Planning for the Construction Process

Bidding and Awarding the Construction Work

When the construction documents (the drawings and specifications) are finished, you will “put the project out to bid.” For a public project, this process will most likely be managed by the City’s procurement or purchasing department. The City will “advertise for bids” (in the local paper and the local business newspaper) and will post a notice on the city’s website, letting qualified contractors know that there is an opportunity to bid on the project. Hopefully, a number of general contractors (GCs) will choose to bid on the project, ensuring competition. Each GC will assemble a single bid for the entire project based on bids received from a variety of subcontractors and material suppliers who hope to provide labor and furnish and install materials products, and systems. For each scope of work, the GC will ask three or more different subcontractors to provide bids (for, example, for lighting and electrical) and then take the lowest bid. The GC may plan to perform some of the work with its own forces, for example demolition, earthwork and concrete. The CG will then combine all of those low bids and add their own bid for the work they intend to “self-perform.” The GC submits a single bid or price for the work and will also be required to provide insurances and performance bonds.

The “bid opening’ is public and anyone can attend. It is held in the procurement office on a certain date at a certain time. The bidding GCs can submit up until the time of the bid opening, for example 10AM Tuesday, July 23rd, 2019. At exactly 10AM, the purchasing officer opens the envelopes one at a time and reads off the name of each contractor and their price. This information is placed into spreadsheet and the procurement department has a day or so to review and evaluate the bids to make sure they are complete, qualified, and “responsive.” The lowest qualified bidder wins the project.

There is a direct relationship between the quality of the construction documents, the conditions in the market (amount of competition, availability of labor, prices of commodities), and the final pricing. One of the most important things a team can do, particularly in a strong economy with a tight labor and materials markets, is to design clearly and thoroughly and try not to make the project any more exotic or unusual than necessary. When work is plentiful, contractors will opt for more straightforward projects every time – they are easy to make money on and the unknowns are few. If a project is a little out of the ordinary, or if the design is not clear and easy to understand, then you run the risk of attracting fewer bidders and higher bids form those who do show up. Nicollet Mall was put out to bid twice. The first time there was only one bidder and the bid was very high: $59M almost double the cost estimate of  $35M. The project team determined that in trying to design the street like a plaza, the project attracted neither road builders nor ground-up/vertical building contractors – it “fell between two chairs.” Over four months the team redesigned the project and modified the drawings and specifications to clearly make the project look like a road reconstruction.  This strategy worked, because when the project was rebid, the City received six competitive bids from roadway contractors and the lowest bid was below budget at $29M.

More generally, the bidding process is important because it encourages competition and results in better pricing and information for owners.  Even for the smallest projects, it is important to obtain competitive pricing for every part of the work if you hope to obtain the right mix of cost, quality, and schedule. For public projects it is even more important to receive competitive pricing or you run the risk of facing political pushback if you cannot prove that you did everything in your power to get good, competitive pricing. If you only get one bid or price for any part of a project, from design fees to construction costs, you do not know what the real cost or price ought to be. And if you have a hard time attracting enough interest, then your design may be too special and it needs to be repackaged as something a number of potential contractors can provide.

Cost Control Throughout the Construction Phase:

One of the most important things to understand about a design and construction project is that you won’t know how long it will take to complete and how much it is going to cost until it is actually done and you have received – and paid – the final bill. Many “budgeteers” and finance types believe that on the first day of a three-year project you should be able to know the final cost of the building down to the last penny and be able to know which day it will be complete three years hence.

This is hogwash. While you can make your best estimates, there are too many internal and external variables affecting a construction project to be able to predict costs and schedule with such precision. To be sure, if expectations are reasonable at the beginning you should be able to come within striking distance of a good estimate, but so many things will happen that are beyond your control, and the larger the project and longer the schedule, the greater the uncertainty. For example, consider the impact of increased oil prices on all aspects of a construction project or similarly, increased steel prices due to tariffs. So, it is important to include “contingencies” in your budget, to actively manage the process, and to enforce discipline – on yourself and the other members of the team – when it comes to considering changes to the design that will affect costs.

