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Why should real estate owners care about optimizing their construction bid process?
Profit margins in real estate are often razor thin. In order to maximize investor returns and create more predictable results, commercial real estate (CRE) owners try to control and standardize as many business variables as possible.
Construction bidding—a process whose success depends on accurate data and frictionless team collaboration—is one of the most sensible places for them to optimize.
Think about it: Before bids are awarded, typically only a small fraction (10% or less) of the total budget for a construction or capital project has been spent. The remaining 80-90% of the job’s budget will be committed throughout the bid process, making this phase a powerful lever in driving outcomes for a real estate portfolio.
In a nutshell, a scalable, replicable bid process can:
Generate significant cost savings. Empirical studies show that the presence of each additional bidder in a competitive process can result in ~4% savings. That means that on a $1 million job, owners could save upwards of $40,000.
Keep owners in compliance. Many institutional real estate owners mandate some form of bidding for jobs over a specified dollar threshold. They do this in order to satisfy their fiduciary obligation to maximize long-term value for their investment partners.
Reduce the risk of change orders and delays. A properly run bid process helps the owner and the winning bidder to understand the job at a greater level of detail, mitigating problems from occurring later in the project.
No matter the size of a construction project or the project team, there are a few principles that every real estate owner should keep in mind when managing a commercial bid process.
Conducting the bid process the right way takes time
Even a simple bid process could require hours of preparation on the part of the project team, and then typically requires at least 1-2 weeks for the vendors to prepare their bids. Taking shortcuts to expedite the process will likely lead to errors and add more time and cost on to the backend of the project.
A well-run bid process requires sufficiently detailed construction plans
If construction and bid documents are not well developed, bidders will have to make lots of estimates and assumptions, making it impossible for project managers to accurately compare bids later. The project team should work closely with the architects to make sure the drawings are clear and comprehensive.
A dogmatic low bidder mentality is not always the right approach
The bid process is the phase when the project team selects their construction partners for the remainder of the job. It’s important that they take time to find the lowest qualified bidder rather than cutting corners and just choosing the lowest overall bidder.
PREPARING BID DOCUMENTS
The key first step for getting ready to go out to bid is to prepare the correct documentation. Commonly used documents that real estate owners should provide to bidders on a typical construction job include:
• RFP document
• Plans and Specifications
• Standard form contract
• Building rules and regulations
• Insurance requirements
• List of approved subcontractors
• Photos and scope narrative
CREATING BID FORMS
A construction bid form specifies the way bidders should breakdown prices in their bids, including all base line items and various alternates. The best case scenario when creating a bid form is that the project manager has access to bid forms from past comparable projects to serve as a starting point.
If a comparable bid form template doesn’t exist, there are a few bid form best practices to keep in mind:
• Use CSI codes to clarify line items. Using the index established by the Construction Specifications Institute is the most commonly used system for categorizing line items and reducing misunderstandings between the project team and the bidders.
• Establish the appropriate level of detail. In general, more than 25 line items will be perceived by a contractor as onerous. Based on the research we’ve conducted from over $6 billion in project volume run through Honest Buildings project management platform in 2017, the appropriate number of cost category items seems to about 15.
• Breakdown unit prices. If the scope of a construction job may change, it’s advisable to request unit prices from bidders. This allows project managers to create a pricing basis for future change orders. For example, if pricing is requested per installed light fixture, and the layout layer changes, the owner can knows in advance what pricing to expect from the contractor.
• Breakout markups. For most jobs, commercial bid forms include General Conditions, Insurance, and Overhead & Profit in the markups section of the bid form. Some also include a Permits or Tax line item, depending on local sales tax laws.
• Request alternates. If a project team hasn’t finalized specifications for particular items, requesting alternates allows them to see the pricing impact of different options.
Together, line items and markups together form the basis of a bid form and, if faithfully filled out by the bidders, will allow the project manager to easily compare and analyze the bids.
Assembling a pool of potential bidders
One of the most important considerations in selecting a contractor is their past experience. Ideally, each vendor has first-hand experience working on comparable jobs and they have the right subcontractor relationships to supplement their team.
Contractors typically want to work on the biggest job they can get, but it’s critical to make sure a project isn’t too big of a stretch for them. In addition to solid experience, bidders need to have the manpower and financial capacity to complete a project without being overwhelmed.
Sharing the documents
Given the potentially large number of documents and their importance, it’s critical that project teams use a centralized document storage system where the latest file versions can be stored and easily shared with the bidders.
It’s equally as important to ensure that each bidder has, in fact, reviewed every document necessary to the project. Some project management programs track this information, but it may be worthwhile for a junior project manager or vendor coordinator to confirm with each bidder that they indeed have the latest and greatest document package.
Setting expectations with the bid group
Regardless of whether a formal RFP document was included in the bid package, project managers should inform the bidders of the key dates in the bid process, like the walkthrough and bid due date. The amount of time that it takes to run a bid process depends on a number of factors, but the bidders should be given approximately two weeks to prepare their bids. The larger and more complicated the job, the more time the bidders should be given to complete a bid.
Ensuring bids are received
Make it clear to the bidders that the bid deadline is strict, and should not be missed for any reason. If extra force is needed for this message, the project manager can say bids received after the deadline will not be accepted. Also make sure the bidders know know to whom they should send RFIs and who the general point person will be during the process.
Conducting a site walkthrough
The site walkthrough is an opportunity for the bidders to think through in more detail how they would approach the job. It’s also often the primary point of generating RFIs, questions and observations from the vendors that can help clarify project details. Project managers should provide the plans and specs to bidders far enough in advance of the walkthrough that they can come prepared to discuss them.
