Electrical Estimating – Page 2 – Candels Estimating & Training

Bidding and Relationships – Why are they so Important?

Bidding and relationships have a lot in common. Sometimes, in the midst of completing an electrical estimate or take-off, you are suddenly faced with a decision of whether or not to bid the job. It happens all the time! You have every intention of bidding the job but then you have doubts based on quality of drawings, relationships with the GC, or even the schedule. Although we have the ability to “say when” we do not always do it…maybe it is because we have too much time or money invested in the project or our egos get in the way.

The following guidelines may help you to analyze bidding and relationships as well as the projects that are worth bidding–and those from which you might want to walk away.

Bidding and Relationships

Perhaps the biggest question you may want to ask yourself is “Do I have a relationship with the general contractor or the customer?”

If you do not have a relationship with the GC, have you checked into the kind of company with which you may be dealing?
Have you run a Dun & Bradstreet report on them or have you checked with others who may have done business with them already?
Or do you think they are using you for a check price?

In terms of having a relationship with the customer and not the GC, this relationship may or may not help you. You must determine if they will work with you and if they will give you feedback. Sometimes the end customer relies on the general contractor or construction manager to ultimately choose the subs, so even a relationship with customer may not be your golden ticket.

Beyond having a relationship with the GC or the end customer, do you truly understand the scope of the work? If you do not fully understand the scope, any other decision you make regarding the project may be immaterial. You must review all bidding documents prior to determining whether to bid a job. In reviewing the bid documents, you must also consider if you have experience in the type of project you are considering bidding. There is no substitute for experience. Having experience on a particular type of project will clue you into the potential pitfalls that could cost you escalated labor time or inflated material costs or both.

Is this for real?

A seasoned estimator will notice the signs that a project may not be “real.” Maybe some of you are asking the question “How can the job not be real if it is out to bid?” Often an electrical contractor will work like crazy to complete an estimate because the GC’s time schedule is tight and he needs a price “right away,” only to find out later that they were simply looking for a check price or just a budget. Other times, an electrical contractor will design-build the job only to later determine that because the bidding documents were so incomplete, the job will be rebid in the future. Similarly, an electrical contractor will design the job assuming that the general contractor will give them the job simply because they completed the electrical design/layout work, only to later find out that the job will be rebid with the new information provided by you. (Again, know who you are dealing with and what the actual scope of work is.)

The size, visibility, location, schedule and number of general contractors bidding the job will dictate how many electrical contractors ultimately bid the job. And, the number of ECs bidding the job should factor into your decision on whether to bid the job. Obviously, more bidders on the project lessens your probability of actually getting awarded the job. A large bidding pool often leads to “an auction” whereby contractors offer to meet and beat the lowest bidder’s price. So even if you are the low bidder on bid day, it doesn’t necessarily mean that you will be awarded the job.

Type and Tools

Other issues to consider are the job schedule, your experience with the type of project, and the tools and resources you would need to complete the project. Often job schedules are extremely tight.

Do you have the necessary resources to finish the job on schedule?
Do you have the manpower to complete the project on schedule or will you have to coordinate “borrowing labor” from a fellow electrical contractor?
If so, do you have relationships with other contractors to share labor?
Can you complete the job with your “B” team and still keep the customer happy?
Finally, do you have the tools and resources to complete the project? If you must invest in tools to complete the project, it will increase your job costs and ultimately hamper your profitability. Having the necessary tools up front will obviously add to your bottom line.

Sometimes drawings that are issued for a project are not completely engineered. Perhaps the circuiting has not been completed; there are incomplete panel, lighting, or mechanical schedules; or there are too many “holes” in the drawings. We find daily that design teams are putting incomplete jobs out to bid and try to get you buy into a guaranteed maximum price for a partially engineered project. This may be a signal that the job is still in the design phase. If this is the case, it is entirely possible that the job will come out to bid again, meaning you, your estimator, or your outsourced estimating team will need to redo the job, adding time and cost to the price of bidding the job. If the drawings are incomplete and you do not have a relationship with the GC, you may want to walk away. If not, then there are still other issues to consider before you decide to submit a price for the job.

Is the job you are bidding in “your territory?” If you are not from the area, are you familiar with the licensing and permit requirements in the area? Is it a heavy union area?

Quotes

Now, let’s get to quotes. If there are a considerable number of ECs bidding the job, it is possible that one or two of them will receive the “whisper number” from the supply house, giving them considerable advantages on bid day. So the question to ask yourself is “do I have a good relationship with at least one supply house, ensuring that I will get a good number on bid day?” Once you get the right numbers from your supply house, then you must analyze your direct job expenses versus your competitors. Have you checked to ensure that the numbers you are carrying are correct and competitive? Again, is your labor force competitive?

