Why Do Contractor Bids Vary By 100% For The Same Project?

[Georgii Grigoriants]

One of the biggest underwriting problems I continue to see isn’t ARV.

It isn’t rent projections.

It isn’t financing.

It’s renovation pricing.

Many investors have experienced the same situation:

Three contractors walk the same property.

The scope is identical.

The materials are similar.

Yet the bids come back at:

• $60,000
• $95,000
• $140,000

For what appears to be the exact same project.

So who’s wrong?

Sometimes nobody.

The reality is that construction pricing is one of the least transparent inputs in real estate investing.

One contractor may be pricing labor and materials.

Another may be pricing project management, warranty exposure, schedule risk, insurance, supervision, and overhead.

The scope may look identical.

The businesses behind the numbers often are not.

But here’s the question that interests me most:

Where is the market price?

As investors, we have relatively reliable methods to estimate:

• ARV
• rent
• cap rates
• market appreciation
• financing costs

Yet renovation pricing often remains surprisingly subjective.

I’ve seen bids vary by more than 100% on the same scope of work.

Not 10%.

Not 20%.

More than 100%.

At what point is a bid overpriced?

At what point is a bid underpriced?

And does a true “market price” for renovation work even exist?

Or are we simply paying for different levels of execution risk?

Curious how experienced investors, contractors, and developers think about this.

How do you determine whether you’re looking at a fair bid, an overpriced bid, or a bid that is simply pricing a different business model?

[Richard F.]

Define "Contractor". Is this a duly licensed, fully insured company with an office, a shop, and multiple crews? Or is it two guys and a truck, and their cousins working for cash? Are all workers on site actually covered by Workers Comp? Do they seem familiar, perhaps even intentional regarding OSHA rules, PPE, and Safety in General? Or are they rushing around in flip flops with no eye, head, ear, or hand protection? Are they using quality new products and materials, or lower grade, seconds, and leftovers from the last job? Does the worksite look like a bomb may have gone off, or is it largely neat, organized, and secure? Do they have appropriate trash disposal bins and porta potties, or is trash moved from one area to another, repeatedly, and the crew is watering the bushes? Do they have an actual job schedule, and do they keep their eye on the Critical Path to make adjustments as needed? Or do they just show up when the surf is sloppy? What do their work trucks look like- well organized, easy to find tools and small parts? Or are they vans stacked to the ceiling front to back?

Also, in some markets, the truly Good Contractors have more business than they can handle, so the price accordingly based on project and schedule gaps. If you are not a solid, pain free, repeat customer that pays promptly, they will price you right out to the next Contractor.