Hard Bid or Negotiated — Which Delivery Method Is Right for Your Project?
A Question & Answer session with Knutson Construction Services Vice President and General Manager Darin Knapp.
Q: There’s a lot of talk in the industry these days about the advantages of competitive bidding vs. negotiated work. Let’s start with competitive or hard bidding. Are there situations where it is the right way to go?
A: Yes, for example, let’s say we are asked to build a distribution center. If the owner has already built 30 distribution centers, all of them approximately one million square feet, they’re very much the same, and the drawings should be tight. The only variation might be soil conditions. Parking ramps, too, can be very cut and dried. You’re not going to increase the number of spaces, midway through the project, from 600 to 900, for example.
Also, when the architect and engineer have time to capture the owner’s wishes — to fully design the project, then bid it out — risk is transferred to the contractor. The owner will get a competitive bid on the front side and take advantage of any mistakes we might make.
Warehouses and parking ramps, too, may look like off-the-shelf designs. But even if there are few changes on the job, it might be that negotiating this type of work represents better value.
Q: Are you suggesting that negotiated work always poses the best value?
A: No, not always. Like I said, there are some projects that are so familiar, and where variations are fairly unnecessary, that hard bidding makes perfect sense. In some cases, laws also dictate a competitive bidding situation.
Q: What are the biggest advantages of a negotiated contract to an owner?
A: On a hard bid project, somebody’s going to be the low bidder, but that won’t necessarily ensure that you have generated the best value. The contractor who’s helping the owner up front in a negotiated situation is in a position to save the owner money by identifying changes and cost saving opportunities before the project begins.
Owners should also realize that in a negotiated setting, actually, 85 to 90 percent of it is competitively bid! Of course, the nature of the project is going to define whether you competitively bid absolutely everything. In health care, for example, you might choose not to competitively bid everything because of the complexities of the systems, mechanical and electrical.
Nine times out of ten, a negotiated approach gives owners best value for their money. Owners must decide up front whether they want the best price on bid day or the best price when the job is complete. This decision will not only dictate whether hard bid or negotiated is best, but which firms are most appropriate — they are usually different firms.
Q: What about timing — how is that affected?
A: In negotiated work, you can often save time, too — which is money. Even if you pay a premium to the contractor, you probably get that back five times over with a quicker start. You can also have concurrent activities as opposed to serial.
Fairview Southdale, a multi-phase project we’ve completed, is a perfect example of how owners can save costs. We started generating revenue for the owner and the core business at a much earlier stage than we would have in a competitive bid situation. So the owner can amortize their costs earlier.
Q: So what is the key to making a negotiated process work in favor of the owner?
A: Everything depends on establishing trust. Now, this is not necessarily an easy thing in this business. Most of us are naturally averse to losing control. But negotiated work gives you more control, not less, in the long run. Bringing in a contractor early means the contractor will be working as your agent, and looking for ways to save you time and money. That is certainly the feeling of our client, Allina Health Systems. They want to pay for the pre-construction services and then bid out the job. Allina realizes that when the builder is on your side from the start, working up front with the architect and engineer, they are adding value to the process. The team is working, in a more coherent and coordinated way, to iron out complexities and confusions from the start.
At Knutson, we stress trust and integrity above everything because our goal is develop a long-term relationship. Any premium is typically more than offset by all the savings you’re going to generate by doing all these things right the first time.
A negotiated approach often prevents costly surprises. We like to challenge the design process, rather than sit back and let the thing get designed and then come back and say this looks like about $14.6 million when you know the owner wants to spend only $13.5 million. We don’t do that. We put all the cards on the table. If we’re doing our job, there are indicators right from the start that this isn’t a $13.5 million job, and we’ll tell you so. Again, it’s about trust and integrity. We play honest from the start, and have nothing to hide.
Negotiated projects almost always reap the best value. Ninety-nine times out of 100 they will turn out to be the lowest cost for the job. Which lowest cost do you want — the day you start construction or the day you end?
Questions or Comments? Write to Darin Knapp at dknapp@knutsonconstruction.com.
An Owner’s Perspective: Mark Hennessy, Executive Director YMCA — Red Wing, MN
Originally, I was leaning toward competitive bidding because I wanted to keep everyone honest. Fortunately, one of my colleagues who has experience with several building projects strongly encouraged me to trust the negotiated method.
Our architects also advised us to use a negotiated approach and get Knutson involved early emphasizing, “You may save money up front with competitive bidding, but you’ll spend more money on change orders and other issues once the project starts.”
We recently completed a project where we used a negotiated approach and there are three things that made it successful for us:
- It was crucial to get the architect, the construction company, and our team on board early. This allowed us to form a three-way partnership and created important checks and balances.
- Through some thorough and precise estimating early on, we discovered several things in the design we needed to eliminate in order to stay within budget. We made these changes before construction began.
- Our change order percentage on this project was very low — 2% versus the typical 6–7% seen in most building projects. This also eased the tension that change orders create between the owner and contractor.
The end result for us was very positive and I would definitely advise other owners to consider the benefits of a negotiated contract.