounts, it adds a layer of complexity since the National Accounts reps must rely on the Subcontractors Quantity Take off (QTO) measurements. I’ve won and lost jobs because of differences in QTO. Getting a National Account rep to give you a unique quote because you’re the only one who noticed that the scale was mis-labeled is all but impossible. I’ve caught something significant in the past and was rewarded by a National Account Rep who notified all my competitors of their mistake. This decreases the incentive for smarter bidders to participate since they can’t capitalize on their expertise.

When the owner furnishes material they take on the risk incurred by having no check on the design team’s measurements. They also take on the risk associated with delivery, billing, and payment for each vendor they contract with. Since material delays would be outside of the build teams control, the client could provide their own undoing. In my experience owners lack the “pull” necessary to get material vendors to correct mistakes in a timely fashion. Obviously the more prominent the client’s account, the more pull they’ll have. Keep in mind that a lowly subcontractor likely purchases millions of dollars of material annually. Their vendors are very committed to overall revenue and that makes a huge difference in their performance.

The client needs to know authoritatively how much they’re being ripped off which will require you to provide historical data on what previous projects have cost. Speak plainly as the design team may be beholden to these vendors who are ripping the client off. The design team may wail and swear that such isn’t the case but that it’s necessity that brought these people to bear. They may claim extra charges to “re-design” elements to achieve your budget which was impacted by dozens of unforeseen issues. Advise your client that they pay the design team for work completed. If the team sublets portions of the design to vendors in exchange for exclusive supplier rights then it seems only fair for you to know beforehand what their final cost will be. This hidden detail is the exposed thread that unravels the whole thing. The industry works on relationships and not all of them are healthy.

Sometimes you can just feel their contempt…

If your client’s facing this situation it’s time for the Architect to call in a solid with their cronies to get the job on budget.

Pretending that this or that valid thing changed to suddenly get the price in line is what causes all the “what if” scenarios. If other similar work is getting built for less, then the design team is making excuses. Many times Architects and their consultants will demand unit pricing for the expensive items. This is a desperate search for ways to pin the blame. The root cause is a vendor overcharging because they know they’ll be protected. The subcontractor can’t risk angering the vendor because they’ll work together again. The Subcontractor’s also in a bind because answering the GC’s unit price questions puts out answers that can and likely will be used against them. Competing vendors may be disinclined to offer other options if they’ve got irons in the fire with the specifier. The more corrupt the design team, the less help you’ll get from the market to fix it. I’ve witnessed projects bidding semi-annually for three years in a row. They celebrate their bid anniversaries by coming in so over-budget that it boggles the mind. The vendor’s responsible can’t/won’t cut their price because they’ve exposed themselves before. Without a team overhaul or a budget boost, the job will never happen. It’s a terrific shame that parasitic situations persists.

The flip side of this is a client who’s so cagey that nothing is ever cheap enough. Developers are notoriously given to speculative bidding. They’ll ask for value engineering ideas from all bidders with immensely detailed breakouts. They’re always one unanswered question away from inking a deal. Weeks and months later, they put out a revised set of drawings that incorporate all of your best ideas. You get the privilege of competing again and again and again. I’ve encountered GC’s who spent so many labor hours bidding the job that they couldn’t re-coup the cost once it finally went to contract.

It’s really important to realize that these people aren’t stupid. They may know that your bids are spot on and that your pre-construction efforts will save them huge amounts. They may also know that once you’ve pounded out all the risk for them, they can go ahead and hire a less sophisticated competitor at lower cost. It’s not that they’re evil, they’re just working the system with people who play along.

This brings me to another experience learning point. Certain subsets of any given market will be populated with a distinct class of professionals. Much of the pairing between client, contractor, and design team comes from a shared level of professionalism and ethical standard.

Despite all the rhetoric about how wonderful everyone is you’ll likely see that weak design teams tend to work for clients that create less competition for their work. Undesirable clients are a magnet for weak design teams. Clients that are broke, “run by committee” or run by a politically connected and unqualified person are disinclined to see the value in a higher level design team.

The less vested a client is to the project’s outcome, the more nonsense you can expect. Gaming the bid with a myriad of alternates allows these individuals to max out their budget with less management interference. It’s these projects that routinely blow their base bid budget because the client’s focus is on spending their allotment entirely rather than building efficiently.

The Design team’s vendors know that the base bid is the low hanging fruit so they load on their profit there. Unsurprisingly the budget is blown. At the GC level it’s apparent how sincere the alternates are when you track through the documents to see if they’re carried to all project scope. For example, there may be a page in the Project Manual listing an alternate for a different ceiling layout. If the Architectural sheets have reflected ceiling plans showing both base and alternate conditions, make sure the Mechanical and Electrical sheets do as well. It’s incredibly common for Architects to pepper their sheets with alternate requests that they never comprehensively list elsewhere. Force the design team to fully acknowledge their alternates via Request For Information (RFI’s.) Badgering your subs on bid day to know that some tiny key-note on the architectural page effects their bid isn’t their job, it’s yours made harder by a weak design team.

Strictly speaking if an alternate exists, you have a duty to provide pricing for it or risk having your bid rejected as incomplete. Be very cautious with this because poorly defined work is higher risk. If you are obligated to use a supplied bid form, you can reliably expect there will be no provision for clarifications, exceptions, exclusions, or contingencies in the single line provided for each alternate price. The client requiring a bid form understandably wants “apples to apples” pricing comparison between bidders. It is therefore critically important that every alternate request be fully vetted at the request for proposal stage. File RFI’s as needed, consult with subs, and control the risk. Discovering that you’re “on your own” to price some murky alternate on bid day is a bad place to be. More than one half-hearted alternate request was revoked following a serious inquiry from a GC.

