Like all entrepreneurial thinkers, commercial real estate owners want to refine and standardize as many business variables as possible, in order to control for better outcomes.
Project bidding—a process whose success depends on the accuracy of a trove of data points and the seamless collaboration of diverse industry practitioners—is one of the most sensible places to optimize.
Why is creating a well-run bidding process so beneficial?
It drives significant cost savings: Empirical studies show that each additional bidder in a competitive bidding event can result in ~4% savings. On a $1 million job, owners could see savings upwards of $40,000.
It helps you stay 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.
It reduces the risk of change orders and delays: A thoughtful bid process also allows both the owner’s team and the winning bidder to understand the job at a greater level of detail, mitigating problems from happening later in the project.
Things to consider even before the bidding process begins
Conducting the bid process the right way takes time. Even a simple bid process could require hours of preparation on the part of your 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 your documents are not well developed, bidders will have to make lots of estimates and assumptions, making it impossible to accurately compare bids later. Work 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 where you choose your partner for the remainder of the job. Don’t cut corners by choosing the lowest bidder; take time to find the lowest qualified bidder.
Creating a robust bid form will reduce misunderstandings between you and bidders, saving you time during the leveling process. Include as much detail as possible in the bid form. This will make it easier to level the bids and discover if bidders are missing information that is material to the proper completion of the job. Referring to bid forms from past comparable projects can serve as a starting point for the bid form for a particular job. You may also want to split up various scopes of work. For example, if you have a bathroom renovation and an office buildout going out to bid, it might be best to create separate bid forms so each one can be more precisely analyzed.
selecting the right number of bidders
Selecting the right number of bidders is more important than many project managers realize. In theory, inviting as many bidders as possible will result in the most competitive pricing options.
According to a study published in Journal of Construction Engineering and Management, triple bidding leads to an 8% reduction in the “bid low price.” A Cornell study shows empirically that each additional bidder beyond three brings down the cost of a job even more.
However, the question of practicality is an important one. The cost of preparing a quality bid is often significant for the bidder. Therefore, bidders are most attentive to bids they have a decent chance of winning. Let’s look at their math:
If four bidders are invited, the bidders estimate they have a 25% chance of winning. That’s reasonable and probably worth their time. However, if there are 20 bidders involved, they have to assume they only have a 1 in 20 chance of winning. This is more risky and they may decide to redirect their energy elsewhere.
There is also additional administrative burden on your side for each additional bidder added. Each additional bidder is another party you need to manage throughout the process and another bid to be leveled.
It’s not uncommon for the bid process to shrink as owners realize the hassle of actually getting bids from all the bidders. However, given the potential for large cost savings from a competitive bid process, this slimming of the bidder pool due to administrative burden should be heavily avoided.
The trick is finding the magic number of bidders that will be manageable for your team and that will spur competitive pricing. For many projects, the magic number is between three and six bidders, with only occasional outliers going beyond six.
Learn how to find the right number of bidders for your project, along with best practices for creating robust bid forms, efficiently answering RFIs and aggregating data for more accurate budgeting on future projects with our Ultimate Guide to Bidding [PDF].