Evaluating Pricing from Multiple Bids

Custom home construction and renovation is unique in the sense that the client is asked to select a builder for a project that is often not fully designed and therefore cannot be completely and accurately priced. Too often, homeowners experience construction nightmares as a result of picking a contractor based on the lower price. Sure, it makes sense to go with the cheaper option in some cases. For example, if you’re buying a new couch and two furniture stores have the same model for drastically different prices, paying less is the obvious choice.



Comparing apples to apples
When it comes to home construction projects, it is much more difficult to obtain completely comparable costs. Early pricing is often based on an incomplete set of plans, and each builder needs to make numerous assumptions when putting together a price. In addition, every construction company calculates their bids differently. With that said, the client is forced to select a builder based on a price that may not represent the true final cost or scope of the project. Homeowners can often be lured in by an aggressive estimate that is made on assumptions that will not hold true through construction.

Remember, a disciplined and experienced contractor should be able to anticipate, before construction, and even before final design, where the cost is likely to go.

To truly understand each bid, it is essential to dissect all of your offers. A good first step is to eliminate any outliers that seem far too good to be true. Ask each builder to break down their bids into individual sections (e.g. electrical, tile, plumbing). Categorizing each bid will enable you to see exactly how much each part of the project will cost, helping you better understand how the contractor reached his final price.

Staying on Budget

There are three common reasons why construction projects run over budget. Understanding these causes and having a plan to anticipate them is key to staying on budget.

1. Additions to the Scope of Work 
   This is the largest driver of production overruns, but it is also the item that you have the most control of. The “while you are here” list can grow quickly and become a significant factor in the construction budget. Trying to anticipate these early in the project can help you reserve some budget for these types of add-ons. The contractor can also guide you as to which additional items have a large economy of scale with the current project,
2. Allowance Overages 
   Since all the finished materials typically have not been selected at the time of the estimate, the builder needs to carry allowance amounts for finishes. The client will end up paying the difference between the actual cost of the material and allowance carried. You will want to pay particular attention to the allowance numbers carried in different estimates when trying to compare builder prices. Did the builder carry $600 for the kitchen faucet or $1700?  What type of finishes are you planning to put in your house? Insufficient allowance amounts can make the bottom line of an estimate look appealing, but it can become very frustrating when you go out shopping for fixtures. You must communicate with your builder regarding the level of finishes so they can apply as accurate an allowance number as possible. Our goal is to have the client end up under on some allowances and over on others. This is a constantly shifting target as styles change and prices shift. For example, if I have three clients in a row go over on my tile allowance, then I know I must raise it for the next estimate.
3. Unforeseen Construction Issues 
   This is the item that gets the most press, but in reality, it should be a smaller driver for the overall budget. If the builder does his due diligence in preparing a detailed estimate, there will often be very little to discover once the walls are opened. Once again, an honest and experienced builder is the key here. It should not be a surprise that the ceilings need to be straightened before installing a new kitchen in a 1940s home. Is this a billable change order, or something that the builder should have anticipated?  This grey area is where many difficult client/builder discussions arise. It is important to discuss what unforeseen issues may come up and which ones the builder is already prepared for.

Choosing the Right Partner

You have a lot to think about when deciding on a contractor. Our advice is to pick someone you trust and can work with comfortably.  You will work with this individual very closely, often daily, for several weeks or months. As such, it is important make sure that your personalities are going to mesh and that you can picture working together for an extended period of time. Even if he has some good-looking projects in his portfolio, you have to realize that every home construction project is different. The finished product is one thing, but how painful was it to get there? In other words, a few nice pictures do not automatically guarantee a great builder/homeowner relationship. When considering a potential contractor, remember that you are the hiring manager. If the builder really wants this project, he needs to earn your trust first. With that said, it’s OK to be skeptical and ask tough questions about his past work. Don’t just ask what has gone right––push him to tell you about previous struggles and how he has handled adversity. You also want to partner with someone who is easy to get along with. If you don’t connect well with that person, continue searching until you find a better fit.