Why Your Contractor Bids Look Nothing Alike and How to Fix It

William Reid (: 00:00

All right, everybody, you've done the hard work. You've gone through design. You've got your plans and you've sent them out to three contractors and the estimates come back. One says 680,000, another says 820,000 and the third one says 510,000. And you're sitting there thinking, are these people are all looking at the same house?

today we're going to solve it for good. In episode 50, I told you that wide bid variance is often a plans problem. In episode 51, we talked about when to pull bids in the design process. And today, episode 52, we're talking about how to pull those bids so you can actually compare them.

How do you level the playing field? How do you look at the three proposals from three different contractors and know with confidence that they priced the same project? The answer is something called a work breakdown structure and is one of the most powerful tools in this entire process. Let's dig in.

Let's start with why. Because before we fix the problem, we need to understand what's causing it. And I promise you, the root causes are not what homeowners really think. The biggest reason bids vary is also the simplest one.

plans and your design probably have gaps. That's the

contributor and

I'll say it again, in all the previous 51 episodes of this podcast, I've probably mentioned it once or twice about how the thoroughness of your plans, your specifications, your design, your products, the materials, everything getting documented ahead of time so that everybody is looking at the same thing when they go to estimate your project. Biggest number one problem.

People don't want to invest in it, they want to rush through it, architects want to blow through it, interior designers leave a lot of gaps open and you don't know it as a homeowner and it needs to be managed later. Meanwhile, we're getting bids all over the place. That's what we're going to talk about today. So ⁓ a contractor can't price what isn't specified. So they guess and every contractor guesses differently.

One contractor might assume builder grade windows and other prices premium aluminum clad windows. Your plans didn't say so. So they filled in the blank. Both contractors did exactly what they're supposed to do with incomplete information. The problem isn't them. And what really exasperates this situation is as the good contractors sit with you with your plans and your design and have a lot of questions.

They might bring up the window question. Well, I don't see any specifications for the window product that you want to use in your home. Have you thought about that? Do you know anything about that? Has your architect or designer helped you make those choices? And then you get into a dialogue with the contractor about windows and quality of windows and you make a decision. You might say, well, let's go with the least expensive or no, I really want a high quality window. And that contractor prices in

what you want. But the second contractor comes in, doesn't ask that question. You don't think to ask that question because you don't know that they need to know that. And they come in with a bid that has very basic vinyl windows, let's say on the project. And that is not something that streams all the way through to the homeowner because you don't

understand all of the complexities and the things that they need to know. And also there's hundreds of things going on here with design decisions that either have been made or haven't been made. So this is what happens. This is a very interesting dynamic in this world because the good contractors sometimes price themselves right out of a project because they are looking out for you where the other ones aren't and you didn't even know it until it's too late.

when you're under construction, and then the question gets asked, well, I just priced in a basic vinyl window, so what, did you want something different? And then you're thinking to yourself, wait, didn't I tell him? no, wait, I told the other guy, the other guy that was the higher bidder. So you get where I'm going here? So this all goes back to the plans, and we're gonna get into some real details about how to organize this so you don't forget these things.

and that you can ask the contractor the questions or even better your architect or designer.

This is kind of crazy, but there's been some studies on this and I don't know how accurate they are. I wouldn't be surprised, but industry data shows that bid variances can be up to 100 % difference from one bid to another on the same project. Not 10%, not 20%, 100%. And almost every time when you trace it back, it's a plans problem. It's a design problem. It's a lack of information.

And it's factored or multiplied because the owner, you, the homeowner, didn't even really realize that.

