I've always loved the custom building business, but in the early years there was one part of the process that drained much of the joy out of it for me. This condition frustrated me, reduced my efficiency, and made my company less productive. You may have already guessed what was causing me so many problems: It was the bidding process.
And I was not the only one distressed and puzzled by bidding. So was just about everyone else involved—competing builders, home designers, architects, subcontractors, suppliers, even the buyers. The overriding problem caused by bidding was wasted time and effort on projects that were never going to be built or that would be built, but completed at prices far from the estimated contract price. The gap between the theoretical price quote and the actual completion cost often varied dramatically. The final evaluation from the client often was that somehow “the builder did a good job for us but never knew what things were really going to cost!”
When the contract price went astray, the architect, builder, and client would each retreat into a different corner to defend a position as to why costs had exceeded expectations. The client could only see the final outcome: “Our project is 30 percent over our budget,” was as far as they could see. The architect might blame the clients, claiming they never fully verified the finish details. “I can't predict every cost for every detail in the project,” was a familiar architect's refrain. “It's not my fault it came in over budget.” As for me, I'd feel that I'd estimated the project; but the specs, textures, colors, finish details, and product selections were never finalized until after construction began. This ultimately became a finger-pointing event where I hoped no one was talking to a lawyer. I repeatedly felt that I was responsible for every aspect of the project but somehow had been banished to the caboose when I should have been up front controlling the train from the locomotive.
My company had been facing a consistent problem: The plans and specs for the projects we were bidding were always incomplete. Some plans were better than others, but the bottom line was that preparing an accurate estimate on incomplete plans was difficult. At first I thought that allowances would cure this problem. But would we need 10, 25, or 40 allowances? And inevitably, the competing bids varied by large percentages due to varied allowances and to different builders with differing priorities specifying, quoting, and estimating unknown selections and finish details. Since the project was going to begin with a myriad of unknowns, it disrupted the entire construction process, including the schedule, product ordering lead times, change orders, decision making, and administrative time for making selections. We always ended up pricing everything under the sun and then arguing over what those things should cost.
I had also learned over time that incomplete plans and specs end up generating cost-plus contracts. I have never liked doing cost-plus work because I've historically realized higher profits from fixed-price contracts. Cost-plus requires considerable administration time and results in disputes over costs, prices, and waste. How do you price unknowns? We know how to plan, schedule, and complete custom homes with defined details. Projects that I call “build as you go” have an inefficient process, and the administrative time they require frustrated me. Ultimately, it was proven that the cost-plus percentage never compensated my staff and overhead costs sufficiently. My joy in running a contracting company was never based in the paperwork aspects of the process.
The solution to my dilemma lay in being true to my vision of the company. Dixon Ventures Inc. is not a design/build (by default) firm; it's a contracting company and that's the business I want to be in. So about 15 years ago I analyzed my problem and developed a company policy designed to mitigate the frustrations of the bidding business. It recognizes that we're not after every project and every client. It acknowledges that we want to target, sell, and sign customers that are seeking our professional services and specialties. It lays out a set of conditions under which we can properly bid work and get paid for our knowledge and expertise. The policy is conjoined with a process to minimize the time invested in clients and projects that are not a hand-in-glove fit for my company. This now is my company's policy:
- Estimate and price out only projects that have 100 percent completed plans and specs.
- If the plans and specs are incomplete, develop a schedule, a process, and action steps to complete the details.
- If the plans and specs are incomplete, charge a fee to work with the architect and client to complete the drawings and specs. This separates the serious client from shoppers. We credit the fee to the eventual construction contract price. If the project is scrapped or awarded to another builder, we will have been paid for our professional expertise and time.
- Target a specific client profile: people who have built before and know what they want, and for whom quality overrides price as their driving force.
- Generate more accurate contract costs by estimating the project within a reasonable period of time. In other words, we're no longer interested in pricing $1 million houses in 10 days time.
I field tested my new policy on several clients, and it struck a chord. Some clients did not understand the difference between five pages of blueprints and fully detailed plans and specs. I had to educate certain clients as to why “pricing out their project” would take some time, effort, and decisions. It made sense to them that plans lacking all of the finishwork details would generate widely varying cost quotes and a myriad of decisions arbitrarily made by others, without consideration to the clients' wants and needs. A set of sample specs, detailing appliances to windows, in simple, owner-friendly wording, is a sales tool worth its weight in gold. Our meetings generated action steps that included going back to their design professionals to “finish” their plan details and specifications. The new approach also catalyzed several design professionals to invite my company to work with them during the design phase by offering cost input, cost comparisons, and product expertise to the planning process.
The first customer to agree with our new policy signed a consulting-estimating agreement for $5,000 with my company, and we worked with their architect to fully complete, spec, and estimate the project. The completed plans were bid out to two other custom home builders. The three bids came in with completed project costs ranging 3.5 percent from high to low price. No 25 percent cost quote ranges here!
Our company was awarded the contract. Price was not the primary consideration; the clients selected our firm because they had gotten to know my personnel during the design process. We had developed trust, credibility, and camaraderie with the clients. Our side-by-side working relationship with the client became a competitive advantage for my company.
The ultimate result of the new policy is that my company will be compensated for its efforts. We have minimized, if not eliminated, spinning our wheels with projects that are destined to yield poor efficiency and minimal profitability. Consider evaluating your own estimating and bidding procedures and identifying methods to improve your efficiency. Take it from me; it's a good way to boost your profitability.
Dennis A. Dixon is an author, contractor, and speaker with more than 20 years of experience in the building industry.