Why Competitive Bidding Doesn't Guarantee the Lowest Price

Conventional wisdom holds that the only way to get the lowest price on a building project is to get competitive bids from several general contractors. This isn't necessarily so, and here is why.

Let's say you have chosen a design professional to prepare the plans and specifications for your new building and are ready to select a constructor for the project. Two principal options are avalable at this point.

The Two Options
You can select several qualified general contractors to submit fixed-price bids, awarding the contract to the lowest bidder. Or you can select the single most qualified construction company and negotiate a contract. This contract may be on a "Cost Plus Fee" basis, which means the general contractor's compensation is agreed upon before construction begins, and you pay the actual cost for the construction work.

The "Cost Plus" contract may have a Guaranteed Maximum Price provision, where the general contractor commits to completing the project at or below a mutually agreeable price, with any savings shared by owner and contractor on pre-arranged terms.

The Role of Sub-Contractors
While a general contractor handles some of the work with its own employees - the concrete and carpentry work, for example the G.C. contracts with other firms for work involving specialized skills: electrical work, plumbing, heating and air conditioning, painting, lighting, and interior design, for example. These subcontractors, frequently account for 60% to 70% of the value of the work.

The reason for using such specialty companies is obvious. It would take massive resources to maintain active crews with all the varied talents required for a building project. Fixed costs and financial risks are reduced by subcontracting.

Prices from Competing G.C.s
Competition requires that a general contractor get bids from each of the subcontract trades to put together, hopefully, the lowest possible total bid package. Each general contractor has its own preferred subcontractors it will invite to submit bids. It would be the sheerest of coincidences for a single general contractor to receive all the lowest bids (indicated by the shaded areas in the accompanying tables) from the group of bidding subcontractors. In this case, the award will probably go to general contractor "A", whose total combination of subcontractor bids is the lowest at $1,569,500.

Prices from a Favored G.C.
Now let's look at an alterate solution. What can happen if an owner decides to go with a single, particularly well-qualified building firm on a negotiated contract basis? In addition to the benefits of working with a single firm from the start of the project, the client can get the lowest subcontract prices.

In this example, assume that the same subcontractor bids are available to constructor "X", who has been selected as the general contractor or construction manager. Because he is not involved in competitive bidding against other G.C.s, he can attract and select the best available bids (again, those shaded boxes). As a result, he is able to put together a price package totaling $1,451,500 which, in our oversimplified example, is $118,000 under the lowest total price received through traditional bidding.

Of course, a negotiated contract with any single building firm does not automatically assure a client of the lowest final price. One key lies in selecting the right construction firm, one of proven experience and excellence of reputation. Another key is using the firm's knowledge and experience throughout the planning and design process.

In many cases, a client is reluctant to put a project into the hands of even the most reputable builder, on a single-source-of-responsibility basis. He has too long been a victim of the concept that the way to obtain the lowest possible price is to get as many competitive, fixed-price bids as he can. But, as we've shown, competitive bidding, by nature, doesn't always guarantee a client the lowest price for a project.