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1 Comment | tags: Alternates, Blown bugets, Breakouts, Corruption, Ethics | posted in Uncategorized

August 13, 2014

How to lower prices

By Anton Takken

A common follow-up question to “How much to build this?” is “Could it be done for less?”. If you are losing to competitors frequently enough , the answer would be yes, yes it can. There’s a tendency to look at a bid as if it’s simply the total of all the subcontractor quotes. This perspective has limitations in that it implies that cheaper subcontractor quotes is the only way to arrive at a lower total bid.

But why are their quotes so high? Risk is the most common reason. Subcontractors must assess factors that go beyond a narrowly defined scope of work listed in their contracts. For example market conditions may have created a labor shortage that limits the amount of projects the subcontractor can safely take on. Bid invites for projects that are planned to start during peak seasons will create a twofold risk for the subcontractor. First, if they win the job and labor is scarce, they will have to pay a premium to adequately staff the job. Second, if they fail to land enough profitable work during peak season they jeopardize their annual earning potential which may leave them saddled with a fastidious low profit job, which is a very serious problem.

GC Estimators can address this risk by carefully evaluating bid opportunities that are leading up to and during peak season. Are the plans ready for permit? Does the client have funding? Can they start when they claim they will? Could they start earlier or later? Lots of ambitious clients choose to break ground in the summer to reduce weather delays. School remodeling typically takes place when the kids are out as well.

From traffic signals to hand grenades – timing is everything!

This is not the time to be optimistic and giving the client the benefit of the doubt. If a client looks wobbly or has a history of late starts tell your subs you anticipate a later start date. If the client is obligated to timelines for contract awards and project closeouts include that on your invitation to bid. Specification manuals are sometimes thousands of pages long and Architects can’t be bothered to list pertinent details like start dates, completion dates, liquidated damages, bonding requirements, Taxes, or Davis Bacon Wage requirements in one place no matter how much it would benefit mankind (but I digress). Honesty counts, I have been involved with bids that were upwards of 20% higher than the best we could do on bid day because we couldn’t count on the client to start when they said they would.

Projects that get pushed back inevitably collide with work for responsible clients. These collisions can be immensely expensive especially when small projects “just won’t end” to free up needed resources.

Order of operations

Projects with limited subcontractor scope may still require several mobilizations to the project to complete. In extreme situations, the mobilizations are more expensive than the scope of work. Imagine a project that requires a new doorway to be cut into an existing wall. The painter might be tasked with painting the wall around the new opening, the door frame, and the door itself. If the painter were allowed to paint the wall after the frame was installed ,they could get the wall and the frame painted in a single trip. Shipping the door to the painters shop allows them to paint it when convenient and bring it with them when they come to paint the wall. Cutting 50% of their mobilizations and allowing them to paint a door in a less chaotic environment reduces their labor and risk on the job without changing the scope of work. Be creative and find alternate solutions. Taking this door example a different way, let’s say the door is wood and must be stained to match the wall trim. A painter is going to have to obtain a stain sample, mix, match, and apply that finish. The millworker will bring pre-finished trim to the job site to install. They have all the equipment to stain and finish the wood door and bring it with them when installing the trim. The stain WILL match because it’s the same material from the same equipment. Again, the staining can occur in a controlled environment at the subcontractors convenience. The painter ends up with a single mobilization, so does the millworker.

If the work is inconvenient or likely to interfere with more profitable pursuits subcontractors will price it higher. Don’t let dogmatic tradition dictate the schedule, look for the efficient approach. Don’t be afraid to make things cheaper for a “little” scope of work.

House cleaning

Part of what defines the work is the GC. Many firms are monoliths of unresponsive yet demanding bureaucracy. Estimators who don’t have a rapport with their subcontractors are rarely well-informed as to what influences each bidders view of the job. Giving prompt, uniform, and firm direction in reply to subcontractor questions builds a positive association with your firm. They will be more inclined to speak honestly with you about their limitations, interests, and concerns. Dithering, weaseling and CYA replies achieve the opposite.

Project Engineers that hastily reject submittals without explanation create administrative log jams that delay critical path deliveries. Project Managers who fail to develop, maintain, and manage project schedules often become “screamers” as the deadline approaches with long punch lists. Taken together, these “dynamic duo’s” are artery clogging masses in the project’s bloodstream.

GC’s who have their project managers bid their own work often receive different subcontractor rates depending on which PM is going to run the job. This is why.

“You could say workplace tension is a factor…“

None of which is to say that everyone at a GC must be everybody’s friend or always “play nice”. GC’s that win work that’s run smoothly and profitably without screwing anyone will have plenty of admirers.

Working around the situation

The modern bidding environment is very formal and compartmentalized. The GC’s are not permitted to informally ask the design team questions. Subcontractors are not permitted to ask questions of anyone but the GC’s. Bureaucratic delays ensue, forcing critical decisions to the end of the bidding period (if then). Then the bids come in and often the client is displeased with the price and all value engineering suggestions. After all, they paid the design team to get everything this far,now they’re forced to choose what to amputate from their vision of the project. The client doesn’t see much value in the ritual of the Request For Information (RFI) exchange. So take the opportunity to push the project back on track by providing leadership BEFORE the job is off the rails.