Once you have analyzed that, it is time to apply overhead and profit to the job. Every electrical contractor has a differing view on how to apply overhead to a job. Some apply it by raising the hourly rate to a “fully loaded rate.” Others apply the overhead to a certain percentage of the job cost. Neither is right; you simply just need to fully understand it and be consistent with all projects. If you do not understand the principle of overhead, it is time to sit down with your accountant or an estimating consultant and review the components of overhead, their value, and the most appropriate way to apply this cost to your estimate.

Finally, we cannot forget PROFIT. Electrical contractors typically anticipate between 7 to 15% profit and almost always that number can be achieved. If by chance, you get the job and you do not achieve your anticipated profit levels, an analysis of why the job went sour may help to avoid those particular pitfalls again.

Bidding jobs may be one of the most nerve-wracking tasks that an electrical contractor undertakes on a regular basis. By paying attention to the signs and asking yourself some of the questions above, you may have a better handle on “knowing when to say when” meaning you will be better equipped to bid a job, or be confident enough to walk away when the signs and signals are there that this is not the job for you. Knowing your strengths, asking the hard questions, and not being afraid to stand up to those with unreasonable demands will ultimately lead to a more profitable electrical contracting business. And, isn’t that really what it is all about?

It’s The Day After Bid Day…

Your bid has been submitted. So, what comes next? You might be surprised to find out that many contractors do nothing once their bid has been submitted and then they wonder why they do not win more jobs. The good news is that a few simple steps can change your success rate.

There is so much more to be considered besides your price. First, let’s start with your product. Consider the service you provide as a brand. Does the general contractor know anything about your brand? If he does, that’s great! If he does not, he might consider you a “no name generic” and consider the bid of another “brand name” electrical contractor. The point is to know the clients to whom you are bidding! If you do not know them now, get to know them. We can site many cases where an EC had been so persistent in trying to win a project with the GC, that he finally relented and gave him a small piece of the job, opening the door to relationship development. The point is to follow up, follow up, follow up! The simplest thing you can do is ask for the order. If you don’t ask straight out, then you may never get the opportunity to do the work.

There are many ways for the industry to get to know your brand. Start bidding more work. You may not get the work right away, but your name will become more familiar with general contractors. Name recognition cannot be underestimated! Join a trade or civic organization to allow you to network with the right people.

Lastly, invite the project manager for the potential job to one of your current job sites and show them what you can do and what you know. Make sure that the general contractor knows about your capabilities. Do you have the manpower, tools, and equipment to get the job done on schedule? This is particularly important when schedules are condensed. Do you have history in the type of work that you are bidding? Give the general contractor a resume of the jobs you have completed to ensure them that you can get the job done. Project managers buy jobs; very rarely does the general contractor’s estimator.

Some contractors try to win more jobs by cutting their price. However, if you sell on price, you may get the job but what have you sold exactly other than your price? Sell your company’s capabilities and benefits to justify your price! Generally, chasing someone else’s number is not a profitable venture. Do you really know if the number you are chasing is real or is the GC just trying to get you to lower your price? Is the number based on an actual take-off, not on a square foot or hunch number? Again, we have seen so many instances of contractors chasing someone else’s number just to get the job, thinking that he is going to make it up in change orders. That may never happen.

If you know you can’t do the job for someone else’s price, walk away! If you have identified your true costs by doing a quantitative take-off, you will know at what price you can realistically complete the job.

By building your “brand,” selling your company’s reputation and capabilities, and following up once you submit your price, you will undoubtedly see better results. Don’t wait for the phone to ring. Be proactive and sell your price!

Win the Bid: Key Points

Win the Bid: Key Points for the Bidding Process

Win the Bid: You know by now that the estimating process involves much more than the take-off. The process starts before you even look at a set of plans, and the process never really ends. This process involves an almost endless loop of deciding which projects to bid, working on relationships, completing take-offs, submitting your bid, and most importantly, following up with everyone involved.

Rather than recap all the nitty gritty, I would like to leave you with some key points to focus on.

Win the Bid: Relationships are beneficial!

To help win the bid, first and most importantly, never underestimate the power of relationships! Cultivating relationships with construction professionals and with local business people has long-term value and will help with any future estimate you need to make. If you think you do not have time, please reconsider. The more effort you put into relationships, the more you will get out of this process.

Make sure that the general contractors to whom you are bidding know who you are! When all other factors are even, I truly believe that the company “with the relationship” will win the bid almost every time. And, although I really did not touch on this previously, keeping in touch is easier now than it has even been. Social media outlets, such as Facebook and LinkedIn, make it easy to help you connect with industry professionals and to keep abreast of the construction industry in your area. Look for links in common if you need an introduction.