Another root cause besides this blaming the designer, blaming the contractor or blaming the designer, sorry, and the architect and not providing enough information on the plans, there's also another factor that lies in here and that's called the workload factor. You know, most homeowners may not realize that a busy contractor will often bid higher on a project, not because they're gouging you, but because they don't need the work.

a slow contractor may bid lower to win the job and neither number necessarily reflects your project's true cost. A contractor 30 % higher than the others may actually be your best contractor. They just happen to be booked out right now. This is why you need a format that strips out the noise and shows you the actual numbers,

what they're actually pricing, not what their current pipeline situation looks like. So here's the root cause almost nobody talks about and it's one of the most important ones. Every contractor has their own internal method of assembling an estimate, their own spreadsheets, their own cost categories, their own way of grouping work and rolling up numbers and that's not wrong.

That's just how the industry works. This is still a very fragmented industry with a lot of different players and characters in it and everybody still comes at it their own way. Even when they use software solutions to do the estimating, they still are building their own methods into the software. So one contractor may group all exterior work into one line. Another breaks it into six categories.

One uses a standard industry division format. Another uses a custom spreadsheet they've built over 20 years. Another gives you a narrative proposal with costs buried inside paragraphs. Here's the direct quote from my book, Section 3.104. When you receive estimates in various formats, it becomes impossible to compare costs and be confident that each contractor

is included every single thing to meet your expectation. And that's the real problem. It's not that the contractors are necessarily wrong. It's that their systems are different and you're trying to compare documents built on completely different frameworks. So when you look at that bottom line number, which is really every homeowner's natural instinct, that number tells you almost nothing without knowing what's behind it.

William Reid (: 07:27

So what do you do? You turn the tables. Instead of accepting bids in whatever format each contractor wants, you issue the format. You tell every contractor, here's how I want your costs organized. Fill this in every line. That's what a work breakdown structure does. Work breakdown structure, or WBS, is a standard

term or terminology in the world of construction

getting to it in segment three, but first I want to make sure you understand what's actually inside every line of a contractor's estimate because once you know that, the whole thing gets less mysterious.

So here's what we've touched on. There's four root causes of complete confusion for you. Gaps in your plans, a contractor's workload coloring their numbers. Each contractor's unique internal system and the fact that no two proposals are really built the same way. The WBS structure solves all

the cost.

Before we get to the work breakdown structure itself, I want to bring back something that we covered earlier in the design series, something that's going to make everything we talk about click a lot faster. And I really suggest you go back and ⁓ pay attention to that design series that I did, where we're interlacing the design process with the work breakdown structure.

and the estimating stages of a project. So it gets a little mixed in there, but I'm trying to break it all out for you. So if you've been a listener, you may remember we've talked about specifications, materials, equipment, and scope of work, the three components of a complete spec package. So if you went through those episodes, what I'm about to show you

same language you use to specify your project is the exact language contractors use to price it.

Every single line item in a contractor's estimate, every category, every trade contractor is built from four elements. Labor, materials, subcontractors, and equipment. that's it, every line. Let me break each one down. Labor. This is work performed by the GC's own employees.

framers, laborers, foremen, supervisors, anything that they're actually, the work they're performing under their own umbrella as employees. So their time has cost, including burdened labor, which I've, which I covered in episode 49. And remember that build rate can reach 60 to a hundred dollars an hour, sometimes even more before, before any profit is applied, overhead and profit is applied.

to that labor rate. So labor is typically the largest single cost element on any project. And in this day and age, it seems like it's getting to be more and more disproportionate that the labor costs are going to continue to rise as supply continues to diminish. And a contractor who underbids labor is almost guaranteed to run into problems. And those problems land on your project. Materials.

lands. We covered two distinct types of materials during the specifications episode. Both types show up here as line items in the estimate. Construction materials. Everything that goes into the home before the drywall is complete. That's a good way to frame it.

There might be some things that cross over back and forth, but this is how I've thought about it for 35 years is construction materials, everything built into the home before the drywall. Okay. Drywall actually technically would be construction materials. Anything after that would be finished materials. So like things like windows and doors and skylights and roofing and siding and framing lumber and concrete and masonry fireplaces.

