When planning a commercial construction or remodeling project, one of the first things you will want to nail down as a building owner is cost. You want to know how much the project is going to run you so you can secure financing and plan for the future. Part of knowing what the project will cost is also about knowing what your general contractor is giving you when he hands you an estimate or a bid. In an earlier blog, we talked about the difference between bids, estimates, quotes, and proposals. Today, we will compare estimates vs. bids and the pros and cons of each.
Also known as Time and Materials, an estimate will list out the many different tasks and materials associated with your project. It will also list general costs such as cleanup, materials handling, liability insurance, and more. It will include the general contractor’s markup as well as any taxes. The final estimation of your project is a rough figure that is based on less clear data and limited information. Estimates are often done for free in order for you to see if a general contractor is within your budget. It’s important to remember that an estimate is just that: an estimate. The final figure is not set in stone. As more details are given to the general contractor the price could go up or down because the contractor is not legally bound to retain that price.
Pros of estimates
Estimates are great for making comparisons between general contractors. Easily, you will know roughly how much any given general contractor is going to cost. This is important to know before you hire one. An estimate will also tell you how much individual tasks should cost so if you don’t have precise plans for your plumbing, for example, you will at least know what the price should be.
An estimate will work best for a smaller remodeling job because you are sure to only pay for what the contractor actually does. When you pay for time and materials, you only pay for your contractor’s labor and the actual materials (plus markup) that it took to get the job done. Even though you might not know the exact final price going in, you can rest assured in knowing that you will only pay for work that was actually done. Of course, as the project is moving along your contractor should provide you with a running total so you can monitor the price.
Contractors also like using estimates because they won’t lose money. Commercial construction is full of unknown variables. If they are doing a commercial remodeling job and they give you a fixed priced and then discover some unexpected pitfalls during the actual job, they might have to eat that money. With an estimate (time and materials) both the contractor and the building owner pay for what actually happened.
Cons of estimates
Unfortunately, because of the nature of estimates, the cost of your project can easily get out of hand if a lot of unexpected problems pop-up. Before hiring a contractor, you should call his past clients and ask whether or not their project stayed close to the original estimate price.
The most important thing to do is hire a contractor that will give you regular progress reports in an easy to understand format. A competent contractor will keep your project moving according to the original plan. However, it’s your job to pick out materials in the beginning and avoid changing your mind a lot. This can help make sure your project’s cost doesn’t take on a life of its own.
Also, estimates will require a lot of paperwork during the construction process because the contractor must keep a running total. He will have to provide progress reports, receipts, and time cards as the project moves along, and this might become frustrating for everyone involved. It will take his focus off of the actual remodeling work.
Also known as a fixed price proposal, a bid will outline a specific amount of work and the specific cost for that work. A bid is created when the scope of the work is clearly defined by the client. It is understood and laid out in writing that the final price will not exceed the fixed price, unless extra work is added by the customer. This is known as a change order and it is the only thing that can change a fixed price. Otherwise, if everything goes according to the original plan, you will pay that price.
Pros of bids
Bids are popular for commercial construction projects because often, commercial construction is quite expensive and businesses will need to secure financing. In order to do that, you will need a price to bring to your bank. Bids allow you to do this more easily than estimates. Many people like the predictability that comes with a bid. You will be able to write checks for predictable amounts as the project moves along. You can rest easy in knowing that your project won’t run up a huge bill without you knowing.
Contractors often prefer bids because it allows them to present bids while focusing on the quality of their work rather than line items. It lets them stand out from the their competition on more than just line item costs. Also, if the project is completed quickly with no surprise costs, they get a little extra profit.
Cons of bids
Since contractors want to make sure to cover their bases when deciding on the fixed cost, you, the owner, might end up paying a little more than you would have with an estimate. The last thing your contractor wants is to mess up his bid and run out of money to complete the project, so he puts a little cushion in there.
Sometimes fixed price contracts aren’t as detailed as a building owner wants it to be and they don’t have the transparency that an estimate has. For example, you are unlikely to see the contractor’s markup in a bid. Also, you might not be able to choose the subcontractors that you want because the general contractor’s final fixed price relies heavily on his ability to choose subs.
Clearly, both estimates and bids have their pros and cons when it comes to commercial remodeling projects. It seems that estimates would be better for short term, small remodeling jobs while bids would be better for large scale projects. In addition, some contractors offer hybrid style contracts in which you can pay for time and materials, but agree upon a “not to exceed” amount.
Understanding the difference between these types of contracts will allow you to make more informed decisions when it comes to your commercial construction or remodeling project.