Keep Bidding

Always bid work while you are busy! If you think you don’t have time, make some. I know a lot of you may not have a healthy backlog of work, but the only way to get a backlog, is to bid, bid, bid! That is not to say that you should be indiscriminate about what you bid, but you should bid enough work to keep your electricians busy and productive. Contractors tend not to make the best decisions when there is no work on the books and you bid jobs below your cost just to “keep the guys busy.” This leads me to my next point.
Never bid a job below your cost (unless there is a solid strategic reason to do so)! This statement assumes that you know your costs, so please always complete a detailed take-off so you can determine all the material and labor requirements of a project. You can always check your take-off versus a tried and true square-foot number, but you should never base your bid on a square-foot number. Remember, every job is different, and you should always review the plans and specs to know what you are dealing with. Reminder: cultivate relationships with your vendors as well; they are the ones that will ensure you have the “right” number on bid day.
Sell your company and its benefits! Please do not assume that every company to which you are submitting a bid knows exactly who you are and what your company is capable of. Again, when all things are equal, the company that presents itself the best will have an edge over its competition. To help win the bid, package your proposal so it stands out. For example, before bid day, send a package to the person in charge of receiving the bids. Include your scope (proposal) letter with “price to follow,” as well as a company capabilities flyer/brochure, and your business card. Follow up on bid day with your price. That way the company gets exposure to you twice in the same bid process. And just a little food for thought, if you do not have the experience or capability within your company to develop a flyer or brochure, contact your local community college or university. There are a lot of students out there clamoring for experience that would welcome the opportunity to help your company at a fraction of the cost you would pay going to a big marketing agency.

Follow Up!

Finally, follow up, follow up, follow up! As the saying goes “the squeaky wheel gets the grease.” While I am not advocating being a downright pest, you should absolutely follow up after you submit your price. Try to find out where you are in “the mix” of bids and see what you can do to close the job. Also, please do not chase someone else’s number unless you know you can absolutely do the job for that price, and that the number you are chasing is actually based on a quantitative take-off. (And again, remember that general contractors tend to “bend the truth a little” so be aware you may be bidding against yourself!)

The process of bidding projects never really ends. It’s a continual loop. I can tell you from experience that producing an estimate does get easier over time if you follow at least some of my advice.

Specification Review Checklist

Reviewing the specs is important to the estimating process.

When completing a construction specification review, an estimator should follow a systematic approach. The specifications, include information for each CSI division, however, none should be reviewed in isolation. Even though our focus is electrical, also known as CSI Division 26 (and previously Division 16), information related to the electrical specs will be shown in other sections and must be reviewed.

Why do we look at other specs sections other than electrical?

An untrained estimator may think that reviewing the electrical specs is enough. It’s not. A thorough construction specification review must include the “front end” of the specs (CSI Division 0 and CSI Division 1). This information includes the drawing list, Invitation to Bid, bid scopes, and summary of work. It may also include the project schedule, (Can you get it done it time with your team and tools?), walk through information (Often this in mandatory!), existing conditions, alternates, and allowances. This section also includes bonding information.

Never bid a job you cannot bond! Knowing your bonding capacity is important. Believe it or not, some contractors don’t know that there is an individual project amount bonding capacity, and an aggregate amount. The aggregate amount is the total dollar amount of all projects. If you have never bid a job with a bonding requirement, know that it takes time to get a bond. If you would like to work on projects requiring a bond, find a local agent and work on your bonding before you bid your project!

Before we move to reviewing the electrical specs, let’s talk about some other spec sections that are worthy of review.

In a previous blog post, I mentioned construction specification Divisions 10, 11, and 12 which detail specialty equipment and furnishings. The reason to review these specs is to determine if there is an electrical component with any of the equipment, and the requirements for the electrical contractor. You don’t need to spend hours reviewing these specs; it’s more like a quick review so you can watch out for these systems in the electrical specs and on the drawings.

Existing Conditions

It goes without saying that you want to know existing conditions. Will there be demo involved? Will the demo involve the removal of hazardous materials, such as ballasts containing PCB’s? If so, as an estimator, you want to be sure to cover the removal cost if it is part of your scope. Sometimes salvaged materials will be required to be returned to the owner so it is best to have this information before you bid the job.

Concrete

Concrete is a related spec section to electrical because some electrical equipment will require the use of a concrete foundation, such as a transformer or generator pad. Pole lighting may require bases made of concrete. Know your scope. Sometimes another contractor is responsible for concrete work, all or in part.

Fire and Smoke Protection

Fire stopping is required on projects. Generally this is a boilerplate spec section, however, be aware of specialty devices that cost more than the norm. Some pathways cost hundreds of dollars, so it is best to give this area of the specs a quick review to be sure to cover the cost of potentially expensive items.

Building Modules

We have seen more modular building. As a matter of fact, yesterday I reviewed a job for a KFC. I did not realize that the building was going to be built in four sections at an offsite warehouse. The customer wanted a price for a “stick built” electrical estimate as well as an idea of what it might cost for the electrical including modular construction. We have also seen projects where a portion of the building is built offside. One such project was a hotel where only the bathrooms in certain areas of the building were modular. It’s good to know this up front because you may unknowingly cover the costs for lighting fixtures, receptacles and other devices that are part of the modular construction and therefore not in your scope! With the rising cost of labor, I would suspect that modular building will become more prevalent.

