Negotiating with GC bids

17 Replies

So does anyone negotiate with bids they received from general contractors on rehabs?

If so how do you usually go about that?

I put together a detailed scope of work and a bid document for the contractors. They then email me their price. This is my 3rd major rehab so I'm still very green. So far I've accepted prices and went with reasonable contractor with good references.

How do you all proceed?

Thanks everyone

Ps I have j Scott's book and Brandon turners books but I don't recall a part about negotiating GC bids.

So I am  general contractor and as far as negotiating bids I would just say this..You always catch more bees with honey as you would using salt. having said I that it's all about communication..just communicate..i know that if you were to come back to me and tell me that im too high that you had to be a lower on this or that..i would just ask you where do u need to be and let you know hey look..just tell me  where u need to be and if its reasonable then we can work on it...prices are really not always the same.materials cost more or less due to seasons a weather, etc so sometimes there is more room than next..One thing to keep in mind though is the old saying you got what you pay for!! Now don't get me wrong there is always competition and yes one company could be higher or lower for all kinds of reasons..So it will boil down to personal preference to decide..Now if you get a company to come down a lot lower than the others, that should be a red flag and you shouldn't use them!! I hope I helped!!

My comments are more general in this situation.  I do think a contractors first attempt at a bid is usually more what they would like to make on a particular project.  I agree there is room for negotiation.  I do have to throw in the fact that many rehab projects that go south are due to lack of funding.  Many of the rehab contractors that I see don't have the resources to fund much of the project themselves, where you find that responsibility pushed upon them, you likely find a project that begins to have increasing issues and increasing risk to the investor.  Once a contractor gets behind the 8 ball - you have trouble!  This also holds true when you are looking for ways to reduce costs.  It's great to reduce costs, but you still have to leave some meat on the bone for the contractor.  If you don't you force the contractor to find his own way of making up that cost. 

I manage rehab projects so I work with a various number of contractors.  I think part of the problem is just dealing in reality.  I mean what are the REAL costs associated with a particular rehab. I've seen those low estimates and they end up with a lot of change orders, unforeseen issues, and increased costs on the back end.  Much of this can be avoided, both investor and contractor need to deal more in reality - this includes budget.  Yes, the older the home the more unforeseen issues there may be.  You can't estimate what you can't see.  

Investors want it done at the lowest cost possible.  Contractors want it done for the highest price acceptable.  What is fair does matter, but what is correct or real, matters most. It's hard to make money and projections on a sliding scale of rehab costs.  Realistic Budget.  Realistic SOW.  

Keep in mind that a good contractor will go lower if he can, but he will pass on the project if he can't. You can certainly beat a bad contractor down on price.  He probably needs the work because he doesn't have any other project opportunities.  If he doesn't have other project opportunities, he's not worth using - and he probably has financial issues.  Bad News!  A good contractor will be in higher demand and can much more easily pass.  I would say (within reason), don't let the good one's get away.  

Another way to look at it is:  To get and keep a relationship with a good contractor, you have to get a good deal up front on the property.  This is where your money is made.  You don't want to be in a position to make your profit on the rehab costs.  Leave enough meat on the bone so the contractor can make something on the rehab costs.  This way you make money, the contractor makes money, and you are both excited to repeat the process over and over.  From my perspective, I think this places more importance on the property you acquire instead of on the rehab costs and the contractor.  I always encourage investors to know the rehab costs before property acquisition.  If the costs are too high - just pass on the property. 

AND, yes, this is all easy for someone else to say!  I hope something in there is helpful!

@Ritch Bonisa  

Thanks for the great insight. A more pointed question.. if materials are provided and it is a labor quote only, how do we evaluate what is fair and what isn't? Should it be based on how long the project takes to complete? Should labor be evaluated based on material costs? 

People value their time differently and a great contractor is difficult to find. But if a contractor is possibly throwing out a bid they would like to receive, or maybe they are giving me a bid they expect to negotiate down a touch.  I want everyone to be happy and making money, but I also don't want to be paying an extra 2-4K giving someone a "great" labor contract. 