These are your structural and building envelope materials. Your architect specified them, hopefully,

You don't necessarily see all these materials when your home is done. Some of them you do, like the windows and the skylights, but that lumber behind the wall, that concrete underneath the foundation, you're not going to see those materials. Those are what I call construction materials. And then finished materials. Everything attached to the walls, floors, and ceilings that makes up the aesthetic of the home. Cabinetry, tiles, stone, hardwood, flooring, molding.

paint and plumbing fixtures, lighting fixtures, hardware. These are what your interior designer likely helped you select and specify.

Both types show up as line items in the work breakdown structure within their respective categories and I'll walk you through that in a minute. So when you were specifying them during design, you were building the exact foundation for these pricing numbers. That's the connection here. So...

And here's the key insight. Incomplete specifications on either type of material means a contractor fills in the blank on their own and every contractor fills it in differently and some are going to ask you and some aren't and you may not realize the difference between the two when you go to start to analyze your estimates. So pay very careful attention to those contractors that seem to care, that seem to want to know what you really want and include in the price.

and consider that when you're evaluating your estimates. And this goes back to not just selecting the low bidder. We're talking about who is providing you the most comprehensive solution and understanding your wants and needs beyond what's written into the plans or not written into the plans, right? Subcontractors, your plumber, your electrician, your HVAC contractor, roofer, tile setter.

a voltage specialist. Each sub brings their own number to the GC And that sub already has their own labor, materials and equipment baked into their number. So when a general contractor goes out and gets estimates on their HVAC system, it's very common that they will get a proposal back.

from their subcontractor, providing all the labor materials and equipment to install the entire HVAC system, not separate labor number, separate material number, and so on and so forth. And then your GC takes that number and plugs it into their estimating program, and they put their profit and overhead on top of that in order to manage them and take responsibility for them.

Equipment. So just like materials, equipment falls into two categories. And the word equipment gets used two completely different ways in construction. So let's be clear about both. Construction equipment. So construction equipment are the equipment that your general contractor has to either rent from a rental place, rental facility, or they have their own equipment such as

scaffolding and cranes and lifts and forklifts and concrete pumps and whatever, they have their own equipment that they have to allocate a cost for for the wear and tear of that equipment. You won't see them in the finished home. They were just how they got the work done. They're a project cost to the general contractor.

and that carries and passes on through to you. Installed equipment, ⁓ so there are going to be cases where certain special equipment gets installed in your home, especially some of the more complex specialty custom homes, but equipment can be classified as your HVAC systems, your water heaters, your appliances, your plumbing fixtures, electrical panels, low voltage system.

This is equipment that your architect and MEP engineers specify during the design. The mechanical systems and products that live inside your home permanently.

So when your engineers specified that on-demand water

that HVAC system, those plumbing fixtures during design, they were creating the spec that the contractors now price. Design and estimating are the same process, separated by time. The WBS is where they reconnect.

So if you went through the specifications episode where we broke down materials, equipment and scope of work, you already have this framework in your head. The WBS is where that design side language connects to construction side costs. Same project, same categories, same language. Now there's a dollar figure attached to every one of them. So this system carries all the way through early on.

during the design process there are there's this list of categories that we're going to go over I'm going to touch on them today and then I'll see if I can include an attachment I probably can't include an attachment for the actual total cost categories tell you what if you reach out to me I'll send it to you

so we're attaching a dollar amount, right, to every single one of them. And here's why this matters when you're reading bids. When you see a really low number in one category, say plumbing comes in $15,000 less than the other two estimates that you got from other two contractors, you now know what to ask.

Did they spec the same fixtures we specified during design? Did they include the installed equipment that we documented? Did they assume a different scope of work? You can investigate instead of just accepting the number. Your design side specifications are your reference point. That's the payoff for going through the design process correctly. So now let's build the structure that organizes all of this.