Heat Tracing

Heat tracing is one of those gray areas where it’s not always clear “who owns what.” It’s good to review the specs in this area to see if the electrical contractor will be providing the circuit for the heat trace only, or the cable as well. The same would apply to electric heating mats, snow melt, and the like. If you have a question about your scope of work and cannot find it in the project documentation or specs, always consult with the general contactor and/or issue a Request for Information (RFI).

Next time, we’ll discuss all the hidden gems in the electrical specifications!

Project Specification Manual

The project specification manual is also known as the specifications.

Always review the entire project specification manual!

You’ve heard me say this many times before. “The devil is in the details.” The project specification manual, also known simply as “the specs,” contains a lot of details! You will notice as you review Division 26, or the electrical specs, to refer to other construction specification sections. Always review those sections for related work and how that pertains to the electrical scope of work.

Division 00 is where it all begins!

An estimator should review Division 00, or the “front end docs” first. Review all project information here, such as alternates, allowances and special job conditions. Always refer to the construction specification index for all specification sections, so that you can easily review information that is pertinent.

Always review Division 10, 11, and 12, Specialties, Equipment and Furnishings!

Divisions 10 through 12 of the construction specification detail information about special equipment and furnishings. While the electrical contractor might not have to furnish these items, every project is different. Always review and never assume what you own and don’t own! In class today, we reviewed a rather extensive project’s construction specification. It included photoluminescent egress markings, exterior sun control devices, dock levelers, projection screens and motorized project lifts, and roller shades.

What are photoluminescent lights?

Photoluminescent egress markings have become much more prevalent because they mark the egress path when both normal and emergency power fails. They are not electrical and recharge with regular light. We have seen some projects where the electrical contractor provides and installs this lighting. However, on the project we reviewed, the specifications clearly stated that the items must be installed by a contractor having 10 years experience. That still doesn’t solve the mystery of whether the electrical contractor on this project had to furnish the lighting with installation being subbed out to a qualified contractor. Honestly, we discussed that the construction specification does not stand alone. Sometimes you have to get additional information from the drawings, and other contract documents. You never know where you will find that missing piece of the puzzle to answer your question.

Sometimes sun control devices are just awnings!

We determined that the exterior sun control devices were not motorized, so we moved on.

Dock levelers may or may not require additional devices to be provided by the electrical contractor.

The dock leveler was provided with a disconnect and the control switch, so we will look for the electrical requirements of this item when we start the take-off. I just finished a project on Friday that had a dock leveler and control switch, but the electrical contractor was responding for providing the “traffic” (red/green) light at the dock. Look for notes on the drawings for additional items that you have to provide! In this case, there was a lighting symbol shown and a part number, so we added this to our list of items that need a quote.

Projector screens and lifts often require control wiring provided by the electrical contractor.

Rarely, if ever, does the electrical contractor have to provide the projection screen or projector lifts, and that was the case here. We were more interested in determining the control conduits and wiring that would be provided by the electrical contractor. Again, more information regarding this was shown on the actual construction drawings.

Roller shades can be motorized and they might be hidden on the drawings!

Finally, roller shades are often a stealthy item! We did determine that the roller shades were motorized, so that we could look for the circuits on the electrical drawings. I cited an example in class of a recent project we completed in Massachusetts. The roller shades were not clearly marked but were shown as a dotted line around the perimeter of a large room. All that the drawings mentioned was a simple note. Upon further review and a subsequent RFI document that was issued, we determined that there were 51 shades! You never want to not cover the circuits and small equipment connections for 51 items!

The project specification manual review can be a daunting task! It does get easier with practice!

We warned our students that it would take us about 16 hours to review everything that you should know about the construction specification. So far, we have reviewed related sections to electrical, as referenced in the specs. Always review the entire spec, paying close attention to related construction specification sections!

Construction Addenda and Scope of Work

Candels uses the acronym “B.A.D.A.S.S” to remember the steps in construction estimating. The “A” represents addenda and the “S” represents scope of work.

As you may recall from previous blog posts, we discussed B, bid forms and invitation to bid; A, alternates and allowances; and D, drawings. Having this acronym to refer to will ensure that you don’t miss anything when reviewing the project documentation.

The “A” (Addenda) and the “S” (Scope of Work) of B.A.D.A.S.S.

Sometimes an addendum will be a simple narrative, while other times and addendum will include new drawings. These new drawings may have changes “ballooned out” so they are easily identifiable, however there are times when there are changes that are not identified! Always try to overlay the drawings to ensure that you cover any changes!

You learn something new every day!

Every time we teach the electrical estimating apprenticeship, I make the statement “You learn something new every day.” While Marc and I have had this business for 15 years, during this class, Carrie noted that she has seen in the specs that if the addenda received are not listed on your proposal, your bid can be automatically rejected. Honestly, I never knew that! That is why I love class participation. You never know who will come up with a great idea or comment about the estimating process!

Pay attention to the scope of work!

