Discover different ways contractors submit costs and the pricing strategies they use. Learn why these are not always the same and the reasons this matters.
Many Homeowners regard contractors like Highwaymen … romantic rogues, hell-bent on robbing and pillaging them before riding off into the sunset, never to be heard from again, having left a trail of destruction in their wake. And judging by the outcome of lots of Home Makeover projects, they just might be hitting the nail on the head.
So how can any Homeowner avoid catastrophic interactions with their contractors ? Well, the advice is not too dissimilar to the advice that might have been given to anxious travellers in the early 18th Century, when highway robbery became widespread - don't travel alone; avoid lonely roads; don't travel after dark; avoid carrying valuables; travel armed.
Wait, what ? How does that remotely relate to advice for Homeowners carrying out Home Makeovers ? Well, it's in the spirit of the advice rather than the actual form of words ... put another way, the same advice would be "Don't. Take. Unnecessary. Risks".
So, what does that mean exactly ? Well, the biggest risks that have the most impact on Home Makeover projects and whether or not they end successfully, relate to costs and contractors. And that's why, in this Blog Post I'm going to be returning to our elephant-eating theme and going even deeper on Home Makeover project costs and how to reduce the risks in your interaction with contractors.
Fact is, getting to grips with project costs can be like dealing with a herd of elephants. Elephants are unpredictable, have no idea of their own strength and can be almost as terrifying as out of control project costs.
Understanding, is the first and probably most powerful step towards taking control of your project costs.
There are four principle ways we get costs from contractors, sub-contractors, suppliers and manufacturers.
The first and most straightforward can simply be called "Prices" - these are quoted on websites and in brochures or in shops and at suppliers. "Prices" typically relate to very well defined items, specific items with few or no variables. If you need fittings for your new shower room then you might locate a website selling a toilet, wash hand basin, shower screen and so on. Click on the item and you'll be quoted the price. And the price quoted is typically a fixed price - there's no opportunity to negotiate.
Quite often with construction materials, buying in larger quantities can get you a price reduction. But these are usually predefined and you seldom interact with anyone from the supplier - you just place an order, pay up and wait for the items to be delivered. Not too different from buying groceries online. Prices are usually instantaneously quoted. You see the cost and you buy it, or not. And if you're sensible, you price compare across various websites and suppliers to try to get the lowest price for the item you're looking for. These prices are low risk - you pay the price and get what you paid for ... Internet scams notwithstanding, of course.
Then we get situations where the products or materials are a bit more complex and probably require some interaction with a sales team or an interactive website. Variables might be colour, size, quantity and similar factors. They might also include associated elements - like the components of a lighting installation. The light fittings themselves are the key items you want to buy but you also need other stuff - like cables, wiring, plug sockets and junction boxes, with lamps, light switches and other lighting controls. In these instances, we might request a "Quotation".
An example might be asking an electrical supplier to quote for the necessary parts for new lighting for your kitchen remodelling project. You might be depending on their expertise to provide all of the bits needed.
They will provide a "quote" for you to review, check the listed parts and verify they're what you need before you commit to placing the order. Quotes typically take no more than a few days - inside a week - for the company to issue. They are relatively simple and straightforward. Although the risk in a quote is higher because they cover more complex, composite elements of work and products.
But, when the scale of the elements or items becomes more substantial and increasingly complex, perhaps including a number of different trades or work elements - including labour, materials and even machinery, equipment or tools, then we usually get competitive costs via a tender or bid process. I expect you're probably more or less familiar with the principles of the process.
Typically you will pre-select a shortlist of contractors or sub-contractors and invite them to submit bids or tenders to carry out the work specified. And for this to be a worthwhile exercise, you will usually provide a lot more, detailed information to the tendering or bidding contractors. This might include design drawings, specifications, a schedule of works or pricing analysis.
Bidding or tendering takes longer than just getting the price or a quote. And the amount of time you allow will directly influence the quality and reliability of the tenders or bids. If you allow too little time, wise contractors will just withdraw from the process because they need to do the job properly. Bids and tenders from others contractors who do submit their costs, would probably be full of risk. I'd be suspicious how much of the bid or tender is accurate and how much is based on guesswork ?