William Reid (: 17:13

All right, here we go. This is the segment I've been building towards, the work breakdown structure, the WBS. So if you've been following the design series, you've actually seen this before, and you can also see the full detail list in the book. But back during the design process, I introduced the WBS as a way to organize your specifications for a project. So every category of construction organized by a division number. So

again let me emphasize that point is there's a decision-making framework that goes all the way through every stage of construction and all the materials, labor, and equipment that are assigned to each one of those categories. So now we're going to use that same framework but this time we're attaching costs to each category and more

we're handing that framework to your contractors and telling them hey fill this in.

So here's another quote from the book. Comparing estimates between contractors is at the top of the list of challenges for any homeowner. This stems from not knowing how to control the process and instead accepting bids in varying formats, making it impossible to know who has the most accurate estimate. Fortunately, this

can be overcome with good plans and specs.

and assist them to wrangle it all in. And this is also one of the big contributors of why homeowners make poor choices

selecting contractors purely by the price because they find out the hard way that things were not included that others hadn't.

So the system is the work breakdown structure. You stop accepting bids in whatever format the contractor wants to send it to you. You turn the tables. You issue the format. Every contractor fills in your categories with their costs side by side. That's how you get apples to apples. Now, you might get a little bit of pushback from contractors that have been around a long time, but...

I don't know, we might be surprised that if they have a framework that they've been given and they can extract out of their tools that they have, that they're doing their estimating and just fill that in, I don't know, I think they might be okay with that. But if they aren't okay with that, then that's a little bit of a red flag to me. It might require them to do a little bit more work. I'm not 100 % sure.

I just know that this is how I've always estimated projects and I've actually shared this set of categories with clients, showed them the numbers by category. It helps people understand where all the money is going. Because just looking at one big number, I don't know, it's kind of hard to swallow as a homeowner.

This method I'm telling you about is how professional developers and commercial contractors and owners run estimating and contract of selections and comparisons. And with the right tools, homeowners can do exactly the same thing. So I'm going to walk you through part of the divisions just to give you a sense. But the WBS is organized into numbered divisions, categories that

follow how a project gets built from the ground up. So let me walk you through some key ones so this clicks.

Division 22, for example, site preparation and excavation. One of the most variable categories, what's underground, rock, clay, bad soil, each contractor makes assumptions about what they'll find. This one category alone can swing tens of thousands of dollars and also trigger disclaimers in their proposals that some may not have and some may have.

and you're going to have to factor that in into your decision making process. What I call division 23, demolition and disposal. Does the low bidder include the Holloway? Did they assume a dumpster or disposal fees? In a lump sum bid, you really would never know. In the WBS format, it's its own line. You can see exactly what each contractor included. And this is another really good example of why

the scope of work term that I've been using all throughout this podcast is important because either you or your architect or your owner agent are going to write a scope of work by category so that you can hand that off to the three candidates that you're planning to get estimates from and say here's my breakdown structure, here's the scope of work for each category so they can read include.

disposal fees, assume so many dumpsters or whatever, or include whatever debris removal devices that you want, equipment that you want, right? So that, because there's nothing worse, and this happens where a contractor says, I just need to get a check for the dump fees. And you're like, what do mean, what? Why do I need to pay for the dump fees? You're my general contractor. You're doing this whole project. well, I didn't include that. Now what do you do?

And it's nowhere written in the document that they didn't include it. So now you've got some tension there, right, that just doesn't need to be. I mean, a good contractor would specify that, whether they included it or didn't include it. But again, we're trying to avoid all of that garbage that happens in this world. So division 34 through 38, there's different variations here, is your plumbing, your electrical, mechanical, the three big trade categories.

each of these subs bring their own number each GC marks them up differently when these are separated out you can instantly spot where one contractor price dramatically different from the others and ask why now here's a good pause point we can talk about is there there's a I think there's 20 or 30 of these categories I guess there's more 30 to 40 of these categories depending on the project

And the simplest way to look at this is asking the contractor, and this is because this is all you really care about is please include all the labor, materials, equipment, subcontractors, and your profit and your overhead built into each category so that you can just compare apples to apples between what contractor A is charging, completely installed or constructed.