A statement about the scope of work is important to review before you start your take-off. You may assume that a certain system is part of the work, but the scope of work may prove otherwise! Pay close attention to “materials supplied by others” and “work under separate contract.” Sometimes the owner may supply lighting fixtures while the electrical contractor will install them. Other times, a complete system will be under a separate contract, such as fire alarm or tel/data wiring, devices, terminations, patch panels and racks for example. Note: even if a system is under a separate contract, you, as the electrical contractor may be responsible for raceways! Be sure to review all the documentation so you cover the costs appropriately.

Other Things to Look For: Mock-ups, extra materials, and warranties!

At the risk of running long on this blog, I do want to mention three things that can potentially impact the cost of your project.

Mock-ups

Mock-ups are common, especially in hotels. A mock-up is usually set up in a warehouse and an entire room, such as a hotel room, will be built so that the designer can see if the room will work as intended. What this means for you as an estimator is that you have to carry the material and labor costs of lighting fixtures, devices, and wiring for the mock-up. These devices are usually retained by the owner. Make sure to carry enough labor for your electrician to “adjust” anything that the designer deems necessary.

Warranty

A one-year warranty is pretty standard on most projects, however, some projects require two or even a five year warranty on some parts. If that is the case, you want to be sure to carry the cost of the extended warranty. The cost will depend on the item(s) you are covering. A good tip, if the warranty is not specified, is to put a statement in your proposal to the effect of “warranty limited to the extent of the manufacturer’s warranty.”

Spare Parts

Extra materials and spare parts should be covered in your estimate. If your project requires supplemental fixtures as noted in the specs, make sure that your vendor quotes these items! We like to include notes to this effect on our count sheets to ensure that the vendor is aware of the extra materials. Spare parts are also known as “attic stock.” Again, make sure that your vendor quotes these items.

Next up is a discussion about the specifications. We always say that the “devil is in the details” and the specs prove that most of the time! Stay tuned!

Electrical Estimating Apprenticeship – Profit is not a dirty word! (Day 2)

Day 2 of the electrical estimating apprenticeship focused on three things. First, profit is not a dirty word! Second, relationships are important, and finally always ask for a full set of drawings!

Profit doesn’t happen by accident!

In terms of profit, it really is the goal of any “for profit” business. Profit doesn’t happen by accident though. A good estimate will ensure that all costs are covered. Effective project management will assure a profit is made when the job is finished. There are several variables that will determine if a profit is made; material costs and labor costs. Material costs include commodity material costs and quoted (packaged) material cost. Your estimate should include material pricing that is within 3 to 5% of your “buy” price.

Vendor relations are important for quoted (packaged) items!

How to ensure that you get the “right” price for your lighting, switchgear or fire alarm package on bid day? That’s right….relationships. It is imperative that when you send your counts and specs over to your vendor that you include the right bill of material. It’s no secret that the “first counts in” are the ones that the vendors quote, but that isn’t to say that you should sacrifice accuracy for speed in getting the counts out. How do you get that “whisper number” on bid day? Cultivate relationships with your suppliers and be sure to “spread the work around” among the vendors you use.

Labor is the most variable part of a project’s costs.

Labor efficiency relies on the human factor, making labor one of the most variable project costs. An average person works 40 hours per week, during daylight hours. Any variance to the “average” can and will result in labor inefficiencies. When you bid your project, be sure to account for things that can effect labor performance. Labor can be effected by labor schedule, weather, building height, project size and so much more.

It is the project manager’s responsibility, along with the help of the job superintendent and foreman, to ensure the labor goals are met. Generally, when you are 90% complete with a project, you should have approximately 20 to 25% of your labor hours left to complete the project. I know that sounds like a lot, but the electricians are generally the last craftsmen off the project, and a lot of work is required once other trades complete their work.

Relationships, Relationships, Relationships!

Never underestimate the power of a good relationship with the general contractors you work with (or want to work with) and your vendors. Cultivating relationships is important. It is certainly much easier to conduct business with someone with whom you have a good relationship, and it may open doors to private projects that never “hit the street” so to speak. How do you build relationships? A good way is to join business networking groups, or even civic groups such as the Rotary Club or social clubs such as the Elks. It will vary from place to place.

Have you ever noticed how happy people are when you bring them something that they don’t expect? A box of donuts may not get you a job right away, but it may help you get in the door of a contractor that won’t take your phone call. Sometimes the little things make a big difference. Be creative!

Access to a full set of drawings is critical in the estimating process.

At the risk of this blog getting too long winded, I have to mention that when you start a project, make sure you have a full set of plans. Although you will be bidding on primarily the electrical drawings, you typically are responsible for anything shown on any of the drawings. For example, some projects will have electrical, lighting design, and interior design drawings, all showing lighting fixtures. These drawings may not be coordinated so you may have to count off three different drawings for the same area!

Read the drawing index.

