Bidding vs. Negotiated Contract

We often find ourselves sitting across the table from prospective clients answering many questions regarding the structure of the anticipated agreement.  We talk through the various contract types with the client and inevitably the dialog turns to “how do we move ahead from here?”

We explain that our preferred method to advance is a process called a negotiated contract.   In a negotiated contract the client chooses Groza as their builder early in the process based on interviews, references, and other merit based factors.  Upon selection we author a simple preconstruction agreement between Groza and the client that outlines an hourly fee structure for our firm to prepare a schedule of values (bid or pricing estimate), value engineering solutions (cost savings ideas), help with permitting issues, and in some cases to act as a liaison between the out of town architect and the local professional subs.  Groza works for you in whatever capacity is needed to pull together a successful “on budget” start.

At this point the owner and Groza terminate the pre-construction agreement and enter one of several different types of construction agreements (this discussion shall be tackled in another blog).

One might think that this arrangement would scare off most clients based on the conventional wisdom that, “you must get three bids before building”.  In fact, it doesn’t, and ultimately three quarters of our projects track this way with great client satisfaction. Still not convinced?  I found this interesting article from architect Mark Asher, AIA in which he argues in support of the negotiated contract

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BUILDING CONTRACTS: BIDDING vs. NEGOTIATED CONTRACT

by: Mark Asher, AIA, Asher Associates Architects, LLC

January 2010

Design-Bid-Build is the most common project delivery method. After the construction drawings are completed, most projects are given to general contractors for bidding. We typically solicit three or four bids from a pool of builders we know and who we feel are right for the particular project. It is important to bid the project to similar types of builders. There is little to gain from bidding a project to a custom home builder and a production builder simultaneously.

 However, bidding a building project is not the only path to a success. Many projects are not bid, but are negotiated with a qualified general contractor. This is an increasingly popular method. Our recent experience has been that with a complete and all-in set of drawings, the prices will be identical across the bidding spectrum. After all, the contractors are not inventing a bid number; they are pricing a set of specific documents. Accordingly, the prices for windows, siding, roofing, and all specified products will be identical.  The builder’s overhead and profit will be the only substantive variable. And this is frequently a negotiated percentage.

 Often when the project is bid, it is to test the waters and to validate that the preferred contractor is on legitimate and competitive financial footing. Rarely, if ever, is the low bidder hired for the sake of cost only. In the custom home market, the successful project is a complex formula of cost, schedule, personality, and quality. If the function of the bidding process is to validate a cost, then we can fulfill that role without bidding. We have a database of cost data and very rarely are we surprised by a construction cost.

 The negotiated contract saves time, money and places the project on a secure path. The form of the builder’s contract is often a “cost-plus” agreement. This offers the client the most transparency as all costs are “openbook”.  “Cost-plus” is the product cost, plus an agreed-upon percentage.

 Where a competitive bid is inherently adversarial, the negotiated contract sets up a partnership of cooperation. It is a ‘systems’ approach to the project: good design, good drawings, good builder. The “deliverable” is not just the finished product but also the experience of the process itself.

 A word about contractors: We have been very fortunate to cross paths with great builders. The good builders make us look good. They anticipate and avert problems while celebrating our successes. The builder is at once advocating for their client, for the architect, and the project itself. They are good managers and good communicators. The successful project is built as much through the dialog as through the documents.