“An appeaser is one who feeds a crocodile hoping it eats him last” Winston Churchill

Many GC’s seek to avoid exposing an Architect’s mistakes in hopes that “playing ball” will naturally resolve complex issues. Assuming the Architect will fully grasp all the issues and costs of a problem is how we get half answered questions, cost over-runs, and project delays. Often these problems are apparent at the bid stage. Cost additions post bid are change orders that the owner doesn’t appreciate. Ambiguity in the plans can raise moral dilemmas that unscrupulous competitors exploit to snag a job. Closing the gaps BEFORE the bid levels the playing field and protects the client.

Subcontractors may feel the same way only they must rely on often feckless GC’s to get direction from the design team.

Start on the right foot by writing RFI’s in a professional manner. Reference an actual drawing that you’ve cropped to the area(s) affected. Wherever possible ask Yes/No questions to simplify things. Offer reasonable solutions and imply that you think that’s what they intended.

Here’s an example: Detail XYZ has a note requiring process X however detail PDQ has a note requiring process Q. ABC Construction believes the intent is to use process X at only West facing openings and process Q at all other openings. Is this correct? If not, please define the desired process for the openings in question.

If the architect writes “yes” on your RFI and sends it back to you, you’ve generated an easy to follow instruction for subcontractors to bid on. Legalese or weasel wording makes for ambiguity which is risk.

Now most estimators will just send this RFI to the Architect and steadily grow their frustration as the bid date advances without a reply.

Get what you need as soon as you can

It may be possible to call the Architect off the record before sending the RFI. Phrasing and tone are important. Portray your efforts as striving to make an easy to answer RFI. The intention is to establish your desire to honor their design, not list mistakes you found in their plans. If done with diplomacy, it’s possible to get the answers you need before you send the RFI. Some Architect’s will formally answer all RFI’s at one time for their convenience. Typically via addendum just before the deadline.

Broadcast the answer’s

Knowing the answer early means you can create a bid directive for your subcontractors well in advance of that addendum which will confirm and formalize your instructions.

GC’s that aren’t afraid to give accurate and precise direction are rare in the market. If you make it easier to bid to your firm, there’s an excellent chance that you’ll attract bidders to your projects. Be advised that asking for alternates for scope of work that “could go either way” depending on an Architects reply can be a sizable request. It’s typically much harder to precisely “break out” some scope of work after the bid is complete. Get such requests out an in front of your bidders as soon as you can.

“I’m too busy to answer you right now”…

Subcontractors bring a profound level of specialized knowledge and diverse experience to the bidding environment. They typically have far more customers clamoring for their attention than the average GC could imagine. Subcontractors do not have the luxury of analyzing a single project from the invitation to the deadline. They may only be able to invest a small amount of time in bidding the work because their scope work isn’t valuable. GC’s are who are unwilling to “spoon feed” subs looking for answers are missing the bigger picture. “It’s in the plans” is a pithy response that results in a furtive hunt for as long as their charity outweighs their frustration. Trades with limited scope, or with scope of work that’s only shown on an obscure detail drawing are likely to come up short on bid day if you don’t let them know what you’ve found. The interplay of alternates is immensely frustrating for subcontractors. Items that are affected by trade overlap are likely to have conflicts when decisions are left to interpretation. Does the roof top unit come with its own fused disconnect or does the Electrician have to supply it? Is carpet demolition by a demolition subcontractor of a flooring sub?

A well-defined estimate should output scope of work checklists that you can send to your bidders to reduce bid-day confusion. Try to remember that competitive bidders default to EXCLUDING anything that’s questionable in their scope. If you don’t know enough about the item in question you should call trusted subs and get their input. Not everything with pipe connected to it is in the plumber’s scope, not everything with wires is an Electrician’s job. A skylight might be handled by a Glazier, a Specialty skylight subcontractor, a roofing subcontractor or even a carpenter depending on the specifics of the situation. Be advised that there’s more than one way to address a scope of work. Sometimes the cheapest option is overlooked.

Plan wrangling

99.99% of the time bid documents are transmitted as Portable Document File (.pdf) files. This can be a blessing or a curse depending on several factors. First of which is the way the document is formatted. A fair number of Architects will transmit one file with all the plan pages included in order. The advantage is that there’s no chance that any single page will be omitted. The disadvantage is that this makes the file large and cumbersome for the majority of bidders. Alternately, the plans can be transmitted by sets defined by group i.e. “Architectural, Structural, Interior Design, Civil, and MEP,”. Finally the plans can be transmitted as individual sheets.

The naming convention of the file is very important. Individual sheet files need to be renamed to match the sheet name. “Sheet #21” is meaningless whereas “A5-3 West Elevations” defines the page. Don’t assign this task to folks who lack construction knowledge, the results are uniformly awful.

Be advised that re-naming sheet files tends to scramble the page order if the page names aren’t alphabetical or sequential. In those cases, I find it easier to put the page number at the beginning, followed by the sheet name. From the example above you would have “23 A5-3 West Elevations” as your file name. Keeping the plans organized, and accessible is absolutely critical for reducing the amount of time a bidder has to spend trying to get what they need. Imagine you’re making highway signs for the autobahn, decisions need to be made quickly so the information must be clear.

Welcome to the FF&E Rodeo

This becomes much more challenging when you’re bidding work in certain markets. The multi-family, retirement, and assisted living, market often use interior design teams who create “Fixtures, Furnishings, and Equipment” (FF&E) packets. Those that have crossed my desk are a perfect storm of inefficiency. Cut sheets for carpet, chairs, paint, wall covering, light fixtures, plumbing fixtures, appliances, etc. are combined into one continuous file that’s generally riddled with nomenclature not shared by anyone else on the design team. Carpet types on the Architectural plans do not correlate with the FF&E types because these teams don’t coordinate. There is no effort made to place similar materials together so it requires a comprehensive search to find all specified material for a given trade.

