The plans were completed and submitted to three custom home builders for a fixed-price-contract quote. The plans and specifications were well defined and factual for bidding and pricing purposes. The six-week bidding allotment went by quickly and the bids were then submitted. One of the original bidders dropped out, but that spot was immediately filled by another qualified contractor.
The bids were submitted by mail to the architect on the specified date. The quotes were $2.32 million, $2.35 million, and $2.38 million respectively, a $60,000 spread between low and high bid (a 2.5 percent variation). Need I say that the architect and the owners were surprised?
The Jacksons were dumbfounded. How could this be? Tom quickly got out his calculator. “The bids range from $580 to $595 per square foot,” he stated. “These quotes are just crazy,” the couple blurted in unison. “Those prices aren’t even anywhere in the vicinity of what we were expecting!” “Is the house coated in gold leaf, or is it an unusual design?” Tom asked. “You know we never asked for the Taj Mahal.”
“Oh, not at all,” reassured Kyle. “These contractors must be too busy to take on your project. Quoting stratospheric prices like that is way out of line and borders on unprofessionalism.” And then he added, “They probably don’t understand how fundamentally simple the assembly and efficiency process is for the 65 beams and the curved roof structures.” Then he mumbled to himself, “These guys are making a big mistake by alienating KK Architecture.”
The architect and owners entered a strategy session to identify the best plan of attack. Many questions befuddled the group. Why were the quotes so beyond their anticipated budget? Was a quote spread of less than 3 percent normal? All the price quotes were so crazy expensive and so far away from the $175 to $225 per foot estimate. Somebody must be doing something wrong or making too much money. What were other owners paying for their homes in this new community? Does the 1,435-square-foot, four-door garage have a big cost impact? What about the raised-seam copper metal roof? All to no conclusion.
After several days, the architect telephoned the owners with some great news. He had found a reputable contractor that was willing to take on the project for a price of $1.4 million to $1.6 million. Furthermore, the low bidder explained in writing how the owners could potentially save another $300,000 by making adjustments in a number of areas. But they would only divulge this information if they were awarded the contract on a cost-plus basis. The owners hired the low-bid contractor using a cost-plus contract in the hopes of saving money and participating in a portion of the cost-versus-value evaluations that go into any construction project. They envisioned that there would be a joint cooperative effort between owner, architect, and contractor to deliver the best home for the best price.
All three original bidders were incredulous that anyone could build that house for a substantially lower amount. They were frustrated and had similar questions. They wondered why no one had informed them of the owners’ target budget of $175 a square foot. That could have saved everyone a lot of time, effort, and heartache.
Reality Check. The architect and builder were billing for their administrative time and managerial efforts as the project progressed. After several short months of this, the owners minimized the architectural supervision to save money. Additional months went by and payment requests were submitted monthly. Six months into the project, the home was approximately 45 percent complete, and 90 percent of the budget had been spent. No one was watching the budget because it was cost-plus. This was the “good deal” the clients had naively agreed to.
The contractor had justifications for the exhausted budget: “Concrete and steel costs have gone through the roof, and the excavation outlay was nearly tripled due to the rock shelf system we encountered.” The owners felt confident that every dollar being billed was well spent and justified due to receipts, line item invoice listings, etc. But how would they know? Are clients cost experts?
The Jacksons finally scheduled a meeting on site with the contractor. The date came and went, and the contractor’s phone was disconnected. His office was now vacant, and the landlord explained that the tenant owed him four months rent. Subs and suppliers began calling the owners for payment. It was soon revealed that few, if any, trades or suppliers had been paid by the contractor during the previous 12 weeks.
