CONCEPTUAL CONSTRUCTION COST ESTIMATING
Someone once told me (Steve Holloway) they would rather go to Vegas and roll the dice than be a construction contractor. The drama in the statement not withstanding, our clients and the subscribers to our newsletters can agree that construction is a very risky business and no element is more risky than construction estimates. If an bid estimate error significantly increases the bid price, chances are the contractor will not be awarded the work. If an bid estimate error significantly decreases the bid price, chances are the contractor will be awarded the work and make little or no profit, or worse yet, lose money.
To make matters worse, contractors are often asked to bid based on a “conceptual” estimate, which might be prepared from preliminary, incomplete and sometimes nonexistent drawings. (A previous post addressed the formally recognized types of cost estimates and their applications.) These conceptual construction drawings are usually not detailed or complete and usually do not show things such as embedments, reinforcing bars, wall openings, pipes, cable tray routing, etc. All equipment foundations and pads, underground duct bank runs, equipment, and sometimes even small buildings are not always on the drawings; however, the owner may still seek a hard-money bid with a firm or lump-sum price. Under these types of circumstances, owners tend to believe that if something is necessary for the completion of the project, regardless of whether it was on the bid drawings or not, it should be included in the bid price.
For typical “hard-money” projects, an owner selects an A/E firm to design what he or she wants to have built and has this firm develop detailed drawings and specifications. These drawings and specifications are issued to contractors for preparing and submitting bids for construction. The owner usually selects the low bidder and issues a contract for construction for a firm price amount. When entering into such a contract, the contractor generally agrees to build everything shown on or reasonably inferable from the drawings for a fixed price. The basic rule of thumb in administering such a contract is that everything on the bid or contract drawings is included in the price. If something is not shown on the plans and specs or is different from what is shown on the plans and specs, it will probably be considered an extra.
The easy way to cover the additional risks associated with conceptual estimates would be to add money to the bid price. The contractor might assume that all material quantities will increase 20 percent, price the most expensive material types, add 50 percent to all subcontractor quotes, assume 10 to 15 percent inflation over the course of the project and add 6 months to the schedule. This approach would probably eliminate most of the risk, but it would also prevent the contractor from being competitive.
In Holloway Consulting’s experience as a construction expert witness, it can be said that the construction bid estimate is either the first step toward a profitable project or the first step toward failure (construction claim, dispute or litigation). This article addresses some of the ways to overcome these challenges and reduce the risks associated with conceptual bid estimates.
IDENTIFYING MAJOR RISKS IN CONCEPTUAL CONSTRUCTION ESTIMATES
First, there are risks involved in the pricing of materials to be furnished. Material information often is not available early on and what the engineer thinks might work during the bidding process is sometimes very different by the final design process. As an example, one project specified insulated exterior metal siding, but the specs did not indicate thickness, size, the names of acceptable manufacturers, or any other details that would have been useful when working on the bid.
Second, there are schedule and time risks on every project. In many cases, the final design and engineering begin at the same time that the notice to proceed is issued to the contractor. Engineering continues as construction progresses, e.g., fast track construction. It is almost impossible to buy permanent materials early in the project and eliminate escalation risks because certain components may not be designed for another year or so. It is typically difficult and expensive to accelerate the construction schedule or have total control of the sequence of work. To add to this risk, many contracts include liquidated damage clauses for late completion.
There is also an increased risk in subcontracting. Because of the nature of conceptual estimates, there may be few firm or competitive subcontractor quotes available at bid time, because many subcontractors prefer not to provide a lump-sum price or take the risk for quantity overruns. Therefore, time should be spent working with key subcontractors to get firm unit prices or a firm price on a fixed-quantity amount with unit prices for quantity growth. These subcontractor quotes should be carefully evaluated and contingency money for overruns or changes may have to be included.
REDUCING MAJOR RISKS IN CONCEPTUAL CONSTRUCTION ESTIMATES
One of the most important rules in preparing a good estimate is to follow established and proven estimating procedures. For example, value engineering should be used during both the estimating and the construction stages. The contractor should try to eliminate over design or exotic materials that needlessly increase the price of a project.
All too often, especially on hard-money contracts, an “us versus them” attitude prevails at the site. It is important to foster cooperation between all of the parties involved in the process. Concepts such as partnering, team-building, cooperative alliances, and alternate dispute resolution can help reduce major risks.
In normal hard-money contracting, the price is based on the scope of work, as shown on the bid drawings and contained in the specifications. In a conceptual estimate, the contractor may have to write a detailed scope of work and qualifications, which should be incorporated into the contract document. In as much detail as possible, contractors should try to identify owner, engineer, and other contractor duties and responsibilities such as:
1. Who furnishes the material?
2. Who performs the work?
3. Who is responsible for testing and inspection?
4. What is and what is not included in the contractor’s scope of work?
These and other questions should be addressed in as much detail as possible in the scope of work.
There is also a need to study past cost and schedule patterns, and any potential causes of any major quantity overruns in previous projects. It is important to include a cap on some of the major work items, including concrete, steel, earthwork, structural steel, and metal siding/roofing. The contract should contain a base quantity (usually the contractor’s take-off quantity) and an allowance quantity for design growth. If the final installed quantity exceeds the base plus the allowance quantities, the contract should include a unit price for the additional quantities. The contract should also clearly identify the party accepting the risks associated with quantity growth.
PART 2 will be posted here in a few days.