Start by breaking down the FF&E files into individual cut sheet files. Use naming conventions to sort them to either Construction Specifications Institute (CSI) number or trade name. Maintain an inventory of what you’ve found on a spreadsheet. The next step is attempting to match the cut sheets to the types listed on the plans (a daunting task). RFI’s need to be promptly filed where applicable.

Be advised that very complex RFI responses are often delayed. If you break your list down to trade specific materials it should help focus the design team’s resources. Presenting your subcontractors with a completed schedule for the material in the FF&E documents reduces their risk immensely. Avoid “narrative” responses wherever possible. Provide highlighted drawings showing the locations you think they’re addressing. It’s been my experience that Interior Designers are loath to use plan notation for RFI replies. This tendency wastes your precious time. If they won’t draw a picture, draw one for them. Be advised that information like room numbers is frequently missing on consultant plan pages which compounds the confusion with narratives.

Drive the bus or get taken for a ride…

Similarly, conceptual or design/ build efforts can be based upon a hodgepodge of plans, pictures, and narratives. It’s incredibly annoying for subcontractors to read through all the pages of a narrative looking for their scope of work.

Subcontractors are bidding to YOU, so YOU need to put your assumptions out in a comprehensive manner. List out the presumed scope of work for every trade you’ve invited being careful to add precise direction for areas of trade overlap. For example, if there’s a kitchen, YOU must declare if the equipment will be gas or electric. If the client intends to furnish material, then list that too. If you’re competitively bidding, define what you expect the budget to be. Leaving everything up to the subcontractors means you’re riding the bus, not driving. Define desired level of finishes using unit costs wherever possible. If there are hard specifications or special inclusions, make sure that the affected bidders are aware of this. List things according to trade to make it easier for them. If it sounds as though conceptual or design-build estimates are more work than a traditional hard bid, you’re right!

To the subcontractor, missing information on conceptual bids generally equals “excluded”. Design-build presents an onerous situation for subcontractors. They’re expected to “protect” the GC from uncertainty but they must also compete. Exclusions are costly – limit their risk by defining what is and isn’t in their scope of work. The MEP trades are facing a significant amount of work to design-build a project. Weak, weasel-worded, or unknown requirements will push them to simply bid high to let someone else take on the troubled job.

Bids are not free

Sometimes the reason a GC fails to attract low bidders is due to the image they’ve cultivated on the market. Constant losses are an indicator to subs that it’s time to change horses. Subcontractors don’t know who was second, third, or fourth low, the awarded GC is all that really matters to them. A lot of GC’s assume that their competitors were working off the same subcontractor numbers. In fact, it’s common for subcontractors to give better pricing to low risk or better clients.

Closed doors and open windows.

There are also a lot of cases where a GC has a low bid subcontractor all to themselves. GC’s that enjoy this situation have a few things in common. First off they are aggressively promoting acceptance of qualified subcontractors. Many firms are enormously insular about widening their list of pre-qualified vendors. Striking the proper balance between competitive pricing and risky subcontractors is a process of continual refinement. If you’re consistently not winning, you need to be widening the list of acceptable subs. Unsolicited bids or late bids from subcontractors who just heard your firm was bidding are prime candidates for review because they are already bidding work in common with you.

Winners pick winners

Another thing these GC’s have in common is that they are conscious of wasting subcontractor time. It’s senseless to invite subcontractors to bid work they’ve consistently lost in the past. Just as it’s unethical to invite a sub you wouldn’t hire, it’s not ethical to invite a sub knowing they are going to lose. Classify subcontractors according to their key markets will help immensely in ensuring that they’re paired with the right work. Too many estimators focus on “at least three” subcontractor bids per trade. If one sub has never won similar work, it’s time to find another contender. Be advised that subcontractors are often in “sales mode” when answering questions about their firm. Base your classifications on their verified performance. Keep in mind that often subs are much larger than they may appear from your desk. A mid-sized GC employs a fraction of the people that a mid-sized subcontractor does. It takes a lot of resources to actually perform the work.

When times are good, it’s imperative to bid Subs on select lists. When times are bad – it’s critical to show subs you’re picking market leaders. Prove it by winning.

Your voice

Many GC’s employ an intern or hapless office worker to manage bid communications and invitations. The least sophisticated firms have someone on the phone nagging subcontractors endlessly for bids. “The personal touch” is considered a benchmark of getting things done in the bid world. Possibly there are subcontractors who feel this is a much-needed aspect of the bid courtship. For most others, this is a mindless intrusion into an already hectic day. If the project, GC, or client strikes the sub as a bad opportunity, forcing them to explain the situation to an intern or receptionist won’t help.

Sometimes the subcontractor will ask a question intended to help quantify the job. Inevitably the caller lacks decision making authority to adequately resolve the issue.

Lots of businesses create customer service positions with authority but no allowance for decision making. The Department of Motor Vehicles is a prime example. From the receiving end one message is quite clear:

“We don’t care, and it shows…”

I’ve heard GC estimators discussing this situation and several claimed that they had their lead estimators making such calls because the interns or secretaries didn’t get results. Its better to ask: “why don’t subs want to bid?”. Not getting nagged enough is the least likely reason. It’s exponentially more likely that the Subcontractors don’t see a viable opportunity. If these GC’s were honest about their chances on an average bid, they’d likely admit that they’re wasting their subcontractors time to an alarming degree.

