Bid Negotiation in a Recession

March 15th, 2010 by KTU | Filed under Cost and Budgets, Notes on Approaches.

I just spent a week in Park City negotiation bids on the Mountain Modern house. I’m building the house with the help of Steve, the broker who sold me the land. Steve lives a couple of miles from the site and has built a series of homes in Park City and elsewhere, so has a lot of local expertise. So, while technically this is an “owner build,” I’ve hired a “consultant” to arrange the subcontractors and to keep me informed about construction on a daily basis.

New home construction in Summit County is very slow right now. Just two building permits have been issued in the first 2.5 months of the year. As a result, almost no one in the building trades has any work right now.

Our strategy has been to select 3-5 subcontractors for each task based on the quality of their work, and then to make a final selection based on price. We have let these subcontractors know this is how we are proceeding.

A few observations from the last week:

  • Subcontractors are highly available, so meetings can be arranged on very short notice. We held 15 meetings over 2 1/2 days, most of them set up a day in advance. This is in stark contrast to the days when you couldn’t get someone to return a call.
  • Bids are all over the map. On one task (to be specified once I’ve selected the sub) we got bids ranging from $31,000 to $55,000. The high bid is 77% higher than the low bid.
  • Of course, the variance is highest for trades with a lot of the sub’s labor or that involve the use of equipment owned by the sub. There is less variance for jobs with a lot of material costs. So, for example, excavation is a task that is almost all equipment and labor, and the variance is very high. Heating contracting is about half materials, and so the variance is less severe.

Subs seem to have reacted to the recession in one of two ways. In the more sensible approach, they bid very aggressively, are responsive to the owner’s needs, and explicitly state that they are willing to do what it takes to win the job. Another approach also is prevalent in which the sub throws out a ridiculously high bid, possibly higher than would have been bid at the peak of the building frenzy. I think this is the result of hoping to “make it up” by winning a highly profitable job, kind of a doubling-down at the gambling table. Only the stupidest builder would get a single bid, though, so I can’t imagine this strategy works.

Interestingly, I find myself not willing to push for the lowest possible price. For one, I have to basically live with these guys for a couple of months while they work on my house. That is a relationship that could easily be polluted by an aggressive bid negotiation. Second, there is a basic sense of fairness that I’d like to adhere to. Yes, the framers may be willing to work for $15/hour just to avoid sitting around all spring, but is that really fair? I’ve found myself doing a reality check on each negotiation to verify that the sub is able to pay a decent wage to skilled workers over the duration of the job. I don’t plan to contribute much in the way of “profits” beyond good wages paid and covering of costs, but I also don’t plan to squeeze the subs to the point where they are resentful and where I feel guilty. I have no doubt, however, that such squeezing is possible when there is just no work to be had.

One Response to “Bid Negotiation in a Recession”

  1. Jim says:

    builders with money in the bank (because they made profit) have been sitting on the sidelines watching the competition go bankrupt working for wages. If you just work for wages, all you have is a job, and when people realize they are not breaking even on a job, the quality of the work deteriorates and then they walk.

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