We are seeing a small bit of life in the pipeline for private projects. However, these owners and developers may have some tough times coming up. It is not from being unable to finance the project but from taking bids that are too low.
The firms contemplating construction are expecting the exceptionally low bids to make their projects, not break them. Where they may have a project at $100 per square foot, they are expecting bids around $70 to $80 per square foot. When they run these through the financial performance calculations, they become giddy with excitement on the anticipate profit margins! And why shouldn’t they, it is a 20% to 30% cost reduction.
However, they are ignoring the ancient adage of if it looks too good to be true – it is too good to be true. The sad thing is there are contractors in the market today that will not hesitate to bid this cheap, which is essentially below cost. The owners that are giddy tend to think only good profits will come from this level of pricing. Sometimes they even fail to make sure the contractors and subcontractors have payment and performance bonding in place.
What happens to the pro forma calculations when a contractor goes under and it costs more to complete the work? What happens if more than one subcontractor on a project defaults on a contract? What size of impact does the extra time and cost have on a project? Consider the dispute resolution arena where disputes can take several months to years to settle, even if a bond is provided.
What happens to the project in the mean time? Will the owners or developers be able to take a hit on their end if a project goes down the drain? Will the successful contractors be able to survive the unsuccessful owners and developers?
Oh By the Way… Owners and developers can prevent these problems prior to bid time by using independent bid evaluation estimates to weed out the low ball bidders that can create problems on their project. Prime contractors can help by not using these goofy low bids. After all, the lowest price is not necessarily the best deal for the owner or for the contractors.