Targeting specific work should entail having a select list of excellent subs who pursue the same kind of work as you. Those subs will bid because it’s a great opportunity and they’ll have better pricing because it’s what they’re good at.

Honesty: the great amplifier!

Nagging, cajoling, withholding, and threatening are symptoms of a backwards relationship. If you’re looking at work that’s a good opportunity for you AND your bidders, you won’t need to shout to attract attention. I have found that voluntarily providing bid results attracted more bidders than nag calls. It’s less work if you publish them using the same system as your invitations. Also, it reduces the nagging phone calls you receive from subcontractors looking for bid results.

A friend at the gallows

Subs bidding to GC’s over time will notice patterns. If your firm never wins a certain type of work, you can’t reasonably expect help from them. Lots of false hope is pinned on loyalty bidding. Subcontractors may choose to bid to a GC they’re loyal to, knowing that GC won’t win. Time is precious so they need to get on to better opportunities. Padding the number and pushing the bid out the door lets them maintain the relationship without the GC consuming all their time. It’s common to hear such GC’s claiming that “no subs are bidding this job” as they beg bids out of their subcontractors. Meanwhile, the winning GC has plenty of bids.

The situation could be fixed in several ways. First off you must quit chasing losses because it’s senseless to repeat an action that’s failed in the past. Second, maintain market pricing by cultivating new subcontractor bids. Third, provide pertinent feedback to your loyal subs . For example they may not know that you lost by $50 last time. Teamwork relies on communication.

Commitment

Just about everything in the modern bid environment is about stalling; whether it’s commitment to relationships, contracts, using a low bidder, or even admitting bid results. The pervasive mindset is that stalling for time is the best move since any other action might play against you. Jobs are often advertised using terms like teamwork. In fact, teamwork tends to mean whatever’s convenient to the GC.

For example, three bids for one trade arrive. The high bidding sub has breakout and alternate pricing that illustrate a very high level of thoughtful detail. The low bid sub has very little information and the inclusions don’t mention several items the high bidder listed in breakouts. The middle sub may list all the inclusions of the high bid but without the alternates or breakouts.

Taking low bidder’s total plus the high bidders breakouts gives a sum just below the middle bidder. Let’s say you call the low bidder and get the adds which come in within a percentage point of your earlier tallies which tells you that they’re now complete. Using that bid is now very low risk.

…who’s the fairest of them all?

Consider for a moment the subcontractor’s view of that example. The high bidders proposal enabled the GC to ask the right questions of an incomplete bidder to arrive at a sound proposal. Knowing what each answer was worth before asking is huge. The middle bidder was the legitimate low bidder based on original proposals alone.

How would things change if all three bidders had held their proposals till the last-minute? The first option is to disqualify the incomplete proposal and carry the 2nd low. The second option is to take the high bidders adders plus the low bidder’s bid and accept the risk that their formal proposal may not tally as expected. Jobs are won and lost on these terms all the time.

“Teamwork is everybody doing what I say”.

At the estimators desk, the “teamwork” here allowed the GC to hire the most irresponsible and incomplete bidder. Without the 2nd and 3rd high bidders, the low bid proposal would lack comparison data . This creates a significant trap to the unwary or uniformed estimator. If this situation persists over several bids, it would become obvious that there is little incentive for bidder #3 to continue submitting proposals. If bidder #1 is consistently missing scope items, this may be a sign that they are attempting to snag change orders. This is an insightful example of how that GC’s brand of “Teamwork” may be perceived!

“Better call in the D team…”

Lessons learned

It’s reasonable to compare proposals. Sometimes unexpected items will come to light on a proposal which prompt follow-up questions to other bidders. There is a certain duality to be expected where conscientious bidders may include so many details into their bids that they drive themselves out of competition. Likewise, the lax or harried bidder may miss something that makes their bid low. It’s the estimators job to sort all of this out, to include calling and scoping apparently incomplete bids.

This is entirely different from maintaining a subcontractor list intended to facilitate hiring hack bidders. The GC must offer value to the subcontractors if they are to receive bids. If the GC will accept incomplete bids, the playing field is tilted against the professional subcontractors. From the outside looking in, this is little different from bid-rigging since legitimate bidders cannot expect a contract in good faith.

Correcting course

Hack bidders should be directed to submit complete proposals or risk disqualification. The estimator must fortify the GC position by more thorough take off pricing to back-stop these risky subs. Unsophisticated subcontractors may offer attractive pricing that’s worth the risk. Be cautious of staffing projects with such firms. As the saying goes, trust but verify.

GC’s must strike a balance between subcontractor sophistication and market value. Those that do, find themselves winning competitive work profitably. Those that don’t are either losing money or losing bids. Don’t let it happen to you.

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6 Comments | tags: Ethics, FF&E, How much?, Incomplete plans, Losing, RFI, Subcontractors | posted in Uncategorized

August 13, 2014

Alternates

By Anton Takken

Alternates: The great scourge of a straightforward bid. How to keep it organized, get your subs on-line, and make money doing it.

These days it’s the rare project that doesn’t include at least one Alternate request. An Alternate may be as simple as a product substitution or as complex as an entire building. Regardless of how complex or how many, the estimator needs to ensure that Alternates are priced correctly.