But, if you allow too much time, contractors will either lose interest or do nothing with the bid invitation for a couple of weeks before getting on it... so all that really happens is you waste time. Just like that well known Homeowner, Goldilocks and her three unsatisfactory tenants, you need to pick a tender period that is neither too short nor long ... it needs to be just right.
When you are inviting bids or tenders for complex works, the contractor will need to reach out, in turn, to their suppliers and sub-contractors and ask them to provide prices, quotes and bids. Once they receive those bids back, they select their team and collate all the costs into their bid or tender document. And all these processes add up. The time taken depends on the size and complexity of the project, as well as on the relative size of the contractor's organisation - meaning how many employees they have in their estimating and tender submission teams - and on how busy they are when they receive your invite.
For Home Makeover projects it is not unusual to allow four to six weeks and in some cases even longer for contractors to prepare and submit their bid or tender documents and best cost. Let me mention, in passing, that, in the next few weeks, in the second and third instalments of this mini-series, I'll be going even deeper on tendering or bidding processes.
The fourth way we get costs from contractors is through "negotiation", a topic I've talked about in previous episodes. Quite often this forms part of a hybrid process that might include an element of quoting or tendering / bidding followed by discussions focused on ways to improve aspects of the quote, tender or bid. Most often the Client is seeking to improve some aspect - perhaps getting the costs down or reducing the project timescale.
This may require changing the design or components originally specified. If the contractor you like most and really want to work with doesn't submit the lowest tender or bid, you might enter into negotiations to find ways they can reduce their overall cost so you can appoint them.
And this also applies very often when the lowest tender or bid amounts are more than you want to spend. So you invite the contractor with the lowest bid or tender to work with you to tweak the project scope to get to a total you can afford. This hybrid approach has the benefit of sourcing both competitive costs and getting the contractor's engagement to get the numbers to work, through the negotiation at the end of the process. An additional benefit, is you get to work closely with your preferred contractor before they are fully appointed, so, if they fail to get where you need them to, then you still have the option to negotiate with other tenderers or bidders.
But, did you know, not all of the costs submitted either through quotations or through tendering or bidding are provided on the same basis. And it's important to understand why costs that contractors submit may differ, what makes them different and why do contractors need to do this even.
Let's start with the best type of cost ... and that's a fixed cost or fixed price. This is a composite cost or collection of costs for everything needed to get a specific job done.
A fixed price is sometimes also referred to as a lump sum. This is recognised as a traditional means of procuring construction work. Contractors are familiar with this approach. Simply explained, a lump sum is a total cost provided by a contractor to carry out an agreed scope of works. This amount then becomes the basis of the contract agreement for the work scoped.
But, a key requirement for contractors to provide fixed costs, is that the work required must be well defined - whether by drawn information on technical drawings or plans and / or in specification documentation. For the contractor to fix their price, they need to be clear that they can minimise the risks of doing so. If there is anything they don't understand, that's not clear, then they will resist fixing the cost of it.
Two key advantages of fixed or lump sum costs include ...
They reduce Homeowners risk and
When based on well-defined design information, it makes comparisons between contractors much more straightforward
But there are disadvantages worth mentioning ...
By passing cost risk to the contractor, they will probably include a risk margin into their tender sum or bid amount which has the effect of inflating the final cost.
The bid or tender process may take longer both in the preparation of the tender or bid documentation and in analysing bids or tenders submitted before you can select the best contractor and get them going on site.
One of the ways experienced contractors may seek to share the risk with the Client - the Homeowner - is to qualify their bid or tender. And they do this when the tender or bid documentation has holes in it, is incomplete or inadequate.
They do this by stating assumptions they have made when preparing their costs and by listing anything they have explicitly excluded or omitted from their bid or tender amount. And they do this particularly in reaction to unclear or insufficiently defined design information.
