Competitive Bidding - Does it Work?

Many people believe the traditional competitive bid method is the best approach to selecting a competent builder for their home. In fact, this method is flawed and leads prospective home buyers into a quagmire of misunderstanding, doubt and confusion. Let's assume that the prospective homeowner has a professionally drawn set of building plans and a complete set of specifications. You might expect that bids from a group of three or four qualified custom builders would be almost equal.

In fact, competitive bids in these circumstances usually have a twenty or thirty percent or even greater spread between the highest and lowest all based on the same set of construction documents. As a prospective customer for a custom builder, the fact that competitive bids typically have that much of a spread should indicate that as a process, competitive bidding doesn't work and is a poor way to choose a home builder.

What Accounts for this Difference?

The builder's bid to construct a new home is based upon the total cost of subcontractors, overhead, profit margin, and any fudge factor that the builder believes necessary.Assuming competent supervision by the builder, quality differences between newly constructed homes come primarily from only two factors differences in workmanship by the subcontractors and differences in specifications for the finishes in the home. Custom homebuilders have little or no competitive advantage over one another for either the cost to construct their homes or building methods. Many builders would like you to think otherwise.

Custom builders cannot purchase building materials any less expensively than any of their fellows. Lumber companies, concrete suppliers, roofing material suppliers charge all wholesale customers the same. Subcontractors price their services based on costs and their profit margins are the same to all builders. There are no hidden tricks to building homes, no special methods, no special knowledge not generally available to all experienced builders. Therefore, differences between bids from custom builders on the same set of construction documents can be accounted for only by differences in profit margins, fudge factors, overheads and errors.

A Dilemma

Faced with bids that have a spread from lowest to highest of twenty or thirty percent, there is no way to judge which is the proper price. Most builders cannot even add fifteen percent of the cost of the home as profit and overhead given the competitive nature of our business. Clearly just profit margins and overheads cannot account for a spread of twenty or thirty percent.

Why So Large a Spread?

It's very time consuming and expensive to properly prepare a bid. Prices must be gathered from subcontractors and material suppliers, estimates of materials and labor completed and totaled, specifications double-checked. It's a lot of work. Many builders are too busy and prefer to base their prices on cost-per-square-foot estimates, guessing, and aggressive negotiation with the owner.

Endless Negotiations

Builders know that most owners are inclined to choose either the lowest bidder or the next to lowest bidder. Some builders therefore, consider the whole process a negotiation rather than a firm bid. By bidding low, they eliminate the other builders from consideration and can then negotiate the owner into a higher final cost by extracting extras and change orders during construction to make up for a low initial bid. Owners do not usually have a set of construction documents that are complete and transmit the owner's requirements in complete detail. It is very rare that a set of construction documents are that specific. This fact allows builders to substitute materials of lower quality or assume specifications that are less demanding. By the time the owner realizes that the builder does not intend to provide what the owner thought was specified, the home is under construction and the owner is forced to pay whatever the builder.

The Solution

The solution which avoids the confusion and disappointment associated with competitive bidding is called design/build. In this approach, the builder designs the home, draws the construction plans, prepares the specifications, bids out the home with his subcontractors, discloses the bids and budget to the home owner and then guarantees the final cost of home with a fixed price construction contract. Anything less is pure guesswork for everyone.