I guess the market may dictate what is a fair price based on the multiple bids I receive. 

Was just thinking out loud. Maybe next time, i may put in my scope of work "most competitive bid" letting them know up front, I will go with the best one (from a good to great contractor) and I won't be countering their offer. Maybe this would entice them to give me their best bid, where they will still make money and be happy with the deal. 

As far as I can see you are on the right track. I manage projects. Investor comes to me and I connect them with the appropriate contractor. I want my investor happy and hitting ROI. I want to work with them again. It's in my best interest to have the right contractor. I have found in order to have the right contractors and to have a happy medium that we have to be conscious of all of the things I mentioned before.

I don't take on jobs where the investor provides materials.  Here is why:  Usually, the contractor can get the materials at cheaper cost than you can.  The contractor often marks up the materials and it is a profit center for them.  In the end it is still often times cheaper or the same in terms of material cost. If you are just getting labor estimates, then I would expect labor rates would be higher, because there are no additional profit areas due to the material situation.  

Then there is who delivers the materials?  What if something needs to be returned?  Are we slowing progress down because we're waiting?  I have also found that when materials are provided, there are more last minute material changes involved.  This can slow progress as well, and increase rehab cost overall.  

There are many ways to handle all of these things.  I am not saying right, wrong, or indifferent.  I know how our system works and it works best for the investor when we take all of these things into account.  

I hope that helps.  

@Ritch Bonisa

When you say materials, are you referring to just rough materials, finish materials, or both? For instance, if a contractor wants to charge me $150 for a toilet I know I can get for $90 or 6k for cabinets I can get for 4k, there's no way I can blindly accept being overcharged for something I know doesn't cost that much.

Originally posted by @Bob Okenwa :

@Ritch Bonisa

When you say materials, are you referring to just rough materials, finish materials, or both? For instance, if a contractor wants to charge me $150 for a toilet I know I can get for $90 or 6k for cabinets I can get for 4k, there's no way I can blindly accept being overcharged for something I know doesn't cost that much.

 Great question Bob that I would like to know the answer for as well.

Hello. I just bought my first rehab house and it will need everything. So I too am wondering about materials cause on a rental unit I had to have a new electrical service put in...the contractor was wanting to charge me $1000 for a 200 amp service panel $50 per complete can light etc. I went to my local hardware store picked up the service panel for $145 and $35 roughly per complete can light. For me it was kind of a shocker that someone would want to overcharge me like that. Another area is kitchen laundry and bathroom cabinets. I had someone quote me $9000 for cabinets for a kitchen then $3000 to install them. I got the same exact cabinets for $5500. I guess I must have just been unlucky and kept getting contractors that wanted to take more than their fair share. I agree with you Bob Okenwa I just can't blindly take what a contractor is willing to bid on materials especially on finished products. Rough materials I can almost understand but that has just been my experience. 

Needless to say that is my sob story time to move on...

So when you are upfront with them on what you are thinking it should cost in the realm of reality contractors are willing to negotiate?

@Darius Burke So the $145 is including the panel, breakers, wires, knock out caps, ground wires? Is your can light including housing, trim, junction box, conduits, wires, and light itself all for $35? Will you pay yourself $15 for a can light installation where you have to remove, drill holes, locate attic studs, secure junction boxes, assemble and install lights, clean-up debris, and paint if needed? If you feel like you want them to work for free, you are in great shape to do it yourself.

Well I did do it myself in terms of putting in the can lights running wire figuring out junction boxes etc. I did get the baffle light and housing all for $35. I am meaning $50 for the supplies only not the work. They then were going to charge me for the work on top of the supplies. No I was meaning $1000 dollars for the panel itself the breakers etc. That was not including the work needed for it. They wanted another $500 for that. I am all for people making money if they do the required work and do a good job. Let me tell you figuring out electrical is difficult sometimes. I though am not ok with people trying to take advantage of someone. I am sorry if my words led to a misunderstanding. All the money figures were for supplies only not work. They were going to charge me for the work in addition to the supplies. So I found a contractor willing to put in the panel that I picked up and tried to figure everything else out with the help of a friend. Got a nice lesson about electrical. Haha. 