Make a list

Only the very best design teams will generate a highly visible list of alternates which are painstakingly detailed on ALL sheets showing the affected areas. This is a rarity to be cherished, the majority of alternates will require some amount of digging to fully define. Be on the lookout for alternates that affect any of the engineering disciplines. Sometimes an architect or interior designer will request alternate pricing via key-note on an Architectural sheet without communicating to engineering consultants.

Create a list of ALL the alternates listed in the plans, specifications, Narratives, and Request For Proposal (RFP) documents. Often alternate numbers are not coordinated between consultants. Give the alternates a unique number to ensure that on bid day the subcontractor quotes align with your expectations.

Define the intent

Alternates do not occur in a vacuum. Some projects contain so many extensive alternate requests that it’s possible to assemble a scope of work that works against a subcontractor bidding the work. For example let’s say a project involves three alternates. The base bid is for a building that will feature a paved courtyard. The first alternate is to erect an out-building in the courtyard area. The second alternate is to pave a drive-through lane on the base building. The third alternate is to pave a sidewalk around the base building.

For a site concrete firm bidding this project, the first alternate is a credit for area NOT paved because the out-building is going up. The second alternate is an add however the third alternate may be affected by whether or not the first and second alternates are accepted. This bidder is forced to decide whether to risk coming up short should the alternates not be selected sequentially. It’s common for the apparent low subcontractor to change depending on which alternates are selected as a result.

Defining the client’s intention of the alternates reduces this speculation. When in doubt – issue a Request For Information (RFI) to get resolution.

Combine the list, intent, and subcontractor obligations

Depending on the state of the plans, the subcontractors may need additional guidance to ensure that bid day proposals are complete. Every alternate should be a mini-estimate with breakdowns for subcontractor quotes. This can be especially important on Mechanical, Electrical and Plumbing (MEP) plans sets that do not adequately define the alternate scope. Remodel work can involve complex plans that use several pages to resolve the areas of work. Consider highlighting the plans to indicate Alternate Boundaries. A word of caution – if an alternate request is conceptual in nature, it behooves the estimator to deliver conceptual pricing. If the client was sincere about accurate alternate pricing, they would have paid their design team to fully develop plans and specs accordingly.

Alternates need to be defined early

Generating a bid is a great deal of work. Knowing that an alternate must be priced at the start can reduce the difficulty involved considerably. Asking for an alternate or a breakout price on bid day can be a tall order.

Shooting a bystander

Some projects require breakout pricing for owner financing reasons. A common example is the “Landlord scope” of a tenant leasing agreement. The Landlord will pay for certain items that were included in their leasing agreement. This breakout is not likely to positively or negatively affect the bidders. Other projects will be so large as to allow entirely different construction teams for “breakout” work. One such project involved two buildings of very different size and difficulty. On bid day one subcontractor submitted a bid for the project as one lump sum. This bid was second low to another bidder who had broken out the buildings individually. The GC asked the second low bidder for breakout pricing. Caught flat-footed and without sufficient time to accurately separate the two buildings, the subcontractor guessed at the value of each portion. They guessed wrong by a significant percentage – making them over priced for the small building and under-priced for the larger one.

The GC won the bid by carrying the incorrect price on the larger building and the legitimate low bidder on the smaller one.

Lessons to be learned

There are several lessons here – first of which is NEVER GUESS at the value of a substantial alternate.

The second lesson is to be aware that EVERY NUMBER YOU PROVIDE CAN BE USED AGAINST YOU.

The third lesson is that helping someone does not make them your friend, nor does it obligate them to help you in return. The GC called asking for a breakout knowing that the subcontractor’s pricing was competitive but not low. It’s possible that the 2nd low bidder could have priced one building cheaper than the low bidder.

The GC knew the proportional value of each building from the low bidder’s pricing. They had enough information to suspect that the 2nd low bidder’s breakouts were wrong before they bid.

Ethics

Let’s approach this from two different directions. Alternate requests may “set the stage” for change orders made necessary to fill in gaps the design team missed. For example there’s a project with an alternate request to upgrade a Roof Top Unit (RTU) to a larger size. The base bid might have the original RTU being replaced with a new one of the same size. Often in such cases the MEP plans will include some details on the alternate. The savvy readers are already seeing where this is headed. What about the structure? A larger RTU may weigh substantially more than the structural opening was designed for. If the design team had no structural concerns in the base bid scope, they might not have hired a structural consultant. As a competing bidder, this alternate presents an ethical dilemma.

Coming from the opposing view, an Alternate request may be worded in such a fashion as to generate unacceptable risk. For example let’s say there’s a remodel of a very large office building and the client has not allowed a job walk. The Architect included a key-note on the reflected ceiling plan requesting an alternate price to repair/replace all damaged acoustic ceiling tiles in the space. Without knowing the existing conditions – this alternate becomes a risk center for all bidders.

In both cases, the ethical course of action is to pursue RFI’s to document the estimator’s efforts to resolve the ambiguity. Another option is to bid alternates with conditions defining what is included and what is not. Be wary of providing too much help. Volunteering a price without a design can leave your firm vulnerable to whatever the design team comes up with after the fact.

Moving parts

It’s a tale as old as time, the Architect produces a set of drawings with carefully selected materials that perfectly reflects their vision of the project. The project goes out to bid and comes in over budget. The client demands changes to meet their budget – the architect goes back to the drawing board and the process repeats until the budget is achieved.

I’m not sure that painting the bricks you picked is what’s driving the cost…

To the GC estimator, the cost of re-bidding a job can be significant, especially when cost cutting measures are evident at the original bid. Anticipating a budget over run and offering suggested cost cutting measures at the original bid puts the GC in a position to help secure the contract without long design delays or costly re-bids.

