Create your own set of rules for pricing a project.

Source: CUSTOM HOME Magazine
Publication date: 2006-09-01

By Dennis A. Dixon

In all my years as a contractor, nothing has frustrated me more than the bidding process. The rules, circumstances, and conditions change with every project. Few, if any, professional standards are followed unless it is a high-profile project being managed by an accredited architect. As a consequence, I have developed my own set of “Bidding Rules & Standards” over the years that give me at least some control of the process. I'll review some of those rules later on in this column, but first let me relate an experience that inspired me to develop these rules.

An architect I'd worked with many times, Lee Johnson of Professional Design Associates, contacted me about an upcoming project his firm was designing. He explained the project details such as the location and the client and encouraged me to meet with this client in hopes of eventually bidding and winning the job. I had an excellent history with Lee based on shared trust, business practices, and philosophy about design and craftsmanship. And my ego was bolstered by his confidence. “The professional standards of your company will enable you to do a terrific job on this project,” he said.

My first mistake: I thought I was a shoe-in for this job.

The architect was excited about the clients. The Savins were both East Coast professionals who were about to retire and wanted to build their dream home among the beautiful red rocks, wilderness, and vistas of Sedona, Ariz. The project would be a good opportunity for Professional Design Associates to get its name out in that community.

The introductory meeting with the clients went great. They said they were seeking “real” professionals to design and construct their house, and money was a secondary consideration. Design began as soon as the Savins purchased their lot.

Several months later, I received a set of raw plans (80 percent detailed) and was asked to formulate an approximate budget range, including pricing several high-dollar options. I generated a contract budget range of $1.65 million to $1.86 million, with the options priced at an additional $165,000. At our next meeting, both the architect and client were pleased when I presented this information, and the owners commented several times that their anticipated budget was in the vicinity of $2 million. They said the price of the options seemed reasonable. The construction process and project completion timetable also met with their expectations. At the conclusion of the meeting, the owners gave the architect the go-ahead to complete the full set of construction plans and documents and asked me to hold a position in my production schedule for their project.

I verbally reviewed my contract process with the Savins and informed them that I would need a $10,000 retainer to prepare a detailed estimate and reserve a spot in my production schedule. The retainer would be applied to the final construction contract amount. “No problem,” they said. “We'll drop a check in the mail to you tomorrow.”

My second mistake: I continued working on the project even though the retainer hadn't arrived.

The plans were rapidly approaching completion. The Savins made decisions on finishes and selections quickly. The architect kept me informed that he and the clients were moving swiftly toward completion of the plans. I used that information as an excuse not to bird-dog the retainer invoice. Soon, Dixon Builders received a completed set of plans and specifications to price for a construction contract.

I was a little reluctant to proceed with a time-consuming estimate because I still had not received the retainer, and the owners seemed put out by my several polite phone reminders. The architect reassured me: “They're both executives in Fortune 500 companies,” he said. “He's the No. 3 man at a major television network. Don't worry, the check will come. And besides, they owe me for the balance of the design work, but that isn't due until they sign a contract with a builder.”

My third mistake: After finally having a direct conversation with the owners, I agreed to prepare a final estimate and contract for them. They reassured me that the retainer check had somehow gotten misdirected and that a new check would be issued posthaste.

Against my better judgment, I priced the project and prepared a contract that was overnighted to the owners' Long Island, N.Y., home. Several days went by without a word from the potential clients. I telephoned them and left several messages. No response. I call the architect's office. He was also having difficulty contacting them.

Several weeks had now passed without a word or a check. Then the architect called with sobering news—the owners had been having second thoughts and felt it would be prudent to get two or three other bids. And they wanted to make a number of changes in order to save money. “So, what's their new target budget?” I asked the architect. “I don't know, but I think they're trying to save several hundred thousand dollars based upon the directives we've been given for plan changes.”

At this point I had a choice to make: Pull out or continue. My company already had more than 50 man hours invested in this project. I decided to review the list of changes and then make my decision based upon how much additional time would be required to get to a new price.

It turned out that four custom home builders priced out the project—three quotes generated by contractors working through the architect and one bid solicited by, to everyone's surprise, the owners themselves.

The bid prices were opened simultaneously at the architect's office, with all parties present. The bids had a $2,312 price variance on a $1.6 million home. Everyone present had a look of astonishment on their faces. How could all the bids be so close? A bid that small is atypical.

We were all told that the owners wanted 48 hours to make a decision. After five days, the architect called again. “The owners have been advised by an outside party that the house is way too expensive for what they're getting. They're canceling all bids and want to solicit offers from the builders to see which can build their project for under $1 million.” “Lee, you've gotta be kidding,” I said. “They also now are going to proceed with only a cost-plus contractual agreement,” he continued. “Count me out. I should have never invested another minute from the time I hadn't received my retainer check.”

“Hey Den, that's not all. They served me with papers saying my firm over designed the house, and they are disputing my fees, of which I've only been paid $12,000. They still owe me a considerable amount plus fees for structural engineering and all the support consultants.”

A home for the Savins was eventually built, but it was a totally new design by a different design firm and a different contractor. This situation occurred in 2002 and is still undergoing litigation; in addition there are lawsuits pending on the new design and the new home.

But this experience wasn't a total loss. I learned some important lessons that are part of my Rules & Standards of Bidding:

There is probably no word in the English language that is more frustrating to a builder than the word <i>bid</i>. I've learned that the only way to overcome this frustration is to create your own definition. —<i>Dennis A. Dixon is an author, contractor, and speaker with 21 years experience in the building industry. You can e-mail him at dixven@aol.com.</i>