Some project teams like to tour all of the bidders at the same time because it’s easier to schedule one meeting and answer all of the bidders’ preliminary questions at the same time. That being said, a group walkthrough can be tricky. The most obvious issue is that the vendors will know who else is vying for the project. Some owners worry this could lead contractors to collude with each other and submit less competitive pricing.
Even though they require more of a project manager’s time, individual walkthroughs limit the possibility of collusion and are likely to elicit more questions than one group tour. However, project managers will have to track the questions posed by the contractors on each walkthrough and provide the answers back to the entire bid group.
Managing vendor RFIs
The most important part of the request for information (RFI) process is ensuring that every bidder has access to the same information. The most reliable way for project managers to do this is to keep a log of every RFI received.
Here are the best practices for managing RFIs:
• Each question should be logged, along with who asked, what the answer was, who responded with the answer and when.
• Each RFI should be assigned a number so they can be easily referenced.
• The log should be kept up to date on a daily basis and shared with the bid group as often as practical.
• The RFI list should ultimately be included as an exhibit to the contract as these questions form a part of the scope of work.
Using RFIs to proactively reduce change orders
Some contractors will intentionally not ask RFIs where they see something missing on the drawings, hoping to exclude it from their bid and then submit a change order later on. Diligently sharing every question and answer with the group can help mitigate this behavior.
Leveling and analyzing bids
Once vendor bids have been received, the project management team needs to compile them into a comparison sheet for analysis.
The first step is to evaluate each line item to assess where the vendors’ bid numbers are generally in agreement and where there are notable discrepancies. Project managers should be cautious not to look only for “high” outliers; “low” outliers may indicate that a contractor is missing part of the project scope in their bid which will eventually lead to a change order or inferior work.
A useful tactic to evaluate bids is to compare them to similar past bids by putting all numbers into a cost per square foot basis. This is particularly helpful for commonly occurring jobs, like office build outs, where there are enough historical examples for this type of analysis to be valuable.
• Avoid allowances. Sometimes bidders will price line items as an allowance, which is the bidder’s best estimate for that cost. This indicates that the bidder does not yet have firm pricing. Push bidders to replace allowances with true bid prices as quickly as possible.
• Acknowledge alternates. Bidders may provide their own alternates in addition to the ones that your team specifies. If some of the proposed alternates are attractive, request pricing from the rest of the bid group.
• Be aware of exclusions. Pay careful attention to the list of bidder exclusions. Some exclusions will be reasonable—for example, items like overtime or permits—but it’s important that these exclusions are also leveled against each other. If one bidder excludes a component of the scope, it doesn’t really matter that they’re the current low bid because they’ll need to revise it to include that piece of the job.
Getting to the best and final round
Once the project team believes it has received enough bids to be confident that the best bidders and most representative bid numbers have been taken into consideration, it’s time to narrow the bid group.
It’s best to narrow the field down to two or three since it’s very difficult to take more bidders to this detailed level of scope review, final bids and even potentially contract negotiation. Some real estate owners try to get about five bids and then they eliminate the high and low bidder. Other owners suggest that it’s best to move forward with the three lowest bids.
Reviewing and getting clarifications
At this stage, it’s a good idea to review the project scope with the bidders. Bring the analysis pieces mentioned earlier, like synthetic low bid or deviation from the average, to discuss with them and see if there is room for improvement.
The bidders who have made it to the best and final stage typically come to these meetings with a very specific set of questions. Some of these questions will be material to the scope and will require architect/engineer involvement, as well as be relevant for the other bidders. Project managers should document these scope related questions to ensure they get answers and are shared with the rest of the final bidders.
Finalizing the process
Formalizing the contract
First, ensure that all the hard work that went into the bid leveling and clarification process makes it into the contract as a formal exhibit. Make sure that every point that was agreed on with the bidder is included and that there is no opportunity for misinterpretation that could result in future change orders.
Attach the following documentation as exhibits to the contract:
• Final, winning bid along with any exclusions and clarifications
• Clarification questions and formal responses from the bidder
• The log of RFIs and associated answers that occurred during the bid process
• The list of all plans and specs that form the basis for the bid, including any and all addendums
Informing the losers
Keep in mind that all of the bidders have spent significant time and effort in preparing their bids for this job, and only the winner will actually make any money on it. The losing vendors should be thanked for their hard work.
Occasionally, bids will come back far too high relative to the amount budgeted on a particular job. It may be necessary to go through a process called value engineering where the project scope is reworked to find opportunities for cost savings.
If there are multiple similar jobs occurring around the same time, economies of scale could be captured by packaging similar work and awarding the entire job to one vendor. Projects like a restroom renovation and an office buildout on the same floor, are typically good candidates for this approach.
Preserving bid data for future projects
Show how much savings were generated
One simple way to do this is to calculate the difference between the winning bid and the median bid. Typically, the winning bid will be well below the median, and thus will result in meaningful savings.
Add the bid form from this project to a template library
The most efficient way to create a bid form for a future job is to use a bid form from a recent comparable job as a starting point. Ideally, these bid forms can be shared across the entire portfolio so everyone in the company can benefit from each bid process.
Record vendor data into an internal database
For each vendor, try to capture the following information that can be used when selecting bidders in the future:
• Did they submit their bids on time?
• Did they submit bids on the specified bid form, or do they go off-script and make up their own?
• Did they submit complete bids?
• Did they show up to the site walkthrough?
• Did they ask quality questions throughout the process?
• Did they submit reasonable numbers, or are they always high?
• Did they make it to the final round?
• How many bids (including revisions) did they submit? Save in an internal pricing database for future estimating
Also, try to capture the following data points:
• Total bid cost for each bidder’s bid
• Bid cost per line item on a cost per SF basis
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