Making that happen requires a deeper understanding of the forces at work in the modern bid environment. Starting with the client, design development is often a long and costly process. Clients often rely on conceptual pricing exercises during design development to assure them the budget is in line.

Client commitment and hidden costs

Conceptual estimates are approached in three ways by the market. The first is to simply square foot cost the project to quickly be rid of a costly obligation. The second is to strictly price only what is shown on the incomplete plans. The third is a painstaking blend of design-build, and plan interpretation to render the most precise estimate of the project. A responsible design team with experience on similar projects and well-defined project scope should be able to accurately gauge the estimated budget. For such established teams, a square foot costing should be accurate enough. Requesting such assistance from a single GC as a courtesy is common in the industry.

Some clients/design teams put conceptual estimates out for competitive bid hoping for accurate pricing via market competition. This generates a considerable amount of work for the bidders who mistakenly believe that construction teams will be selected based on this bid. The second method is generally employed here on the part of GC estimators looking to lock up a job. This method exposes the client to potentially huge cost over-runs as the design team finalizes the plans to include predictable items that were excluded from the conceptual bids.

Rarely a client may choose to contract with a GC early in the design development process to assist the design team in maintaining the budget. These clients benefit from a GC estimating approach that strives to not only fill in design gaps, but offers constructive options to the design team as the project moves along.

Pressure on the Design team

A design team may face significant obstacles to meet their client’s expectations. It’s common for a project to have oversight and funding restrictions from a myriad of individuals. Some of these people may not have a vested interest in the total project cost. A developer may demand aesthetic consistency which obligates the design team to specific finishes or vendors. A utility provider may demand easements that force the building to a specific location. The local Fire Department may require amplifiers for their radio equipment if they deem the project likely to interfere with their signal. Many of these agencies communicate only when asked the right question. The due diligence work required of the design team can be immense as the affected agencies are rarely coordinated.

A client with a poorly defined project makes the process more difficult. Often design teams rely upon local vendors to offer solutions. In some cases these vendors provide extensive support in exchange for a commitment to use their products on the project. The design team must carefully weigh the cost of this obligation against the time saved in exchange.

Compounding the Architects difficulty is the market forces that affect pricing. It’s very common for a client to schedule design development such that ground breaking on the project coincides with advantageous weather. Conceptual pricing takes place during the slow times of the year when contractors are hurting for work. Final bid pricing ends up taking place during peak profitability season where labor shortages and fuel costs are highest.

Great expectations VS. institutional inertia

The design team approaches the final bid with greater commitment to their decisions owing to the work they’ve put into getting the plans this far. The client has a more firm vision of their project replete with lots of “bells and whistles” that the design team introduced them to as the plans progressed. It’s understandable that both groups would feel animosity towards budget solutions focused on amputating all the “frills” that gave the project its shape. The traditional design, bid, build project development method separates the intent from the outcome until the bid which is why budget overruns are so common. Institutional inertia is a destructive force in this industry.

Voluntary Alternates / Value Engineering

Reviewing the construction documents with an eye towards trimming costs, an estimator may find cost centers that are attributable to much of the above. Voluntary Alternates can be used as a sales technique to guide the client and the design team depending on the situation. The term “Value Engineering” is used for voluntary alternates that generally focus on cost-cutting measures.

Voluntary information should be balanced against client commitment. Many GC’s have “helped” clients refine their designs only to see their ideas on drawings put out for their competitors to bid. Generally speaking, the less complete the plans, the more voluntary alternates should be selling consulting services. At the opposite extreme a final bid may come along with some opportunity to reduce the cost. The GC estimator has little to lose in offering potential savings.

For example there might be costly sole-specified products pushing the project beyond its budget. Volunteering an alternate here might expose how costly the design team’s vendor relationships are to the job. If that’s the case, expect fierce push-back from the design team. Subcontractors may be loath to antagonize a vendor they must rely upon for other jobs . Proceed with caution – it’s not reasonable to demand subcontractors join in your struggle against perceived corruption.

It’s also possible the sole specification is due to a principal mandate – the design team may have no option but to require a product. For example the door trim on a suite must often match building standards.

Be careful what you promise

Substitution alternates benefit from cautious pricing because the Design team is given final say on whether a substitution meets design intent or not. The client perceives the dollar savings as a fixed amount – it takes a lot of convincing to explain how partial acceptance of your alternate comes to only partial savings on their budget. The design team may require alternate submittals be revised and resubmitted several times before they are accepted.

This all costs time and money that will not be recovered later. If using product X in lieu of product Y saves some amount – retain a percentage of those savings to cover these expenses.

Diplomacy required

Be cautious about causing embarrassment by how the alternates are presented. Design team animosity is often expressed through bureaucratic delay and compartmentalization to the exclusion of meaningful interaction. Many jobs have been delayed by a design team, however the GC will bear the brunt of client frustration up to and including legal action. Nobody gets out clean. Pay particular attention to the exposure of subcontractors, allowing a Design Team to exact vengeance on a member of your team can have far-reaching repercussions. “Throwing them under the bus” earns a reputation for cowardice.