Contingencies:
Contingencies are dollar amounts added to a project budget to cover the costs of things that you cannot anticipate happening at the beginning of the project. At the beginning of a project it is common to budget for multiple types of contingencies. For example, you may carry a “fee contingency” (a percent of your budgeted design and specialty consulting fees) in case you need to hire additional services or consultants you had not anticipated. You may also carry a “design contingency” that is a percentage of the anticipated construction budget and that accounts for unexpected impacts to the project budget due to the increasing amounts of information and design detail over the course of the design phase. You will also carry a “construction contingency” (a percentage of anticipated construction cost) that would cover unexpected costs that arise during the construction phase such as change orders or unforeseen conditions. On top of all of these contingencies, a wise owner carries a contingency on soft costs as well as an overall project contingency (a percent of the entire project).

Over the course of the project, as the amount of information grows and uncertainty decreases, contingencies are often adjusted downwards, reflecting the lessening of risk but even then, they are often spent and these contingencies can add up to big money. Consider the impact on a project of incorporating a 10% design contingency, a 10% construction contingency, and a 10% overall project contingency at the beginning. Of course, when the budget comes in too high, the first instinct is to reduce contingencies, but can you afford to do that? Contingencies are also established based on the type of project. A very simple project with few unknowns may have a lower contingency, for example 5%, but the renovation of an old building or plaza with many unknowns as to the condition of systems and what is underground suggests a higher contingency, from 10% to 15%, for example.

Unforeseen Conditions:
The easiest thing to do is a project on a “greenfield site” in the far exurbs, however, much of the work of planning and design for the urban public realm involves urban places with known and unknown existing conditions. For example, you may know that the site of a new park you are planning has some contaminated soils because it used to be a gas station, tannery, commercial laundry, or electroplating factory, but there may be more contamination than the environmental study uncovered and, worse, you may not know until after you have started digging that there are also old building foundations in an inconvenient location and that you will need to pay extra to remove those. You may also hope to reuse existing underground infrastructure, such as water piping for a fountain, but you may find that in some places the pipes are too badly rusted and clogged to be reused and must be replaced. This is why you have “contingencies” (see above).

Change Orders:
A change order is a formal modification to the construction contract to reflect a change in the scope of work. This may be in response to an unforeseen condition (like the wall, above) or it can be as simple as the need to add a plaque to accommodate the names of the donors. The actual change order specifies the original work that will be eliminated, if any, the new work that will be completed in its place, the net cost of the change (it can be an increase, a decrease, or no change to the total price) and the impact on the schedule in days, if any, which in the end may extend the completion date.

How loud is your eraser?
The most important thing to keep in mind throughout design is that the later in the process that you make a change, the more costly it is likely to be. If you decide to move one wall during the schematic design phase, it will only require the architect redrawing the wall on the sketch plan. In the design development phase, it may require modifications to the site plan as well as the engineer’s structural drawings and details. During construction documents phase, the electrical engineer will have to change his drawings to reflect the relocation of electrical outlets and light fixtures affected by the relocation of that wall. At this point, we are still talking about lines on drawings and, as you can see, changes in the later phases are likely to cost more in design fees as more lines, drawings, and consultants are involved.

But if you want to move a wall that has already been built, it is a lot more expensive. This is why it is good to review the design thoroughly before construction begins. Sometimes you just can’t visualize something until you have seen it built at which time you realize that you don’t like it. Other times you have not studied the drawing closely enough and do not realize what was designed until it is in place. Yet other times you may not like the construction quality, but then you must make a good case if the GC is to replace the work at no cost – something contractors are typically unwilling to do without a fight. In any case, if you are inclined to randomly or liberally tear out and replace completed work, you will soon eat up your contingencies with change orders that could have been avoided if decisions had been made earlier in the process. As one architect I knew used to say, “the louder the eraser, the higher the cost.” If you need a jackhammer to make a change, it is probably going to cost you a lot more than if you had just erased some lines on the sketch plan at the beginning.