Purchasing and Negotiation Training

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

 Editor’s note: This is Part II of a two part story on procuring construction services.  Part I provides an overview, Part II deals in contracting matters.

The gold rush 

When a public project is advertised for bid, virtually any GC, absent a pre-qualification system which is still rare in the public sector, can bid.  Since liens are prohibited in the public domain, the successful bidder must post payment and performance bonds to assure the public that all contractual requirements will be met by the GC and that all payment obligations will be discharged.  A contractor must be credit worthy to obtain such bonds and the limits of such credit indicate the contractor’s resources and abilities.

In the private sector, the rules are few and a function of the wills, ethics, and sophistication of the contracting parties.  An owner may prudently require its successful GC to produce performance and payment bonds and often, the GC will require the same of its subs.  Except in rare cases of state law requiring subs to publicly bid government work, buyers for owners must be aware of a practice called bid shopping.

This is the practice by which a contractor who is awarded a project will “shop the job” amongst sub bidders to drive the prices down, there by gaining a greater profit.  Theoretically owner loses because those “buyouts” could have been achieved by the owner but instead are pocketed by the GC.  A good argument can be made that the extra margin added to bid prices to cover the bid shopping pressure artificially drives up the costs of construction.  The adage, “a word to the wise” applies here.    

Girls got guns out west, so all y'all watch your manners

Rounding up the strays

Buyers of construction services must decide on an approach.  You can run the foot race to the low number and lug all the baggage that comes with it or you can choose to apply the principles of Total Cost of Ownership.  Why not qualify and evaluate your construction GCs and subs as you would any other supplier?  The cost of failure is too high, no matter how low the price. 

Suppose that a private or public owner needs construction services.  Traditionally, that owner would hire an architect (sometimes engineers) and seek bids from general contractors (GCs) who then collect bids from sub contractors (subs) and their sub-contractors (sub-subs) for the many individual trades.  The GCs would then offer the Owner a lump sum bid. 

Today’s options for delivery of construction services extend beyond the traditional and include Construction Management (CM), at risk or for fee, Design/Build, and a variety of forms of contract may be deployed.  Brief details on these terms are found in the Glossary. 

Whether you choose Design/Build, or hire a CM or a GC, be advised that these prime contractors (first tier in the chain) actually perform very little of the on site construction work.  By most estimates, more than 90% of the work will be performed by subs and their sub-subs.  The prime contractor may ride herd, but the workhorses work are the subs.  In terms of Total Cost of Ownership, the quality, service, and delivery will be largely in the hands of the subs.

Buyers must be alert to the potential pitfalls resulting from payment problems like mechanics liens for improvements to real property for which payment is not made.  In Part II, we’ll talk more about available precautions like surety bonds. 

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 Glossary II

Bid shopping       the practice by which a GC will shop amongst sub bidders to drive the prices down, there by gaining a greater profit

Buy out      the additional profit obtained from bid shopping

Cost Plus    a contract best suited to unclear scopes such as unknown subsurface or emergency conditions

Lump Sum                    a contract best suited to precise scopes as presented in detailed drawings and specifications.  This form of contract is common in building construction. 

Mechanics Liens           a form of payment protection for parties (mechanics) that improve real property with construction goods and services.  The lien process varies by state and can force a buyer to pay twice for the same work if payments to lower tier sellers are not made by upper tier buyers who have received payment for this work. 

Not to Exceed or Guaranteed Maximum Price (NTE, GMP)          a contract intended to assure the buyer/customer that that a generally specified scope will not exceed a certain guaranteed maximum price

Performance bonds       an instrument of financial guarantee provided by a surety (insurance company or bank) that performance standards specified in the contract shall be observed by the contractor or the surety will do so

Surety bonds       an instrument of financial guarantee provided by a surety (insurance company or bank) that payments accruing due to liabilities under the contract shall be retired by the contractor or the surety will do so

Unit Price a contract best suited to imprecise quantities and expressed by a price per unit, such as $/SF.  This form of contract is common in “horizontal” (not building) construction.