Erroneous Economics

Do Building Clients Pay a Premium for Bid Alternates?

S.S. Saucerman / October 2019

A while back I did an article where I ranted—er—offered my opinion on a list of practices in commercial construction (CC) that I found “messed up” (sorry about the technical jargon so early) about CC bidding procedures. In the piece, I chastised (what I felt was) the specious and questionable use of bid alternates on CC bid forms. Unfortunately, since the topic of alternates was just one of many items covered in the article, I was forced—to appease the word-count gods—to limit my remarks on the subject to just a few lines. I want to correct that today because I feel it’s a subject worthy of further and deeper analysis.
    
My opinions are founded on my 44 years in the construction industry, 25 of those as a CC estimator and project manager. I also moonlighted as a construction industry author/writer/speaker and (if that weren’t enough) put in an 11-year stint teaching evening building construction technology classes at our local junior college. As it turned out, this many-faceted and prolonged period of activity allowed me ample opportunity to meet and interact with a vast and varied network of fellow building professionals—and boy did they have a lot to say.

Collective Wisdom
And as a writer, I listened. I also came to realize (quite surprisingly at times) that many of the stories, complaints, laments and grievances voiced in these conversations were strikingly aligned with my own experience. At times it was uncanny. I felt as though the person telling the tale had been peering into my day-to-day activities. And though enlightening, I can tell you also that there was something soothingly cathartic in discovering that my views regarding such matters as 1) heavy-handed architectural protocols, 2) twisted and tainted business morals and ethics, 3) the poisonous effect of local backroom politics plays in construction awards, and 4) the systematic role that greed and avarice plays in our industry weren’t nearly as singular and isolated as I’d sometimes feared. In short, it was nice to know I wasn’t the only crazy one.
    
So, I’d like to return to one of the more popular topics in my network conversations: the use and proliferation of bid alternates in commercial construction. There were two primary camps—branches, really—to the bid alternate argument: the first revolved around the morality and ethics of (if someone were so ill-inclined) possibly using bid alternates to circumnavigate the open-bid process by allowing decision-makers a way to manipulate the bid outcome by accepting only those alternates favoring one bidder over another. Though many deny this problem is widespread, I’ve seen enough in my travels to grant it some credence. Unfortunately, to serve the topic justice would require far more space than we have here today, so I’m afraid we’ll have to tackle it in another article (coming soon!).

Bid Alternates: A Primer
Today I’d like to address the second theme in the bid alternate argument: economics and value. More precisely, the adverse economic effect that bid alternates have on not only the CC bid process itself, but also (and far more importantly) on the building client’s bottom line.
    
But let’s back up a bit. If you’re unfamiliar with bid alternates (and I realize many of you may be), let’s set background. In a typical world of the average CC general contractor, a vital and sustaining avenue for acquiring work lies with the open competitive bid process. This is an exercise where a number of (in our example) GCs are invited to bid on a construction project being proposed in the community. Those invited may have come from a shortlist of candidate bidders created and vetted by the architect/engineer/client team in charge of the project or, in some cases, the bid may be open to anyone willing to submit a number. Each bidder then receives a set of bidding documents (either paper or electronic) that include architectural/engineered working drawings, specification manuals, addenda/clarifications, geological reports and basically any information deemed appropriate by the AEC team. This set of documents is called the bid package.
    
The bidders then spend (perhaps) two to three weeks—the bid period—analyzing the documents, assigning costs to the work elements they see in the documents and preparing their bids. When bidders finish calculating costs for labor, materials, subcontractors, general requirements and any/all ancillary or indirect costs (including fee/markup) associated with the work, they write their final number (the lump sum) on the appropriate line of the bid form supplied in the bid package. The form is then enclosed in the proper envelope, bonds or other required paperwork are attached, and the bid is rushed to the bid location before the required bid date and time. Once collected by the AEC team, the bids may either be 1) opened publicly and read aloud (an “open” letting) or 2) received and opened privately at a later date/time (a closed letting).

Not So Fast
So far so good? Kind of.
    