A quick review of the drawing index will be the roadmap to the drawings you should really review. Yes, you are responsible for anything electrical that is shown on the drawing, regardless of whether it is shown on an architectural or mechanical drawing. Make it a habit to review all the drawings, using the index as your guide. Remember, it is the estimator’s role to determine the true cost of a project. Sometimes it’s a puzzle and you never know where you’ll find the missing piece.

Stay tuned for this week’s thoughts on the electrical estimating apprenticeship!

Bonding with the Specs

Specifications, scope of work, the walk-through and bonding are important pieces of any project, large or small.

Before you uncap a highlighter or open up your counting and take-off software, a thorough review of the specifications is critical to your estimate. Also, the scope of work, invitation to bid, and any other information provided should also be reviewed to totally understand the project.

Specs and Scope

The project’s specifications provide the road map to complete your take-off, estimate, and ultimately get to your bid price.

The front end specifications (Division 1) provide general project information that applies to all trades. The responsibility schedule or a scope of work document will detail “who owns what.” Never assume that everything you normally bid is part of the bid package on every project! Make sure to thoroughly understand the scope of work for your trade!

The specifications should also detail the project schedule. Be sure you can meet the deadline. Do you have the labor and equipment to complete the work on time? All over the U.S., contractors are experiencing labor shortages in the trades. Unless you know you can staff the project, you should only bid what you know you can complete.

The project schedule and liquidated damage clause should be reviewed in advance of bidding a project. Liquidated damages could cost thousands of dollars per day! Even when failure to meet the schedule is no fault of your own, you can be held responsible, particularly when you are one of the last trades off the job. When you experience delays due to other trades, always document the situation and put the owner/GC on notice, so as not to be hit with liquidated damages charges.

How important is the walk-through?

Another piece of information included in the front end of the specifications will be regarding the project walk-through. Often the walk-through is mandatory. Regardless, you or a designee should always attend this meeting. Valuable project insight can be gained about job site conditions and restrictions, working access, working hours, parking or materials storage space availability, and even the presence of asbestos.

If the walk-through is mandatory and someone from your company does not attend, your company will not be able to submit a bid. A walk-through also allows you to “see” what may not be shown on the drawings, such as existing equipment, access to the equipment, and general site conditions that may be hard to depict on the drawings. If the walk-through is not mandatory and you cannot attend, consider using a tool like Google Earth to get familiar with the job site. Do you ever wonder what we did before we had the internet and Google?

Let’s Bond

The front-end specs also include bonding requirements — be it bid, performance, or payment bonds. There is a lead time in getting a bond, so the earlier you request one, the better. A bid bond, usually no more than 10% of the project value, is subject to full or partial forfeiture if the winning contractor fails to either execute the contract or provide the performance or payment bonds. A performance bond, also known as a contract bond, guarantees satisfactory completion of a project by a contractor. Finally, a payment bond is a surety bond posted by a contractor to guarantee that its subcontractors and material suppliers on the project will be paid. Any of these bonds can take 3 to 4 working days to acquire. A good working relationship with your bonding company can reduce the lead time tremendously. And, if your relationship is really good, you may be able to arrange to write your own bonds through power of attorney.

Finally, the general contractor or construction manager may require you to carry “extra hours” to be used at their discretion and they may require you to carry allowances for contingent items. Often these are high-ticket items, so you want to make sure to include them in your proposal. More and more often, general contractors, especially larger ones, are including “500 extra hours to be used at their discretion,” feeling that they are pre-buying hours that can be used for change orders at a discounted rate.

Trade Specifications

After review of the Division 1 specs, you should read your trade’s specification section very carefully. Often your trade’s specifications will also refer you to other related specification sections and it goes without saying that you should read those as well. The bottom line is to understand the requirements of the project, and what your trade “owns” relative to the work on the project. As the old saying goes, “the devil is in the details.” If there is a conflict between the specifications and what is shown on the drawings, try to pinpoint a reference within the text that defines what information supersedes other information. You cannot rely on old wisdom that “the specs supersede the drawings.”

For example, the specs may state that outside duct banks shall be run in Schedule 40 PVC. However, a drawing note may state that all duck banks shall be run in galvanized rigid conduit (which costs a lot more than PVC!) If you can’t find a specific reference about what information supersedes, submit a Request for Information (RFI) for clarification. At all times, you want to be sure to cover your costs, yet at the same time, you do not want to cover any unnecessary costs that could unnecessarily inflate your bid price. Whatever you do, always qualify your bid! For example, it could be as simple as “Carried Schedule 40 PVC for all duct banks per specifications. Did not carry GRC per drawings.”

Specs are often considered “boiler plate,” meaning they do not always contain project specific information. And to be truthful, it can get tedious reviewing hundreds of pages of what may seem to be worthless information. For example, for electrical, the contractor will look for wiring methods, fittings required, testing and coordination studies, and the responsibility of providing starters and disconnects. As a general rule, if the project is funded privately, a contractor can deviate from the specifications. However, if the project is publicly funded, each trade will be bidding on “plans and specs,” meaning no deviations from the plans and specifications.

