10/27/2021: Written by Anthony Carter

Your project budget depends on the numbers you get back from contractors to perform the tasks needed to complete your project. When making a major purchase like a home or car you shop for the best value possible. Be it interest rates, sale prices, or a service, you want to pay what is fair for what you are getting. You may go to two or three dealerships looking for the right price for that car, and with construction projects you should take this same approach. If you are choosing a contractor to provide materials and or services for your project, it is important to get multiple bids per trade.

In construction there are many ways people bid projects or come up with their numbers. Some like myself have college degrees mixed with real world experience, and some have no idea what they are doing. So it is important that you at least know how numbers are created, especially if you are running the project yourself. This will allow you to have a better understanding if the contractor is performing the service you desire for the price stated. This can be tricky for the average home owner and sometimes shady contractors take advantage of you because you don't know. That ends today!

Always approach a situation no matter what it is with a little bit of knowledge. This can save you thousands of dollars, time, and frustration. It doesn't matter if you are building a house, doing a remodel, or flipping investment properties, you should always create a Scope of Work. The Scope of Work sets the foundation of what is to be created or built. This information provides for the contractor exactly what is taking place and in some cases what is being used in the project. If accompanied with a visual rendering or a floor plan, it is even better. You can learn about Scope of Work and other construction terminology in our project management course.

There are many ways contractors create an estimate in the construction industry. Below are the 4 main ways contracts are prepared for pricing.

  1. Unit price: This method I think is the most accurate way to bid a project. It consist of understanding construction assemblies and the associated components and putting a price to each. The price is the price and your budget will need to be able to cover it.
  2. Negotiated: This can be relational and therefore the person negotiates a price to do the project with a preselected person or entity. This works well with established construction relationships. You can also use this method with budget constraints to stay with in your bounds.
  3. Time and materials: Time and materials can be a good thing or bad thing for your budget. A contractor using this method in some cases has no way to determine the actual cost without performing the service first. They track time, materials, and then add overhead and profit. This can be costly in some cases.
  4. Lump sum: Is a stated price for services rendered and includes everything to do your project. Overages are most likely carried by the contractor and you will not be responsible for them in some cases.

Understanding what format of bid you received from a contractor is important, especially when comparing estimates. As stated earlier, it is important to get three estimates per trade for your project. This does not apply to fixtures, furniture, and equipment which sometimes is owner supplied. Let's look at electrical for you project as an example. You supplied all interested parties with a Scope of Work and drawings and a due date. Once received the first thing you should do is look at the final number before reading contents. Look at all three bids to see how close they are to each other in price.

The general rule is to choose the least expensive of the three, but sometimes that can backfire. Especially if a contractor bidding doesn't know how to read blueprints or estimate. If two of the bids are within a couple percent apart and one is way off, either high or low, something potentially is wrong with that estimate. That bid should be tossed because it could be a potential disaster waiting to happen. Say all three bids are all over the board in price with no clear winning bid, those bids should be tossed and the project or trade should be bid again. Once you have found bids within your budget it is time to see how they came up with their numbers. Typically you will receive a one sheet with the number on letterhead, and sometimes you get detailed bids over several pages.

With the understanding of the four ways to produce the bid above, you look over them and ask pertinent questions to the contractor regarding the bid. It is also important to know the construction schedule or how much time it will take to complete the project. You want to avoid contractors giving vague information about how they came up with their numbers. As the project owner it is at your best interest to have this information provided by the designer or you determine it yourself to be able to compare to bids. What you should have to compare is total square footage of certain line items, quantities, and processes etc. If they can give you rough estimates to compare to contractors great if not the internet is loaded with data.

Say you are getting new tile flooring throughout and there is a total of 1200 sf of flooring needed and a $10,000 budget. When looking over your tile bids you should be able to see that 1200 sf reflected in their numbers. If they are showing more or less you are able to question them. If you do not know this information you could be setting yourself up for a budget bust. You might be asking "how do I come up with square feet for my project?" Typically sf is used for walls, floors and ceilings and can be determined by taking the length and multiplying by the height of the area. This gives you square feet for that area. This information may relate to paint, tile, wall paper or anything that covers an area.

It can be a little overwhelming when understanding what unit goes to what trade. As stated above square feet covers area for a multitude of of line items. Then there is SQ (square), EA (each), LF (linear feet), CF (cubic feet), CY Cubic yards) and many others. To get deeper into how they function you can take our estimating course. You will see these units in the estimates you receive from contractors and if not beware of that bid. In those bids you should also see contingencies, over head and profit, and taxes. Contingencies are recommended to be included when doing remodels for unforeseen situations that may arise. That fee is typically 3% of the total budget cost before taxes. If not used you should get that money back depending on the contract you signed with the contractor.

Overhead and profit can sometimes be negotiated if you feel the number is high. Average OH&P for a residential project is 21% for projects under a million, and some may be higher or lower depending on firm size and popularity. Uncle Sam must get his cut too and it must be broken out as line item in the estimate. There will be some line items where the estimates are more than what might be listed. Like with tile there is always waste added for cuts. So if you did the numbers and got 50 SF and the contractor has 55 SF they are accounting for waste. Sometimes waste turns into surplus materials that you can either return or keep. If you are the type of person that doesn't like numbers or math, make sure you have someone on your team who can do this for you.

In closing out this weeks blog make you sure you get 3 bids per trade for your project. If you can, provide a scope of work with drawings to potential bidders. Toss bids that don't seem to line up with the scope or other bids. Don't be afraid to toss them all and rebid the project if numbers don't look right. Understand what you are looking at when bids are received. If you don't understand make sure someone on your team does. Also make sure you get a construction schedule that matches the bid time line and price. Last when choosing the winning bid understand that it may not always be the cheapest one of the 3 that gets picked, but the most responsible bid.

If you need or want additional help we offer coaching services for a reasonable fee. For a free consultation click the contact us link in the menu and say "coaching service" in message. Thanks for your time and see you next week!