With the possible exception of the closed-letting (which will always spawn suspicion), everything’s been relatively straightforward and reasonable. But here’s the thing: The scenario I just described? It never happens! In real life, it is extremely rare to see something this simple and clean. In today’s commercial construction world, it is not at all uncommon to open the bid documents, go to the bid form and see several base bids, dozens of bid alternates (my record was 70), pages of unit prices and all sorts of fun add-ons such as cost-schedules, sub lists, EEO requirements, preliminary project schedules, manpower predictions and much, much more.
    
But in order to maintain focus, let’s narrow our attention back to the subject of bid alternates. Let’s look at an example: Suppose we have a commercial construction client who wants to build a 10,000-square-foot, single-story office/warehouse complex on land he already owns. He arranges financing, enlists an A/E firm to draw up the plans and specifications, and anticipates—according to his own research and through discussions with the A/E—spending around $200 per square foot, or $2 million, to construct the project.
    
Now, our client is a businessperson. He’s been around the block. This means he’s out to get the best bang for his buck. However, he also knows from bitter experience that budgets have a way of creeping out of control, so, in the name of wrapping his arms around (he also uses “paradigm” and “low-hanging fruit” a lot) the project, our client instructs the A/E to compartmentalize the project down into separate, logical (and for him, more understandable) bidding modules. The A/E reluctantly does as told and breaks the project down into Bid Package #1: Office Area, Bid Package #2: Warehouse Area and Bid Package #3: Mezzanine (over the office).
    
Following a brief in-office debate about clarity (they choose ‘no’), the A/E labels the three elements “Base Bid 1,” “Base Bid 2” and “Base Bid 3” on the new bid form. Since bid packages are already in the bidder’s hands, the firm then hastily draws up addendum #1 and rushes it out to the bidders. Bid date and time remain the same. This calms the client’s angst completely. He goes onto be delighted with the bidding process, and he makes no further changes to the project documents. Ha! Just kidding! In real life, the changes in addenda quell the client’s natural nervous apprehension and inordinate need to meddle for a stunningly short period of time.

The Creepiness of Scope
Back at the office, the client’s key employees have now had a chance to peruse the plans for their new facility. It was better than working. And (I mean, what are the odds?) it turns out they have some thoughts of their own on the new place. Is the warehouse ceiling high enough for pallet requirements? Do we really need to heat the northwest corner of the warehouse? How much would it be to add a loading dock? Or what about a wash bay for the trucks? Well, you get it. The client calls the A/E. A week later, addendum #2’s in the mail and the new bid form shows Base Packages  #1, #2, #3 and 1 through 9. Still optimistic, the AEC team keeps the bid date and time the same.
    
Monday comes and a new week sees even more discussion over liner panel, radiant floor heat, awnings, site signage and the glass doors Janice saw in a copy of Architectural Digest—they would be perfect for the new conference room. Engineers are consulted, details rendered, hands are wrung and addenda 3, 4 and 5 are distributed over the next two weeks. The bid date’s been extended twice, and the group of previously enthusiastic bidders has now morphed into something more resembling a disenchanted mob after a major sports loss. Some cost estimators begin questioning their career paths, others turn to alcohol and—worse yet—some consider running for president. The bid forms display five base packages, 27 bid alternates and almost two pages of unit pricing.

Losing Money and Other Fun Business Activities
To an untrained eye, it might appear that, as bad as it is, there is one saving grace to this keystone-cop act in that it appears to primarily affect only those poor saps bidding on the project (and let’s face it, some of us really deserve it). But look a little closer and you’ll discover another—and possibly greater—victim of this frantic and frenzied process: the client (and the public, if the project happens to be supplemented by tax dollars). It has to do with the true economy of breaking a building project (or many other things for that matter) down into multiple bidding modules.
    
What the client doesn’t realize (and what the A/E seldom explains) is that he is paying a premium for the “luxury” of breaking the project down into smaller components. More aptly put, the more a building project is compartmentalized, the more each of those individual compartments will cost.


