Subcontractor Bidding Process

Experienced developers and owners of high value residential construction projects (collectively "Owners") know that the subcontractor bidding process is the last best opportunity to significantly affect the cost of construction. To succeed the Owner must be engaged in the subcontractor bidding process by 1) setting the rules for subcontractor bidding in the contract with the lead construction manager or general contractor (referred to herein the "CM/GC"), and by 2) being engaged in the subcontractor bid solicitation, evaluation, selection, and subcontract negotiation process.

The overall goal of the Owner is to establish its leadership position on the construction project (the "Project") with the goal of controlling the Project's cost and maximizing the prospect of achieving a finished product that meets the Owner's quality and schedule goals.

Generally, the Owner does not contract directly with the Subcontractors (except in multi-prime projects). Therefore, the Owner must work through the CM/GC to accomplish its subcontractor goals. This means that the tools needed by the Owner to influence subcontractors must be imbedded in its contract with the CM/GC. Elements of the Owner's contract with the CM/GC that are critical to the Owner's goals include:

1. Subcontractor bidding procedures
2. Special rules regarding self-performed-work and/or subcontracting to related parties
3. Requirements for the subcontractor's pricing approach such as:
   1. Fixed-price
   2. Guaranteed maximum price (GMP)
   3. Cost-plus-fee
   4. Time and materials (T&M)
4. Pass through clauses that require subcontractors to adhere to the same rules required of the CM/GC, such as:
   1. Records retention
   2. Audit requirements
   3. Field reporting requirements
   4. Adherence to the Owner's code of conduct
5. Billing procedures, including requirements for lien waivers, back-up documentation, and status reporting

Before bids are solicited, the CM/GC should provide the owner with a breakdown of how it proposes to categorize the project into the various trades. This breakdown will later serve as the basis for the Project's schedule of values (SOV) and periodic billing forms (to be discussed in detail in later articles). The breakdown should include the names of the subcontractors which will receive a request-for-bid ("RFB") from the CM/GC. The Owner should review the CM/GC's proposed RFB recipients to confirm that the subcontractors listed meet the Owner's pre-qualification requirements.

Ideally, the Owner will wish to have the CM/GC solicit at least three bids for each major trade. The bid solicitations (request-for-bid or RFB's) should be as thorough as possible to minimize the unknowns faced by the subcontractor. This will reduce the amount of money included in the subcontractor's bid proposal for contingencies. RFB's should be issued early enough to allow the subcontractors time to study the materials provided and to ask questions of the CM/GC, or others on Owner's team. Keep in mind that subcontractors that ask questions are more likely to be serious about the opportunity and to provide the best, most informed, bid proposals.

Subcontractors should be required to bid 100% of the scope of their designated bid solicitation package. Each subcontractor should be provided a breakdown of the categories within its trade that are to be priced separately in the subcontractor's bid. Also, the CM/GC should not be allowed to provide services to, or bill for services in, any of the trade work categories, unless approved in advance by the Owner.

The Owner should attend the bid opening for all major subcontracts, particularly if the Owner allows self-performed-work or bids from parties related to the CM/GC.

Bid evaluations should be documented and all bid submittals should be retained for a period that coincides with the Owner's records retention requirements. The bid evaluation sheets should not allow the CM/GC to pencil in contingencies or allowances for charges directly for the CM/GC.

Once the bidders have been evaluated it is up to the CM/GM to select the winning bidder that the CM/GC has identified as the lowest responsive and responsible bidder. At this time, contract negotiations will occur and if successful the subcontract will be executed.

On some construction projects, particularly residential projects, the CM/GC will engage subcontractors without requiring a fixed price. These subcontractors will likely provide an estimate of the cost of work and will bill on a cost-plus-fee or T&M basis. In these situations, the Owner must have language in the CM/GC's contract that requires certain controls are implemented when subcontracts are issued without a fixed price. This contract language will protect the Owner's financial interests and peace of mind. The critical controls the CM/GC must require of subcontractors under a cost based billing arrangement include:

1. Definition of the cost-of-work
2. Monthly billing procedures
3. Labor tracking and reporting procedures
4. Purchased material documentation requirements
5. Work production reporting and/or reporting percent completion
6. Records retention requirements
7. Audit requirements

Previous articles for developers and owners of high value residential construction projects authored by ResX can be located on our website (www.ResXpc.com). These include:

1. Avoid Contractor Overbilling (a general overview of the issues Owners face)
2. Project Design is the First Defense Against Contractor Overbilling
3. Obtain Competitive Bids from the Lead Contractor (CM or GC)

Also, look for future articles from ResX that will discuss the following related topics:

1. Monitoring the construction process
2. Managing the contractor billing process
3. Critical elements of the construction contract