Obtain Competitive Bids from a Reputable GC V2
A critical early action that a project owner (Owner) can employ to control the cost of construction, is to solicit price quotes from the competitive marketplace for the project's lead contractor. This lead contractor will likely be either a general contractor (GC) or a construction manager (CM).
In our experience, soliciting a price bid via market competition will result in a lower cost to the Owner than trying to negotiate a price with a sole-sourced lead contractor. This rule (i.e., bidding versus negotiating) also applies to subcontractors. However, in this article we will focus only on the lead contractor (i.e., the GC or CM). Later articles will address the unique aspects of soliciting price bids from subcontractors.
GC's and CM's are often indistinguishable to a typical Owner. The major difference between a GC and a CM is that a GC generally bids work on a fixed price basis while a CM will bid based on a cost plus fee with a defined approach to determining the cost-of-work and possibly with a guaranteed-maximum-price (GMP). CM's are also engaged during pre-construction to assist the Owner with understanding the impact of means and methods on project cost. Both the GC and the CM will employ the use of allowances to bookmark costs in areas where the design is incomplete, and will employ the use change-orders (CO's) to accommodate changes in the scope of work. Under most circumstances the construction contract will assign the GC or the CM (GC/CM) lead responsibility for executing the Owner's requirements with regard to construction activities.
The important goal of the bid solicitation process is to establish who is in charge of the project. Ideally, the Owner leads, the architect/engineer defines the design, and the contractor (with the help of subcontractors) gives life to the design in the field.
When preparing for bid solicitation, the Owner must first select the appropriate project approach. This is necessary because an effective bid solicitation should include the Owner's proposed contract and this contract will differ depending on the project approach.
There are three basic project approaches that are typically used by midsize developers and owners of high value residential construction projects:
- Design-Bid-Build (DBB) where the Owner contracts with a GC, CM or directly with the subcontractors using a Multi-Prime contracting approach
- Design-Build (DB) where the Owner contracts with one entity to perform both design and construction which is either a lead by the Contractor (GC or CM) or the Architect/Engineer (A/E)
- Cost plus a Fee where the Owner seeks a lead contractor to propose a target price, a guaranteed-maximum-price (GMP), or in some cases simply to construct the facility for the cost-of-work without an explicit price cap.
The ideal project approach will depend on the Owner's in-house expertise, management capacity, and input from its trusted advisors (e.g., A/E, attorney, and consultants). The project approach selected by the Owner will dictate the type of construction contract to be included in the bid solicitation.
We highly recommend that the Owner provide its proposed contract in the bid solicitation because this establishes the owner's position of leadership and because by doing so the Owner reduces the risk of having the GC/CM incorporate unfavorable terms in the contract that place the Owner at a disadvantage with regard to controlling costs, achieving expected quality levels, or achieving planned schedule milestones.
Important elements of a construction bid solicitation issued by an Owner to a GC/CM:
- The design should be as complete as possible
- The Owner, with the help of his/her advisors (e.g., architect, engineer, attorney, or consultant), should limit the solicitations to a list of pre-qualified bidders
- The bid solicitation should also include:
- A description of how and when bids must be delivered
- A statement that the selection will be at the Owner's discretion
- A ban on partial bids (i.e., bids that do not include the entire scope of work)
- The Owner's proposed contract
- A request for a bid bond
- The project's scope including plans, specifications, and performance requirements (if applicable)
- A reasonable description of the site conditions accompanied with an offer to the bidder to inspect the site
- The target completion date
- A list of any special conditions or requirements
- A description of insurance requirements
- A request for references
- A request for a list of any litigation asserted or adjudicated in the past five years
Once the bids have been received, and evaluated, the Owner, with the help of its trusted advisors, will select the most responsive bidder with the lowest cost.
The winning bidder will then be invited to engage in contract negotiations which may include clarification of scope, contract terms, and price. If these negotiations are successful then the GC/CM will be bound by the agreed upon construction contract and work can begin.
Previous articles for midsize developers and owners of high value residential construction projects authored by ResX can be located on our website (www.ResXpc.com). These include:
- Avoid Contractor Overbilling (a general overview of the issues Owners face)
- Project Design is the First Defense Against Contractor Overbilling
Also, look for future articles from ResX that will discuss the following related topics:
- Subcontractor bid solicitation
- Monitoring the construction process
- Managing the contractor billing process
- Critical elements of the construction contract