But before we go further, and for you to see the entire picture, it’s important you understand a few fundamental truths about commercial construction and the cost estimating process—things you may not know. And it’s here where I strongly urge any prospective building clients out there (and any A/Es for that matter) to pay particular attention here. These are the truths:
    
1. The amount of time and resources a commercial construction cost estimator can devote to your bid is finite.
    
2. Cost estimators earn their livings (and feed their families) based on their ability to bring work into the company. For a majority, the opportunities for doing this come only through the open-bidding process where multiple firms compete by submitting bids for the work, with (most often) the lowest and most responsible bidder being awarded the contract.
    
3. But here’s the thing: In what may appear to be diametrically opposed logic, cost estimators also earn their livings and keep their jobs by not losing money on their bids. Let’s recap: Be lower than everybody else, but don’t you DARE be too low, particularly when 90 percent of what drives profit and loss on a construction project is completely and utterly out of the estimator’s hands. But again, that’s for another article.
    
4. Of rules 3 and 4, 4 will always trump 3. Let’s test this theorem:

  • #4: Lose money on a single project, and the founder’s son fires you on the spot.
  • #3: Lose (be high) on a few open bids, and the founder’s son fires you after a few years.

Yup, it checks out. 4 is worse than 3.
    
5. So, knowing what we do thus far, in the event a bid period is short or sabotaged by late-published bid packages, ponderous addenda or even too many other projects going on in your own office, when our cost estimator is thrust into a bidding environment and timeframe that is clouded with uncertainty, rife with loose ends and shrouded in cloak of haphazardness and ineptitude, what do you suppose happens? The answer is unfortunate but true: The estimator reverts back to Golden Rule of Estimating, the one-and-only, sure-fire, died-in-the-wool strategy that has long-served cost estimators who have wandered into that ludicrous realm of ridiculous expectation: Cover your ass!
    
No information? Add money. Time running out? Add money. Owner and/or architect have reputations for being difficult to work with? Add money.
    
6. The base bid will demand and draw the overwhelming majority of allot-able time, care and attention afforded the bid. Alternate bids, unit pricing and silly attachments to the bid form will always receive low priority. Most won’t be addressed until the final bid day.

Class Summary
So, how do those 27 alternates look now? Do you think—just maybe—they’ll wind up being hastily addressed, overtly padded and exist only as a vehicle for low-bidding contractors to squeal with delight every time another alternate is added to their contract, thereby raising their aggregate bottom line? Good, then you’ve been paying attention.
    
And there’s one thing we haven’t discussed: The quality and competitiveness of your base bid? Well, it’s pretty much gone down the tubes, neglected and ignored in the name of chasing down alternate #22, the Japanese shoji screens in rooms 131, 132 and 135. Now, multiply this by 27 and then add 1.75 pages of unit pricing. Base bid? What base bid?
    
Still don’t believe me? Think about it. Put yourself in a similar situation: If you found yourself tasked with arriving at an estimated cost and your job was (immediately) on the line if your guess was too low, would you address unknowns by slashing your price? Of course not. If hampered and hindered by needless distractions, unrealistic timelines or just plain delusional thinking, any person in your position will add money to cover potential loss. And since poor documents and short timelines are abundant (the norm?) in CC, you, Mr. Building Client, are without question paying not only for the alternate work itself, but you’re also paying a substantial premium for the privilege of having the alternate on the bid form.

Those Poor Rich Guys
OK, OK. I know many readers may find it a bit challenging to muster up sympathy for the “poor building client.” I hear you. This is a class of society who are commonly quite wealthy (old money), display alarmingly white teeth, own tiny/snotty dogs and tow tandem Jet Skis behind custom RVs around the company parking lot on Friday mornings. Their mothers are medicated, their sports seats boxed, and their fathers is bitterly disappointed in them. They are always named Brent or Chad.
    
But for good or evil, it’s their dreams and whims and boatloads of cash that keep our commercial construction world spinning round, so I don’t know about you, but I will always remain a huge, huge fan.
    
Good luck!

S.S. Saucerman is a retired commercial construction estimator and project manager in the Midwest. He is also an established freelance writer and author whose work spans 20 years.