Be aware that specs may include information on systems that are not shown or referenced on the drawings. That doesn’t mean that you shouldn’t cover the cost for these items if they are in your bid package.

A thorough review of the specifications helps you map out the entire bid process and set the stage for the next part of the estimating process — the take-off.

Material Escalation: Managing Commodity Prices and Bids

Material escalation…think about it. When you hear the words “steel,” “copper,” “aluminum,” “cement,” “petroleum,” “natural gas,” “lumber,” and “gypsum,” what thoughts or words come to your head? Crazy? Volatile? Unpredictable? All of those words are pretty descriptive of the prices of these commodities. For any contractor or supplier involved in construction, many of these commodity items and their volatile pricing escalations will pose some concern in terms of your bid price. Do you plan for a pricing increase and include that contingency in your bid price, possibly causing you not to get a job? Do you include a price escalation clause in your contract to cover unforeseen price variations? Or do you just ignore it entirely?

Not being a lawyer, I am not here to offer legal advice. You should consult your attorney for that. But, armed with some valuable information, you will maximize your time with your attorney to protect your company, and also the outcome of the job in question.

Most jobs that contractors bid are based on a “fixed price.” These prices are based on material prices estimated before the beginning of the project, even though the project may take a year or more to complete. It is entirely logical to think that material prices will rise from bid time to completion time, but major price variations often cannot be anticipated or estimated.

Contributing Factors to Material Escalation

So what has caused this volatility in commodity pricing? Many world events have changed the commodity market. The American political climate has changed the way the world sees trade deficits, and recent events have caused crude oil prices to quickly increase. Former rapid economic development in Asia, especially China, had stressed the market for steel. China consumes about 25% of the world’s steel and they are willing to pay top dollar for it. Much of the steel went to build the infrastructure for the Olympics and the 2010 World Games. Growth in other parts of the world, such as India, Russia, and the Ukraine, have limited exports from these countries so they can meet their own domestic demand.

Storms and natural disasters have also affected the commodity market. Hurricanes and other storms that hit the Gulf Coast region stressed the market for PVC. Material shortages, high energy and transportation costs, and consolidation of production facilities have also attributed to material cost increases.

Resultant Market and Job Site Changes
The magnificent rise in commodity pricing has resulted in market and job site changes, such as job site theft, lack of firm price quotes, higher project costs, delayed or cancelled projects, increased litigation, liquidated damages, and extended overhead.

Avoiding the Pitfalls
There are a number of things a contractor should do in order to manage price escalations. By being proactive in the pre-construction phase, you can add a material cost escalation clause into your contracts. This proactive approach would be based on specific cost indexes, for specific products reaching a specific price point escalation. By doing so, this would avoid large contingencies that the contractor would need to build into their bid price.

As a side note, as gas prices increase, you may want to check your overhead. Rapidly increasing prices may effect your bottom line!

On the flip side, if your company chooses not to address the issue of material price escalation, a number of scenarios could occur. A retroactive quantification of material price escalation will involve “forensic” material escalation analysis, using cost indexes, material lists, and trigger points not quantified in advance.

A contractor should always monitor his costs versus the estimate. Strong pre-construction service is essential for setting costs, scheduling, determining alternative methods and solutions, providing early identification of issues and risk management.

Contracts with Material Escalation Clauses

Essentially what a material escalation clause accomplishes is shifting risk from a supplier of goods and services back to the owner. Fair and efficient sharing of risks can save many projects from legal battles and claims. It has been stated that “If you communicate the unexpected in advance, the unexpected becomes the expected, and the expected is easier to handle than surprises.” I like that.

Material escalation clauses can be “cost based” or “index based.” A cost-based clause compares actual incurred costs with bid costs. AGC Document No. 200.1, Amendment No. 1, requires the parties to establish a series of baseline prices for material identified by them as potentially “time and price” impacted and to provide a method for adjusting the contract price as a result of fluctuations in those baseline prices.

An index-based clause tracks and adjust prices based on numerous existing material price indexes such as the Producer Price Index “PPI” published by the Bureau of Labor Statistics and one published by the Engineering News Record.

Contracts without Material Escalation Clauses

Contracts written without material escalation clauses that experience exceptional price increases in commodity costs will undoubtedly be subject to claims. The outcome of these claims will be based on factual circumstances and whether the contract language and applicable legal doctrines provide a basis for relief.

It does make practical sense to provide some relief to a supplier or contractor rather than face a default precipitating the need to re-procure. Relief will avoid claims, saving everyone time and money, avoid a breach, or avoid a contract to terminate or go under. No doubt a replacement contractor would pass the price escalations onto the owner anyway, will probably not guarantee the previous contractor’s work, may possibly cause time delays on the project due to remobilization, and there may possibly be a drop in quality. Owners who allow a price escalation clause may really benefit in the end when you consider the previous statement. And, it really is unlikely that the owner will be able to avoid price escalations altogether.