The qualifications contractors include don't necessarily make their tender or quote invalid but Homeowners evaluating tenders or bids must be very careful to assess these when considering competitive bids.
If you don't provide full details then the contractor may do one of three things :
One - they may simply exclude the cost of selected items completely and only price the other elements that they believe to be adequately specified.
Or two - and intelligent, capable, experienced contractors are likely to do this - they make an assumption based on their experience of what might be suitable and include a cost for that option and they qualify their tender or bid accordingly. But this means you need to check very thoroughly that the option offered is something you like, has the required functionality and quality standard.
It's very important to realise that you cannot rely on a contractor's assumptions. Even though they may be based on their years of experience and on what a previous client wanted ... because they may be nothing like what you want.
And three - Sometimes contractors may include provisional sums in their tenders or bids. Like fixed prices or lump sums, this term is also well understood by contractors. But not so much by Homeowners. A Provisional Sum is like a placeholder amount. It's not an actual cost for a specific item, it is just a reserve, included in the overall total that is replaced when the actual cost of the item can be determined.
And that's fine if any "Provisional Sums" are close to the actual cost of the items you want. But more often than not, the contractor just sticks in a placeholder that could be way off the real, end cost.
So, careful bid or tender analysis is essential to discover and understand what's not included - the exclusions, what's been qualified - those assumptions, and whether all the costs are fixed or lump sum prices and if any are Provisional Sums.
There is another very common way contractors can submit tender or bid costs but which you need to be very wary about. "Cost Plus". This is another term generally well understood by professional contractors but Homeowners are not always aware of the dangers they conceal.
On the face of it, it might seem a fair and reasonable basis for entering into a contract. And it's particularly enticing when you're in a hurry to get going and you haven't got your project fully designed. If the contractor knows this, they may offer you to do the job on a "Cost Plus" basis.
Simply put, they propose to charge you the actual cost and then add on their overhead and profit margin. But this method allows way too many loopholes for a contractor to inflate the costs. Take labour charges for example. In a fixed price contract, the contractor quotes a fixed price for installing a new shower room and let's say he bases his costs on doing the work in 5 days. If he takes 6 days, he has to swallow the extra cost. If he does it in 4, he benefits and makes a profit. So he's actually motivated to work quickly. So if you can accept the overall cost, you don't really mind if he manages to do the work faster. What you want to avoid is the cost going up and the time taken getting longer.
Unfortunately, in a "cost plus" contract, an unprincipled contractor might be motivated to take extra time - he'll get paid for it plus his mark-up. Why would he make any attempt to work faster. There's actually a disincentive for him to do so.
And when he presents his invoice for one of his subcontractors, can you trust that the invoice is real and not inflated ? Having caught contractors doing this myself, I would be cynical and believe that the temptation to contractors to have their friend, who they know well and work with often, add a bit extra onto their invoice so when it's presented for payment plus the contractor's mark-up, you end up paying money that will end up in your contractor's pocket.
This is a common practice in construction. It can even be made to sound reasonable. Like a volume discount. The sub-contractor might happily agree a 10% or more kick-back to a general contractor who keeps giving them project work. Except that it's dishonest if the general or main contractor doesn't declare it to their client - you.
And a final warning ... the amount of effort it takes to police and verify things like timesheets presented for work carried out for site crew, means it is unlikely you will really check that every hour claimed by every operative on the site is legit. Hours are easily inflated. Actual numbers of workers can be faked. Quantities of materials on invoices are difficult to check. An old contracting trick is to present an invoice for materials delivered to your site - you might even check the quantity off the delivery vehicle. But what you don't notice is that over the next few days a few lengths of timber, a few sheets of wallboard or other materials find their way onto the back of a pickup and end up on another site ... so you're subsidising the contractor's work on another project.
These are just a few of the many ways contractors can rig cost plus contracts in their favour. So my advice is to avoid them like the plague. They are risky. Even for an expert who is trained, knows what to look out for and has a ton of time to spend in checking and verifying every invoice, timesheet and so on.
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