Bidding & Award: The Problem with Unit Pricing

A while back I did a piece wherein I offered my scholarly opinion on the use of bid alternates in the commercial construction bidding process (I wasn’t a fan). My lambasting was based on a quarter-century stint I did as a commercial construction estimator. Well folks, I’m back to pick yet another bone: unit pricing (UP). I’m not calling it evil, I’m just saying if UP were a movie character, it would be bald, have a cheesy accent and be stroking a fluffy, white, Persian cat on his lap.

    

OK, so maybe UP is a little evil. But before we go further, let’s set some background. Unit Pricing is defined as “a system of assigning a cost to a consumer product or service based on a standard unit of measure, such as so much per pound, quart or yard.” Simple enough. However, as with many simple things, when wielded improperly or immorally, UP can quickly degenerate into our movie villain above. In short, UP isn’t the problem, it’s the people manipulating UP to subvert and circumnavigate fair-practice and ethical safeguards. But more on that later.

Unit Pricing

Construction cost estimators are asked to provide UP in many forms, but here’s a sample of the most prevalent form I came across (by far) in my travels:

The estimator fills in the column on the right and everybody’s good to go—at first glance. Of course, there’s more to the story. Though straightforward in appearance, there is a lot missing from this form, information that can easily spell the difference between profit or loss for the contractor. It’s also within the “informational void” where the possibility of manipulation and shenanigans can (for those so inclined) loom once this is no longer a pricing exercise and becomes an actual construction contract.

    

Some of you can likely see issues right away. What are the specs? Are we installing this in winter? What about the economy of scale? Can we get some quantities? Yes, some of this is sometimes addressed in greater detail in the spec book, but I found it to be far more the exception than the rule. Even when there was additional information, it often offered miniscule insight into anything relevant to your actual question. However, being the poor sap saddled with assigning a unit cost (which one day may well become a contracted cost)—and being starkly aware that your job may be hinging on it—you can bet I was less than thrilled with the level of information provided me, knowing full well that given the myriad variables possible, my best effort would be no better than throwing darts. To better explain why this is so, let’s examine some key issues surrounding UP and decide whether it’s a truly impartial, effective and economical method of exchanging services for dollars.

Quantities and Economy of Scale (or Lack Thereof)

As mentioned, a quantity should always be included with UP line items on a bid forms. Without a quantity, there is no way for the estimator to determine the economy of scale related to that item. This is a vital element to the UP equation. Anyone in business (with the exception apparently of some in the design community) understands the quantity of a product/service directly relates to the aggregate unit cost of that item. A general rule of thumb is when the quantity goes up, the UP goes down. Much of this relates to fixed or static business costs (mobilizing/demobilizing, travel, warehouse time, etc.) that form a key part of every sale, and so must be accounted for by being distributed amongst the sale as a whole.  

    

Let’s look at a simplified example. Say it costs your company, on average, a minimum of $10,000 to mobilize/demobilize to a job site. This is a comparatively fixed expense because it includes necessary startup/knockdown expenses like trucking/hauling, fuel, trailers, large equipment, temp utilities and more. This mob/de-mob happens whether you supply 100 units or 10,000. Now, further suppose that your raw, net cost to provide our product/service is $5 per unit. Assuming this is an isolated, one-time event where there is overlap in your general requirements on site, your effective total costs for each of these scenarios would be as follows:

    

Smaller Quantity: [100 units X $5 = $500] + [$10,0001] + [P&O: 10% of $10,500 or $1,050] = $11,550

    

Larger Quantity: [10,000 units X $5 = $50,000] + [$10,000] + [P&O: 10%2 of $60,000 or $6,000] = $66,000

    

This would further break down to this:

    

Smaller Quantity: $11,550/100 = $115.50/unit

    

Larger Quantity: $66,000/10,000 = $6.60/unit(!)

    

Wow! Again, this is an overly simplified example, but it does demonstrate how the math works. It also begins to show how wildly open-ended the determination of a UP can be when no quantity is attached as reference. The moral? If a UP doesn’t come with an associated quantity, it should not be allowed on bid forms.

Adding & Deducting Unit Prices Are Two Different Things!

Every UP entry should include separate lines for ADD or DEDUCT. Yes, I’m aware many in the design community consider this nonsense. They dismiss it as some sort of contractor shell game. I assure you, however, there is sound mathematical foundation that backs this rationale. Some has to do with the economy of scale discussed earlier, but there are other more empiric forces that can affect both the adding and removing of a product/service.

    

There are many different ways to explain this, but let’s look at one way you’re likely already familiar with:

    

Welcome to a New Game Show: “Who Gets the Bonus?” A building project is three-fourths complete and an issue arises wherein a large amount of fill (included in the original plans and specs) is now going to be benevolently donated by a neighboring lot. The client is thrilled because he’s expecting a credit. The fill material is calculated and indeed turns out to be a significant amount: 1,000 cubic yards. The civil contractor (CC) on the job had previously submitted a UP for this fill back at bid time: $25/cy furnished and installed. Therefore, the A/E (representing the client) asks the contractor for a $25,000 credit. So far, so good.