Legal Terms and Doctrines
If you need to confront the owner with a material escalation issue, you may or may not have a legal battle ahead. Many lawyers will rely on the Latin phrase of Roman origin “pacta sunt servanda”, which roughly translated means “the contract is law.” Therefore, the contract binds parties to absolute liability for the unconditional contractual promise.

Some of you might also have heard the term “force majeure”, which relates to when an event occurs that is beyond a party’s control that would invariably lead to the non-performance of a contract. If you use the force majeure clause in order to help with escalating material costs however, it probably will not help you. It usually only allows a contractor additional time to perform, rather than additional money to perform.

There are also some legal doctrines which a contractor may be able to use as justification for material cost escalation.

“Commercial impracticability” deals with an unforeseeable change in a basic assumption upon which the contract was based. However, since commodity construction prices have been fluctuating widely since about the year 2000, this would be a difficult doctrine upon which to base your argument knowing the history of price escalation.

“Impossibility” occurs when defects in the plans and specifications arise for which the contractor is not responsible. However, courts will not apply the doctrine of impossibility just because performance of the contract has become more expensive than previously anticipated.

“Mutual mistake” deals with situations where the mistake was a fact that caused a severe imbalance in the risk of a project. Explanation….

“Frustration of purpose” must be a substantial claim, requiring demonstrating certain facts to satisfy legal criteria. This is very difficult and rarely successful. A party’s purpose of the contract must be completely, or almost completely, frustrated by a supervening event. Without it, the transaction would make little sense.

Regardless of a contractor’s situation, the “burden of proof” lies with the contractor. Either they have to make the owner/developer understand it and compensate them for it through a change order or they will have to fight for it in court. Either way, it’s on them.

Sample Material Escalation Clause: If, during the performance of this contract, the price of significantly increases, through no fault of contractor, the price of shall be equitably adjusted by an amount reasonably necessary to cover any such significant price increases. As used herein, a significant price increase shall mean any increase in price exceeding % experienced by contractor from the date of the contract signing. Such price increases shall be documented through quotes, invoices, or receipts. Where the delivery of is delayed, through no fault of contractor, as a result of the shortage or unavailability of _______, contractor shall not be liable for any additional costs or damages associated with such delay(s).

Federal Statutes

Some contracts, especially those for state and federal procurement and public works, contain “escalation” or “price adjustment” clauses. Federal Acquisition Regulation FAR § 16.203-2 allows for “fixed price contracts with economic prices adjustments to be used when there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance.” FAR § 16.203-2 recognizes three types of escalation clauses, including adjustment clauses tied to established prices, adjustment clauses tied to actual costs versus bid prices of labor or materials, and adjustment clauses tied to indexes of labor or material.

The concept behind these escalation clauses is that the government agency ultimately will save money when contractors cannot predict commodity prices with assurance because the agency will avoid the large contingencies contractors would need to build into their price quotations.

If a contract in which the provision of goods predominates, the Uniform Commercial Code UCC § 2-615 excuses performance if the rise in cost is due to some unforeseen contingency, such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a increase in cost or altogether prevents the seller from securing supplies necessary to his performance. If a contract involves providing services as well as goods to a jobsite, the UCC will not apply.

Finally the American Institute of Architects AIA Article 4.36 allows a contractor to make a claim for additional compensation if he incurs additional costs for several stated reasons and “other reasonable grounds.” In addition, AIA Article 8.3.1 states that “contract time shall be extended if contractor is delayed for labor disputes, fire, unusual delays in deliveries, unavoidable casualties or other causes beyond his control.”

Managing Escalation During the Project

The best way to avoid trouble is to avoid trouble, remembering all the while that the most influential part of any construction project is money. Money can keep a project going or it can stop it. Monitoring your progress on a job will bring potential issues up early, hopefully avoiding job loss or stoppage.

A contractor should always monitor his costs versus the estimate. Strong pre-construction service is essential for setting costs, scheduling, determining alternative methods and solutions, providing early identification of issues and risk management. In other words, while you might not be able to control costs (of commodity items), you can manage them. Historical escalation rates will also help a contractor predict long-term material escalation.

Other Options
What if the owner will not agree to a material escalation clause? A contractor does have other options. Purchasing materials in advance or increasing your buying power by buying the material for several projects at once, may be helpful. Perhaps the owner will pay you for materials for his job that will be procured and stored in a bonded warehouse, eliminating possible price escalations. You can also include a contingency budget, or an adder to your bid, for price escalations.

Conclusion

There are a number of issues to consider when bidding a job in this tricky economy with crazy commodity cost fluctuations. First, you should address the issue of material price escalation during the negotiation phase of a project. Review and revise your contracts now because procrastination in this case will not pay! Also, do not wait until escalations begins affecting your project, your profitability or your company’s sustainability to try to convince the owner that it should absorb the price increases. Communication is the key to the success of any project, especially one where there might be pitfalls. Involve the owner early and act as partners to complete the job on budget and on time.