versus contractor B completely constructed. Now some contractors will show their profit overhead on a separate line item at the bottom of their estimate and that's often with

cost plus or time and material projects, which is a whole different type of contract. So we're going to talk about contracts down the road here, but for the most part, I'm thinking that you are hiring a contractor that is doing lump sum contracting, but is also breaking out the cost so that you can do some comparison and understand where your money's going and understand where maybe there's areas that you could actually, you know, revise or reduce down.

to get within your budget. Another one is like Division 47 I call a cabinetry. This is very highly spec dependent by you or your architect and designers. You know in a 15,000 difference here almost always means one contractor price stock cabinets and then there another price semi-custom or custom cabinets. Your specs should define this. If they don't, you get fill in the blank pricing.

and they're not going to be the same from one to the other. if you look at your cabinet breakdown, you see one guy's at 15, another guy's at 35, geez, why is that? And you can go back and go, well, did I tell them what I wanted? No. Then why are we such a big difference? And we're going to talk about that in a minute. Division 65 could be painting.

I even have a Division 90, which is specialty, kind of a catch-all category. So there's a whole list of categories in between drywall,

countertops, slabs, stonework, you know, there's all kinds of categories that go along with this that you'll be looking at. And this is a common way that things are priced out for a project. So you shouldn't get too much pushback on this as far as filling in the blanks.

So let me kind of give you a really good idea of what the benefits are of doing this. ⁓ Kind of a high level bullet point list here of why you would really go to the trouble of doing this. One, it gives you a method to organize your project costs. Pretty simple. Two, it ensures you've thought of all of the areas of construction. You don't just hope the contractor covered everything. You can see it.

3. Provides a format to outline specifications and scope of work. 4. Allows you to compare contractor costs side by side. And beyond that, when you enter a contract, the WBS becomes the framework for your payment schedule on the project.

folder system for organizing all the specs, drawings, and contractor correspondence.

throughout the project. And this has been one of the best parts of developing the BuildQuest application I'm working on is in once we go through the beta testing and we do our launch, I'll be launching an additional module to do all of this for you. So you'll be able to have a place to house all of your documents, all of your specifications, issue bid requests to your contractors for them to log in and fill in.

Can imagine that, having all one central location for you to do all this? Even for you designers and architects and contractors, this might be a good tool to qualify clientele, to present bids to them. I mean, who knows where this thing's gonna go, but it's just growing. It's just exploding, actually. So the WBS doesn't just help you compare costs. It changes the dynamic of your relationship with your contractors from day one.

you walk in as an informed owner with a system. Not a confused homeowner hoping the numbers make sense. But there's one thing inside every estimate that can undo all of this progress if you don't know how to handle it. It's called an allowance. And it's coming up next.

Okay, I want to touch on this. It's a little out of order, but I just want to touch on this because this word allowances has been just abused throughout the industry. But okay, so the bids are back. You've got the WBS filled in with the three contractors and one of them is dramatically lower than the others. So before you call that contractor and say, hey, you're hired, I need you to look at one specific thing, allowances.

An allowance is a placeholder. It's a contractor saying, I don't know exactly what you're going to choose for this item. It could be for tile or fixtures or appliances or cabinetry or stonework. There's just a whole list of that stuff. So I'm going to just put in a number that represents what I think you'll spend. So the question is,

Are they guessing honestly? A legitimate allowance reflects realistic market pricing for your finished level that you want. So a low ball allowance is used to win work. The contractor knows you'll upgrade. They plan to recover the gap through change orders. And sometimes it's not even consciously by the contractor. They just don't know. So they put a number in. Nobody specified the material.

Nobody declared what allowance should be put in it's not like they're being Devious, it's just that a lot of them don't and then there are some that do do that, right? So they plan to recover the gap through change orders, right? Is is a possibility and that's not a hypothetical that's a documented industry pattern out there that

really is kind of makes everybody uncomfortable.