    

But there’s a problem. When the CC bid the job originally, he, in turn, took supplier bids on the fill material from a handful of yards in the area. Based on the quantity pulled from the plans (totaling 3,500 cubic yards), the low material supplier quoted him $15/cy because the quantity was above their 3,000 cubic-yard threshold for volume pricing. Had the quantity been 3,000, the price per cubic yard would have been higher, $17/cy.

    

You can see where this is going. Once the dirt donation is announced, the CC goes back to tell his material supplier he now needs 1,000 fewer cubic yards than was originally bid. The supplier smiles and immediately responds by increasing the cost per cubic yard by $2. In other words, the 2,500 cubic yards with a value of $37,500 back during bid time was now going to cost our CC $42,500, sucking $5,000 out of his pockets!

    

But I hear some readers screaming, “Why didn’t he just submit a smaller UP in the first place?” Here’s why. Let’s turn scenario around. Let’s suppose we’re now adding 1,000 cubic yards, and let’s also assume this new quantity [3,500 + 1,000 = 4,500] yards again straddle the next level of volume pricing back at the material yard, pushing it down to $13.50/cy. Cool! But not so fast. As we did before, let’s compare the values from back at the original bid:

    

Originally: 3,500 cubic yards x $15.00 = $52,500

    

Now: 3,500 cubic yards x $13.50 = $47,250

    

This time, it’s our civil contractor who picks up (as the client loses) a sweet $5,250 bonus! Now, depending on your alliances (the contractor or the building owner) and the eventual outcome, you may be OK with one or the other making/losing money in the transaction.

    

But that’s not the point. What this shows is that in the end, the building client would have been far better served by receiving two different unit prices for this line item: one to reflect an increase in quantity ($13/cy for material—to keep this simple I am assuming the placing/equipment labor/equipment cost is the same) and another ($17/cy) for a decrease. The driving point here is that UP—as a bidding and contractual vehicle—is nowhere near equitable and impartial as a bid method. In fact, it’s wildly volatile and easily prone to manipulation from outside circumstances, and that’s not how the process should be.  

    

Requests for Unit Pricing that Cover Entirely Different Scopes of Work. This one would seem elementary, but it’s still a ridiculously abundant occurrence when bidding commercial projects. There are scores of examples I could offer here, but my favorite by far is the “Concrete/cy”. (I’m not simplifying this. I can’t tell you how many times I came across this one in my time as an estimator.) Seriously?  Does this A/E or client or anyone really believe that forming/casting concrete for foundation walls, driveways, footings, sidewalks, curb/gutter, light pole piers and bridges is the same thing? This happens to be a unit price I tracked faithfully for many years, and in my experience, the unit price for concrete work (depending on the application and usage) varied from $190/cy to over $2,000/cy. Try entering into a contractual amount based on that range!

    

Excessive and Wasted Administration. Unit pricing should be allowed only when the A/E can prove it’s necessary and relevant to the project. Message to the A/E community: We do not need busy-work! I can’t count how many hours we wasted in my office addressing UPs on bid forms, only to have that work completely disregarded or forgotten later in the project. Most of time it was replaced with standard change-order protocol (of lump-sum bid and acceptance) because the situation arising on site (where the UP would have been used) coincided or interlaced with the “anticipated” scope of work for the UP bid. There was virtually always an element of current reality that rendered the original UP useless. This would all be grudgingly bearable had this UP been the only one siphoning off precious office time, but there were far too many occasions where I was compelled to nurse a five-page-long UP bid attachment on bid day—arguably the most frenzied and manic day in all of modern business.  This distracting (and eventually fruitless) routine was one of the more frustrating and surprisingly time-consuming exercises I had to endure as an estimator. It detracted greatly from the thoroughness and quality of the bid effort itself, which leads me nicely into my last and most important reason why unit pricing should be cast to the curb: It cheats the building client!

The Ultimate Victim

In my mind, the most damaging part of the whole misguided UP system lies not in its tainted mathematics or superfluous administration but in the fact that the group of people who suffer the most from its use are the people we should be trying most to help—our clients. I think it’s safe to say most potential building clients have no idea the vast amount of time and energy it takes to address UPs during the bid period, only to have that work rendered useless once the project is underway. The logic is simple: The more time a cost estimator can devote to your base bid(s)—by far the most critical part of your bid, the more complete, accurate and competitive that bid will be.

    

Put another way, the client is paying a handsome dividend for the privilege of including sheets full of UPs on a bid form. Don’t believe me? Think about it: If an estimator is up against unrealistic timelines and nursing administrative time-suckers like UP, do you believe for a moment that when it comes down to making a choice, the estimator will address “gray” or not-fully-addressed line items by slashing their item costs? Of course not. We aren’t fools. If forced to do so (as we pretty much always are on some level), we estimators will always add money to cover unknown, unclear and potentially volatile line items. Remember, contractor owners hire us for two (what may seem to some to be diametrically opposed) reasons: To be lower on your bids than all of your competitors, and to never, ever lose money on a job.

    

And reason number 2 is way more important than reason number 1. Good luck!

S.S. Saucerman is a retired commercial construction estimator and project manager who worked for a large upper-Midwest general contractor. He is also an established freelance writer and author whose work spans 20 years.