September 22, 2020
Stay-at-home orders and supply chain disruptions resulting from the COVID-19 pandemic were two of the biggest changes impacting the construction industry this year. The trickle-down effect as states have fully reopened is that projects are now being approached very differently particularly when it comes to bidding. Companies are now facing tighter competition, a longer procurement period, knowledge that unexpected delays are likely and an increase in risk-sharing between owners and contractors. Even though about half of contractors nationwide still expect profit margins to shrink over the next six months, the Construction Confidence Index (CCI) improved from July to August. Backlog was also up, but the Associated Builders and Contractors (ABC) report cautioned that the months ahead will still be volatile. Given there is now more competition than ever, it does not mean industry companies need to rush through the bidding process, or accept lower margins, to win new projects. An optimized bidding process can ensure clear expectations, balanced risk-sharing, and favorable project pricing. To help clients, prospects, and others, Wilson Lewis has provided a summary of bidding best practices below.
Collect More Information
The more details that contractors can agree on in the beginning, the fewer surprises that will pop up later. Surprises are unwelcome during a project and can often lead to cost overruns and delays, even without a global pandemic. The key is to start planning even before the bidding phase. Successful contractors that protect margins are planning for impacts to profitability during the design phase. Plus, no matter what kind of contract or type of project, the same process can apply of getting as many details as possible about the initial bid.
What happens when the bid does not contain all the necessary details? In this situation, it is important to submit a Request for Information (RFI). If the request goes unanswered, clearly specify in the bid if something was left out or assumed as a result of the missing information. Along this same line, always conduct a site visit, but if a physical visit is not possible then consider using Google Maps to conduct a visual assessment of the proposed site.
Increase Communication Among Parties
Whether it is questions to the owner, developer or ensuring the subcontractor has completely captured the scope of work, do not underestimate the simple power of communication. Ask questions that help specify the timeline, type of labor, project details, potential risks, trouble spots, and materials. When the project requires the work of subcontractors, make sure selected parties are the right fit for the job. Also look for areas in subcontractor proposals that leave out key elements of work, instead of including them as an exclusion.
Include Contingencies
This can be a tricky area for contractors. Contingencies are traditionally a way of safeguarding the project price but including too many of them can affect whether a bid is successful. It is important to strike a balance between contingencies on events outside the contractor’s control. Examples can include weather, supply chain, economic conditions, and new since COVID-19, items like skilled labor availability, government mandates, and so on.
Another area where contingencies can be effective mechanisms for price control is in materials and finishes. If the owner did not choose the final products, the contractor needs to make certain pricing assumptions. Verifying whether the products will be low-, mid-range-, or high-priced will help narrow down costs; nevertheless, a contingency should be added stating as such. If products end up going from mid-range to luxury, for example, or previously priced materials go up in cost, the contingency protects the contractor from absorbing the balance.
This is also why it is a good idea to include a deadline to respond to the bid so that if certain materials are priced out already, it can be guaranteed by a certain date. Economic data from ABC points to the likelihood of volatile materials pricing in the months ahead and the potential for price increases.
Explore Alternative Price Arrangements
There are two basic ways to price a construction contract: fixed fee and cost-plus. Owners prefer a fixed fee because it presents the smallest risk to them, but the opposite is true of contractors. The ideal scenario for contractors is a cost-plus arrangement because they are guaranteed to get paid for direct and indirect costs, plus a fee based on overhead and profit. As with contingencies, properly bidding a contract is about balance risks and rewards. Sometimes, cost-plus contracts can be attractive to owners if they include limits and project caps. An alternative may be a cost-plus variable fee contract, which allows both owner and contractor to share any cost savings. Going back to the earlier point about communication, ensuring both parties have the same expectations and understandings of terms and conditions is critical.
It should go without saying but double-check everything before the bid is finalized. Incorrect data or underestimating the scope of work can lead to bidding errors. Avoid the temptation of bidding on work and intentionally shortchanging the price, timeline, or other project aspects just to win the bid. Although it is true that these elements can sometimes be made up for in other fees and surcharges, it is not always the case. Go for quality in the bidding process, not just price.
Contact Us
Contractor confidence and backlogs are up, but now is not the time to idle. Exploring ways to mitigate risk and maximize profitability is crucial to weather whatever volatility the market has in store over the next several months. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.