So here's what I want you to do when your bids come back and if you use the WBS structure, however you want to do it. So list every allowance and every bid and compare them side by side. This is where the WBS format really pays off. If one contractor has a $500 tile allowance and the other two have $3,000, that's not a deal, that's a gap waiting to blow up. So for any allowance where bids vary significantly,

ask the contractor what assumptions that they've made, ask them what product they priced. Now honestly you shouldn't be asking any of this stuff because you should have already told them what to price out. What we're talking about here right now is compensating for inadequate design, lack of decisions by you, deferred decisions, not enough guidance from your designers. All of those things compound into what we're talking about now.

Ideally, we don't give anybody wiggle room on that. We tell them exactly what they want. Or at the very least, you say, want you to include $3,000 worth of allowance for the tile material in the project, regardless of what you think it's going to be. It could be 20,000. But at least you have the same comparison, right? If you leave that door wide open, this is where it screws with all your numbers.

So a quality contractor will be able to tell you exactly. A contractor trying to win on a low number will get defensive. So think about it that way. Here's a rule, an allowance heavy bid with honest realistic numbers is almost always safer than a clean bid built on fiction.

Another thing we can talk about is that you can be proactive about in your project and we did talk about that in the design process too, is pre-identify options and alternates in the bid package. You ask contractors to price specific scenarios separately so you understand the cost of each decision before you commit. For example, price the primary suite with

tile that we specified and also price it with an alternate tile. So now you have real numbers to make that decision, not guesses.

Another example of options or alternates is you actually may want to have them segregate the pricing of one of the bathrooms, the complete bathroom project out of the baseline bid and provide an alternate to, you know, remodel existing primary bathroom. Or you may want to get an option for hardwood flooring throughout instead of carpet and vinyl. If anybody uses vinyl anymore out there.

⁓ There's all just think how much more is it to upgrade the windows to an aluminum cloud window from a vinyl window? So these are all the things that during the design process that you can identify with your designer that you want to understand the cost of so that you can make informed decisions and Providing that information ahead of time to the contractor as opposed to after they submitted their bids

is a much cleaner way. It can get really messy when you start asking them to extract out how much more is it to upgrade the windows, then it gets, it just creates double the work, honestly, for the contractor. So think about how you want to option things out and that will help everybody, including you.

William Reid (: 32:13

All right, I wanted to get into the actual bidding process and how to go about implementing this ⁓ strategy to obtain bids. I'm running out of time today. So I'm gonna move that over to the next episode and how you can go about actually doing all of this. But here's what we covered today.

Contractor bids vary for four reasons. Gaps in your plans, the contractor's current workload, every contractor's unique internal pricing system, and inconsistent proposal formats.

The work breakdown structure solves the format problem by giving every contractor the same categories to fill in. Every line item is built from four elements, labor, materials, both construction and finish, subcontractors, and the construction equipment. Those same material and equipment categories you specify during the design show up right here as pricing line items. Design and estimating are connected. The WBS is where they meet.

Allowances are the hidden variable and the most common source of budget surprises. A low number in any one of those categories isn't a deal. It's a big question. That's the framework. That's how you go from three confusing numbers to a real apples to apple comparison.

So I do get into this in the work breakdown structure in the book, section 3.104, along with the full division breakdown 22 through 90. And you can grab the book at the link in the show notes.

And if you're, if you are interested in following along with what I'm doing with this digital platform called build quest, you can join that beta testing at build quest.co. So if this episode clicks something for you, if you finally understand why your bids look nothing alike, send me a message on Instagram at the awakened homeowner or leave a comment on YouTube.

And if you know somebody right in the middle of this right now getting estimates confused by the numbers, share this episode with them. This is exactly what they need. So coming up in the next episode 53, we're going deep on the bid package. What exactly goes in it? How do you assemble it? What makes a difference between a bid package that gets quality responses and one that gets ignored? That's next. I'm Bill Reid

your home building coach. And my mission is to enlighten, empower, and protect you. Now let's go make it happen.