Nobody Wins When Construction Projects Are Underbid
The lower a contractor’s bid, the better its chance of securing work, especially in a sluggish economy. Everyone likes a bargain, and awarding agencies are no exception. But when a contractor underbids a project’s actual costs, everyone stands to get burned. In the case of government-funded projects, however, it may even be obligated to seek out low bids. But property owners need to beware of offers that look just too good to be true.
Underbidding Hurts Owners
If a bid is unnaturally low, buyers can expect to come in over budget. Left unchecked, change orders and cost overruns will devour the difference between the lowest bid and more realistic estimates. The low bid may even end up costing more — especially if time is taken into account.
If the contractor doesn’t stand to make a profit on a project, he or she is likely to get distracted by more lucrative opportunities. Valuable time is wasted on nickel-and-dime disputes and change orders. Lowball bidders may make ends meet by underpaying or delaying payments to their workers and subcontractors. They, in turn, become frustrated and begin looking for other opportunities.
And don’t forget the old adage that you get what you pay for. Contractors who low bid themselves into a corner will try to meet the budget by using low-quality materials, shoddy workmanship or both. Property owners can avoid the pain of underbid contracts by issuing bid guidelines that require more than the lowest price. Reward “best value” bids over “lowest” bids. Watch for bidder red flags:
- an inexperienced principal;
- little or no experience with similar projects;
- a company in financial distress that may be willing to lowball for a quick infusion of cash;
- missing or recently revoked licenses;
- companies with high EMR factors, indicating they are an insurance risk;
- a troubling history of willful violations; and
- a lack of adequate insurance.
Underbidding is not always a nefarious marketing tactic. Sometimes it’s an honest mistake. If all the bids on a project are in a similar range and one comes in dramatically lower, that’s a red flag that the bidder may have forgotten a key element or made a mathematical error. Check those bids thoroughly before proceeding.
Underbidding Hurts Contractors
The pressure to bid low is intense, especially for a young company that needs capital. But beware: Lowball bidders win the battle but lose the war. Even if they get the job, they risk damaging their reputation and long-term job prospects.
“If all the bids on a project are in a similar range and one comes in dramatically lower, that’s a red flag that the bidder may have forgotten a key element or made a mathematical error.”
Some contractors try to shift the pressure onto their subcontractors. They quibble over costs, pay late or otherwise try to cover their own losses by saving on what they pay their subs. This can backfire spectacularly as companies that could have been long-term partners and referral sources are left instead with a bad taste in their mouths.
A contractor that bids at or below cost has nowhere to go. Either it does the job at cost and loses money, or it lowers its costs by using cut-rate labor and materials. Good workers know what they are worth and won’t work for a contractor that pays low, pays late or is always causing drama. The long-term costs of low-quality building cannot be overstated. A contractor whose name is on poorly constructed buildings will never be able to escape that reputation.
How to Prevent Accidental Underbids
Mistakes happen, and even the most aboveboard contractors could find themselves underbidding by accident. Overlooking a key part of the project, underestimating the cost of materials or subcontractors, and mathematical mistakes are all small errors that can have big consequences.
Luckily, accidental underbids are easy to prevent. Contractors should never rush a bid. If bid documents are due at the end of the day Friday, aim to have completed them by Thursday night. That way, the person submitting the documents has all day Friday to make sure everything is accurate.
On that note, bid documents should not be created and submitted by the same person. It’s human nature to overlook our own missed decimal places. Someone not involved in the documents’ creation should review them before submittal.
Beware of underestimating costs. Vet bids from subcontractors with the same diligence the awarding agency is using. Even if a contractor has a go-to sub, it should get numbers from several companies to make sure the bid is realistic.
When a project is underbid, either by accident or design, the results will be unsatisfactory for both the bidder and the buyer. Bidders need to be realistic about the lowest amount they can work for. Awarding agencies should take special care to scrutinize extra-low bids. In the event of an accidental underbid, agencies can allow bidders to withdraw or amend bids before the contract is awarded.
Sudersan Vassen is a certified construction manager and has more than 12 years’ experience in the construction industry. He has been involved in a wide variety of new construction and renovation projects for multiple state and federal government agencies in the United States. For more information, please email email@example.com.