Think beyond the plans

Most Voluntary Alternates focus on either substitution, addition, or subtraction of project scope. Creatively thinking offers other options; sequencing, timing and duration. If the project were to start during the “off-season” many subcontractors would submit lower bids. Changing the order of operations can have immense impact on costs. Factors that the client could change should be approached as a means to potential savings. For example a phased project may place a restroom remodel at the end of the project schedule. Restrooms generally require the maximum number of trades per square foot of any room in a business environment. This can create a “log jam” in production since there’s only so many people who can be in the restroom at one time – thus prolonging the duration of that phase. Offering the client an alternate to sequence the restroom scope for greater subcontractor efficiency could not only reduce subcontractor pricing – it could shorten the project duration – thus reducing General Conditions. It can be great fun to find a creative solution.

Slippery slope

Alternates create administrative loose ends that must be addressed. Notice of award forms often neglect to accept or decline the alternates submitted. Frequently these issues are left unresolved or deferred to the “kick off meeting”. Voluntary / Value Engineering (VE) alternates that require Design team approval may be unresolved for extensive periods of time. Some clients attempt to defer accepting an alternate until the project is substantially under way. Depending on the alternate, the change in scope could require extensive re-work to accomplish. If the alternates were priced assuming that accepted alternates would be in the base contract scope – the additional cost of re-work is a valid change order. Protect yourself and your subcontractors from unintended consequences of client dithering.

Everything in the GC’s world is a scope of work, a price, and a timeline for completion. Clients should be able to understand that all prices come with an expiration date. Once that deadline has passed, the scope of work in question is subject to re-pricing. Estimators “holding” a new project before Project Manager hand-off should file individual RFI’s for each alternate provided requesting an answer. Include the deadline and the default action that will be taken once the deadline has been reached.

For example “Please confirm that alternate #3 for wood in lieu of metal doors has been accepted. The price quoted for Alternate #3 is good until this date whereupon this alternate is respectfully withdrawn and the base bid scope prevails.”

Architects answering RFI’s with some variation of “wait for owner approval” should be tracked as “open” RFI’s since this is a non-answer. Don’t be afraid to get this sorted since subcontracts need to be written and these details must be well-defined for them to be complete. Rocky starts make for bad finishes. Lots of clients have good intentions but fail to see how dithering hurts their GC.

Wallowing

There are some clients who come up short on financing just after the bid. For whatever reason, they face a situation where the project cannot move forward without reducing the total price. Value engineering is requested and the client begins bargaining about what is really necessary in the project. Often brainstorming sessions are started and the GC’s are expected to work their magic to return with answers. Some GC estimators begin menu pricing hoping to give the client an “a la carte” proposal that works towards hitting their budget. The Design team may request pricing for portions of the job to justify the design or enable horse trading later on.

There is much to be cautious about here depending on how far off the budget is. A huge miss is in indicator of problems with the Owner and their design team.

Don’t feed the stupid – it only makes them stronger.

A weak design team and/or a dithering client will consistently blow budgets. Some of them consider it “part of the process” as they re-bid the same job over and over hoping to snare a lower bid. Winning a job with these people is a losing proposition.

Make it easy to make good decisions

If the budget is achievable via Value Engineering – present ONE option to hit their budget. Breaking a Value Engineering solution into additive parts allows the Client to decline something critical to hitting their budget. This approach is especially critical with projects that are severely over budget because poor decision-making is the root cause of the problem.

Clear, concise, and comprehensive

Competence brings confidence. Solve problems by providing the direction and encourage action. This is not the time to treat every hare-brained scheme like it’s a valid answer. Some people struggle visualizing the moving parts of an alternate. Giving them concrete “This or that” pricing to avoid misunderstandings. If it’s too complicated for words, make a picture. There are times that literally cutting and pasting plans to make a visual aide is the best approach. Be advised that clients may not understand what drives cost in a given assembly – don’t feed misconceptions or erroneous assumptions even if they “work for you” at the moment.

For example, a client once asked how much the support structure for a mill-work counter cost on a linear foot basis. The assembly in question involved individual cabinets which provided the support for the counter. The cabinets are built and priced individually. A counter installed without cabinets underneath would have to be supported in a completely different fashion. This hypothetical situation has no decision-making value because the cost is not tied to the assembly as the client imagines it. Helping the client to understand how things are actually priced respects their intelligence and promotes meaningful discourse.

Close the deal or close the door.

Until the client has contractually agreed to work directly with your firm – they are refining their plans at your expense. In extreme cases a GC can end up spending so many hours estimating a job that there is no profit from building the job. Don’t let it happen to you.

Final observations

Alternates add or deduct scope of work which means that every alternate potentially affects the project duration, site logistics, critical path, and staffing requirements. Take a moment to fully consider the project “in a vacuum”. Now think about how the alternate affects the total job. Alternates that drive duration should not be “free”. Be cautious about deductive alternates – giving back overhead and profit on omitted work can leave the overall project under-funded.

Conversely, it doesn’t always make sense to “tack on” full overhead and profit to all additive change orders. Simple product substitutions may end up substantially out of the client’s reach. Additive Alternates are up-sells. Sometimes it’s a better move to accept a lower fee on an easy- to- earn alternate than it is to chance losing it altogether.

Be aware that clients and design teams rarely think like this. Some feel product substitutions should only cost the difference in material costs. Others feel that the awarded GC should meet the lowest alternate price of their competitors. Their opinion is not necessarily your obligation – negotiate accordingly.

Finally, there are times that an alternate is so poorly defined that it creates unacceptable risk for the build team to price. Assuming RFI’s seeking clarification went unanswered before the deadline – my advice is to decline to price the alternate it until they are. If the alternate was truly integral to the client’s expectations the design team would have handled it accordingly.

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37 Comments | tags: conceptual estimates, Ethics, Request For Proposal, RFI | posted in Uncategorized