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We’re so glad you’ve joined us for Episode Three of The Perlo Podcast! Host Elissa Looney, Director of Strategic Initiatives at Perlo Construction, is joined by two repeat guests: Chris McLaughlin, Vice President of Preconstruction, and Todd Duwe, Vice President of Business Development. Join us as we compare and contrast two common terms in the construction industry when procuring a general contractor on a project: “hard bid” and “negotiated”.
When a property owner decides that they want to build a building or renovate an existing space, they first must determine how they will pick a general contractor to use. Without getting too far into the nuances, we can use a few broad terms when referencing the subject. First, we have a hard bid strategy, which refers to when an owner has several contractors selected, and they are asked to give their best price on a project based on a set of documents. The second option is to do more of a negotiated strategy, where there is one specific contractor selected to come up with their price and complete their work.
So, what does it mean to hard bid on a project? According to Chris, you need all of the documents 100% finished and the design to be fully complete to solicit bids and get the subcontractor bids to be competitive. Design elements include:
- Civil design
- Architectural design
- Structural design
- Fire protection
Chris notes that this method requires a much more defined scope. Once the scope is defined and the project and construction documents are complete, the owner would need to select several competent and experienced general contractors to bid on the project. Traditionally, there is a hard bid time and date that the bid needs to be turned in, where the selected contractor is most often chosen based on the lowest price. As a result, teams typically work up until the last minute in a high-stress environment to get all subcontractor bids in by the submission time.
The word “negotiate” comes into play right away. According to Todd, this method comes down to “negotiating the terms of the contract, which might include price, schedule, scope, quality, and even individual team experience.”
There is usually a set of circumstances that lends itself to negotiating, most often because it is very early in the process of a construction project. For example, in the case of negotiated strategy, a client may still be getting a grasp of the project’s construction budget and scope, so there may not be a complete set of documents. Because of these circumstances, contractors are typically brought in early as a partner.
Todd notes that most negotiated projects can still be hard bid out. In a negotiated project, you still have the opportunity to hard bid subcontractors. However, there is valuable information to be gained early in the process.
Elissa remarks that when a scope is not necessarily clearly defined and an owner is not sure how to proceed with their project, a contractor can use this method to help develop a clear budget for the owner and can still participate in a hard bidding process to ensure that the owner is getting a competitive price.
Negotiated strategy is a more transparent process because you’re showing the client your numbers upfront, as opposed to a hard bid, which is a bottom-line lump-sum price. If the project is negotiated, you’ll see the math of what it took to get to the proposed price, which may include potential savings clauses.
“The perceived benefit of a hard bid is that you’re going to get the lowest price. The truth is, you’ll have the lowest price on day one, but at the end of the day, there is no guarantee that you’ll have the lowest price overall,” Chris states.
In the case of hard bidding, you’re bidding off the documents, which may not be realistic. In this case, if any documents aren’t accurate or there is a change, a contractor will have to submit a change order, further increasing the price.
For negotiated strategy, you can find out about long-lead items early. Without this information, you don’t have a contractor on board to identify these items and preorder supplies. Additionally, some projects might be more complicated and come with unique challenges. In cases such as healthcare projects, occupied school sites, and seismic upgrades, negotiating allows you to plan how to phase out the project. Bringing a contractor in to identify potential issues is essential, as they can set up bid packages to help subcontractors and trade partners bid the scope out properly. The contractor has a lot to add to the process and can influence the design “both structurally and architecturally to design a more effective and efficient design cost-wise,” notes Todd.
One of the most significant differences when negotiating is that a savings clause can be incorporated so that a portion of savings can go back to the client. Additionally, a hard bid doesn’t necessarily have a schedule that you are bound to, as the priority is based on the lowest price. According to Elissa, “In a negotiated contract, you have a scheduled date you want to hit, and you’re finding out how to build it so that you meet that schedule.”
Chris agrees with this statement and touches back on long-lead items. If you have a hard bid, you start the clock once you are awarded the project, whereas in a negotiated contract, you can start the clock early to get those products on site.
Additionally, a hard bid job doesn’t account for risks as much as a negotiated project. Todd states, “In a negotiated project, you’re spending time in a period of preconstruction where you’re identifying all of those risks, both from a schedule standpoint and a cost standpoint, and you’re communicating that to the rest of the team, including the owners and design team. This makes negotiated contracts less risky for both the owner and the client.”
One big challenge of hard bidding is the lack of risk identification. When doing job walks for a hard bid, people may see risks but don’t mention them because it’s what’s on the documents that matters at the end of the day. Subcontractors aren’t asking questions on the job walk because they know that everybody else will bid solely on what’s on the set of plans. If they attempt to adjust for potential risks they see, they will not be the lowest bidder.
If there is additional scope later on, the difference will have to be made up by creating a change order, which can create conflict between the owner, contractor, and architect. Contractors have no choice but to create change orders because they don’t get the opportunity to solve problems at the original price if they hard bid the work.
Unfortunately, this creates more potential for risk in a hard bid. However, this can be hard to quantify as every project is unique. It can be deceiving to just look at numbers in a hard bid, as you’re just looking at one component of a project: price. You aren’t able to get insight on subcontractor teams, onsite teams, and project management teams.
“If somebody doesn’t want to just look at the price, what options do they have to identify whether a contractor is qualified for the work and whether they would be a good partner for negotiating their project?”, Elissa asks.
We learn that in some cases, owners are doing a “hybrid” model, where they are prequalifying general contractors for projects based on qualifications for a specific type of work. Once this list of prequalified contractors is selected, they will conduct a hard bid.
How to Decide When to Hard Bid
At Perlo, we look at the completeness of the drawings and how well they are done. The level of competition is also a significant factor and is determined on a case-to-case basis.
Todd notes that diversifying revenue streams or breaking into a new market sector requires you to build your resume up, as owners like to see a portfolio of relevant experience when negotiating for a project. Sometimes, you can only gain that project resume by hard bidding. Not to mention, hard bidding here at Perlo allows us to keep our pulse on the market and keeps us from getting complacent. Although the majority of our work is negotiated, we are not afraid of hard bidding and being competitive.
There are benefits and challenges to both strategies, and standards vary depending on the project. When choosing which strategy works best for your company, it is important to determine what is most important to you in a project.
Want to learn more about procurement strategies? Find more in our Newsroom here for more information on Hard Bid vs. Negotiated Procurement Strategies. If you’re ready to find a contractor, check out our article on achieving comparable bids here. If you’d like to know more about the different project delivery types that go along with hard bidding and negotiating, review our article about Construction Project Delivery Types here.
As always, if you’d like to hear more on these topics or others related to construction, please get in touch! We’d love to hear from you!