Question

A contractor says that he intends to "low-ball the bid and make up for it on change orders." What does he mean?

Short answer

The contractor plans to win the project with a low bid, intending to increase costs later through change orders.

Step-by-step solution

Understanding the Term 'Low-Ball the Bid'

'Low-balling the bid' means that the contractor is submitting a bid that intentionally underestimates the true cost of the project. This tactic is often used to win the project by appearing as the lowest bidder among competitors.

Explaining the Term 'Change Orders'

Change orders are modifications to the original construction contract, which often include adjustments to the scope of work, design, or materials. Such modifications can increase the project's cost.

Analyzing the Contractor's Strategy

The contractor plans to secure the contract by offering a low initial bid, then use change orders to increase the project's cost once the work has begun, thereby 'making up' for the low initial bid.

Implications of the Strategy

While this strategy might allow the contractor to win the bid and potentially earn more profit through change orders, it could lead to budgetary problems for the client and possibly damage the contractor's reputation if perceived as unethical.

Key concepts

Bidding Strategy

In the world of construction contracts, a bidding strategy refers to the approach a contractor takes to win a project. One common strategy is known as "low-balling." Here, a contractor deliberately bids lower than the actual estimated cost of the project. This tactic often aims to outbid competitors by appearing as the most cost-effective choice. However, while low-balling can secure a contract, it's critical to consider the risks involved. Submitting a bid that is too low can lead to problems like unforeseen expenses or quality compromises down the line. Additionally, this strategy might involve recovering initial losses through future cost adjustments, such as change orders, which can strain relationships with clients. Ultimately, a strategic and ethical approach to bidding must balance competitiveness with realistic cost predictions to ensure sustainable business practices.

Contract Management

Once a bid is accepted, efficient contract management becomes crucial. Contract management involves overseeing and administrating the agreement's terms to ensure all parties meet their obligations. For contractors, this means closely monitoring the project scope and timeline. It also involves managing any changes or variations that arise, known as change orders. Effective contract management helps to minimize risks and prevent disputes. It ensures that project goals are met within the agreed budget and schedule. Successful contract managers must maintain clear communication with clients and subcontractors, promptly address any issues, and ensure all work complies with legal and industry standards. By doing so, they maintain trust and prevent misinterpretations of contract terms.

Cost Estimation

Cost estimation is the initial step where a contractor projects the overall expenses involved in completing a project. Accurate cost estimation serves as the foundation for drafting a bid. Elements such as labor costs, materials, equipment, and other overheads are considered in this phase. Estimators use historical data, supplier quotes, and project-specific details to arrive at a realistic project cost. Mistakes in cost estimation can lead to significant financial losses either for the contractor or the client. Low estimates might result in underestimated bids, while overly high estimates could mean losing the contract to a competitor. Maintaining a balanced and precise cost estimation can aid in winning bids and ensuring project profitability.

Construction Contracts

Construction contracts are legally binding agreements between the contractor and the client. They outline the project's scope, costs, timeframes, and specific responsibilities of each party. Construction contracts often involve complex details and require thorough understanding. These contracts serve as the blueprint for the project, dictating every aspect from beginning to end. Common types include lump-sum contracts, cost-plus contracts, and unit price contracts, each having its own implications on risk and reward sharing between parties. It's critical for all involved to read and understand the contract before signing. Any amendments or unforeseen issues are typically resolved through a structured process involving change orders. By establishing clear terms upfront, construction contracts provide a framework to avoid disputes and ensure smooth project execution.