In a previous post we discussed the various Project Delivery Types, which discussed the ways an owner can choose to engage a contractor contractually. Another important distinction for an owner to make is how they wish to procure a contractor, and that boils down to two broad categories of what is known as ‘hard bid’ and ‘negotiated’. Of course, each has some nuances and pros and cons, which we will explore here.
Hard Bid Procurement Strategy
Commonly known as ‘hard bid’ or ‘competitive bid’, this process involves an owner hiring a design team to create bid documents, and then soliciting pricing from multiple contractors based on those documents. Typically, there is a set date and time that contractors must submit their bids by, and the one who submits the lowest price based on the documents is awarded the contract. In this way, contractors are competing for the work by submitting the lowest possible price to complete it.
As with any of these systems, though, there are exceptions to the rule. Sometimes the invitation to bid will include requirements to submit qualifying information, such as a schedule to complete the work, information about the financial health or safety record of the contractor, or methods to phase the work. In these cases, the price may be heavily weighted in the owner’s evaluation of which contractor they pick, but these other factors may play a role in their decision, as well. If additional qualifications are required beyond the price, the bid solicitation may be referred to as a ‘request for proposal’ or ‘request for qualifications’. Regardless, if the owner is soliciting these prices or proposals from multiple contractors, it all falls under hard bid umbrella.
The hard bid strategy is the most conventional way to procure a contractor. It’s straightforward and, if the bid documents are complete, is a good way to provide clear expectations for what a contractor should and should not price. It is also required on many public projects, and is seen by some as the only way to guarantee that contractors are submitting the ‘best’ price for the work.
Additionally, the hard bid method of procurement can allow an owner to compare pricing and quickly identify outliers – such as bids that are far too high or way too low – to help make sure they’re getting the right price for the work. With this method of bidding, the onsite work often begins quite quickly after the project is awarded, as the construction drawings are typically complete when the project goes out for bid.
Challenges of the Hard Bid Strategy
In the case of the hard bid strategy, the contractors are obligated to price only the work that is clearly shown on the bid documents. This helps make the process fair across multiple contractors by setting expectations and ensuring all parties have clear standards to bid from. The downside to this, however, is that the drawings may not properly account for hidden conditions, may not include all of the details to properly complete construction, and the prices submitted will not include any contingency funds for unknown risks. Therefore, if a change is needed once construction starts because of something that wasn’t included in the drawings, the contractor has the right to send a change order for the additional costs of the work, and the owner is obligated to pay for that added cost.
In addition, this method can lead to potential conflicts between the design team and the contractor, as there can be some gray areas between what an architect thinks a contractor ‘should have known’ to include in their price versus the contractor. The owner then ends up in the position of having to decide which party is correct.
In some instances, the hard bid, low cost strategy has led to some less than reputable contractors cutting corners in their work or materials in order to minimize costs and maximize profits. That said, most contractors make their best efforts to fulfill their contractual obligations, but owners must consider that lowest cost often comes at the expense of time or quality.
In short, a hard bid procurement strategy, while effective for collecting equal bids, has the potential to set up the owner, contractor, subcontractors and design team for a contentious relationship, as any small change, whether owner driven or project driven, leads to changes in cost.
Negotiated Procurement Strategy
This method involves an owner negotiating the terms of the construction contract with a single contractor. In this case, the owner generally knows and trusts that the contractor will be able to complete the work as promised and foregoes the competitive hard bid process. Often, this method allows the owner to engage a contractor long before or simultaneously with the design team, although sometimes the project drawings have been completed prior to the contractor getting involved.
With negotiated procurement, a design-build or CM/GC method of contracting are frequently used, where the contractor commits to completing the work at cost plus a set fee. This affords the owner several advantages over the hard bid process, primarily in the pre-construction work to ensure the project will match the owner’s needs and still meet their desired budget.
One benefit of the negotiated procurement method is that the team can choose how best to procure subcontractors for the project. In a hard bid scenario, subcontractors are solicited just like the general contractor – they submit their pricing based on the documents and the lowest price wins. In a negotiated scenario, subcontractors can be prequalified based on financial stability and history of successful project completion, helping to ensure that all trades involved can successfully deliver on their contracts.
Finally, the negotiated procurement method sets up a team based rapport in lieu of the potentially contentious relationship established by the hard bid method.
Keys to Effective Negotiated Contracts
There are several keys to ensuring effective relationships between contractors and owners when a project is completed based on a negotiated contract. While this is not an exhaustive list, ensuring that all of these boxes are checked is a great start to successful projects:
- Engage a qualified general contractor with market specific experience during the conceptual phase of the project. It is not necessary to having drawings in hand in order to utilize their experience for contributions to the design and budget.
- Find a contractor with a great ability to develop accurate budgets at a minimum of the following milestones:
- The general contractor must maintain an open book policy. At each budget and pricing milestone, the owner should be able to review bids and calculations used to compile costs, if desired. The GC is responsible for managing risks and maintaining the budget for the life of the project once the GMP cost is set.
- Make sure constructability reviews are completed at each budget milestone. Preventing changes as the project progresses is achieved by ensuring the design matches what can feasibly be built.
- Budgets should include allowances and contingencies that account for unknown risks that will be exposed as projects progress. These funds are transparent to the owner, can be used as needed and credited back to the owner if they do not end up being used.
- Determine the strategy for procuring subcontractors. When the GC is involved early in the process, they can help determine which trades should be involved early in the process, perhaps utilizing a design-build agreement for mechanical, electrical, plumbing and fire protection trades (MEPF trades). By involving these trades ahead of the others, they can finish designs and submit for permits with the local jurisdiction concurrently with the building permit, often expediting the approval of those permits. In addition, procuring the MEPF contractors early can help aid in the overall design by identifying the following items, among others:
The single largest contributor to a successful project is that the client, design team and contractor approach it as a team. When all parties are clear about expectations, communicate frequently, and look for win-win solutions to challenges, the end result is a project that is completed as expected, and a team of people that are satisfied by the journey it took to get from beginning to end.
The options for soliciting a contractor are not limited to just these two. In reality, there are some hybrid options that might best fit an owner’s comfort level and risk tolerance more than the two options discussed above. Each comes with distinct advantages and disadvantages, and largely depend on the complexity of the project, the desired speed-to-market, and public vs. private funding requirements.
If you are considering an upcoming project, we encourage you to reach out here, and our teams can help discuss the options available to you.