@Darius Burke I see what you mean, now to me that would matter, just between me and client. I am ok with clients purchasing materials no problem, but I do have to charge them delays if i request materials and they don't buy the right one. I don't do that one with subs tho, but then again it is a government contract that i mostly deal with.

Question for everyone - so on a rehab project, of course you should get multiple bids. Each time a general contractor comes out for a bid, they spend about an hour on the property. Then, even more time making phone calls to their electricians, plumbers, even making further site visits with their subs to put together a bid. I have never been asked to pay for a bid, but if there are, let's say, three contractors spending hours and hours of their time getting me a bid, only one will be chosen.

Have I burned bridges with the other two general contractors? Should I offer to at least pay them for their time? Or is this just part of the business and I'm thinking too much about it.

A word of caution, depending on your level of detail it could be costing you more money. What i mean by that is it's important to discuss what needs to be done, but remember the contractor (likely) will have the experience and motivation to do it most efficiently. Remember time is money/profit to them... so if you get to detailed and tell them how to do something and it'll take longer than the way they would do it they'll gladly accept. If you tell them how to do it also know they will come to you the second it doesn't work and you'll get change orders for everything. Tell them what is needed, they'll tell you how it's done by the bid.

For line items that are vastly different look at what makes up those differences? If it's material discuss the quality, maybe you both have different ideas of what's acceptable. If it's time discuss the level of intent/scope of work. If they give you a break down of man hours and it's "too high" ask them to explain it. Maybe there are multiple people working it and that wasn't accounted for in your est or maybe you have a more efficient way to do something and contractor agrees to lower it ...

DON'T get caught up at each line item IF the total price makes sense and you've discussed potential discrepancies (if there are some).  For example, say a work item you have budgeted at 10k, contractor comes back at 5k, but the final price is inline with what you came up with. Discuss it, talk scope of work/materials, if you are both on the same page then i'd accept it. If it's the opposite and you budgets 5k but it comes back 10k, use the same process, but if the TOTAL cost is acceptable I wouldn't argue that line becasue you may be getting discount in over items to make up for it... and since total price is acceptable it doesn't really fix anything, just makes more work.

@Erik D. depends what type of relationship you have or are looking to have with them.... Are you going to have lot of work that will keep them busy, or is this one off job here and there. If you are going to have lot of work in your pipeline and your just starting to build relationships you could offer to pay something using their hourly rate in the project but I personally wouldn't. 

I would however give them a chance to "sharpen their pencil" and have a chance of giving you a updated bid once you reviewed the items that were high. The ones that weren't selected you tell them why (price to high, couldn't meet timeline) and tell them you'd reach out for the next project. If they consistently come in high it shouldn't be an issue if they stop bidding because they were too high anyways, maybe in the future they'll either decline to provide you a bid or lower the price if they want work.

I haven't read every answer but I'd bet most share the same sentiment. Be upfront with how you want to work with them. I don't like to do the whole 'hanging the carrot' thing like "I have a bunch of work, if you give me a great price I'll give it all to you." Honestly this will likely drive away most good contractors because they now think you are cheap and will attempt to beat them down at every opportunity. A smart contractor can deduct you may have more work from the fact you are an investor so just be tactful in how you phrase your statements to clarify for them that you do in fact have more work, if you actually do. I don't like to negotiate with contractors, I just ask them to bring me a fair price and if it works for my budget I'll say yes, if it doesn't then maybe we can work together on another project. I've had contractors offer to do it cheaper after they put in their bid but I decline, if they were willing to do it cheaper than they should have given me the lower price from the start. I don't want to work with people that will try to get as much out of me at every opportunity because I give them the same courtesy. It's all about building a mutually beneficial relationship. In the beginning I did negotiate and I can't remember a time it went well, the first time they run into a delay they're going to get restless and not want to be there anymore, this is where corner cutting and delays start. The only thing I negotiate on now is the payment schedule. 

If I might comment here as one who works with   many contractors every month in the rehab projects I provide the financing for. What I see again  and again is a client looking at a line item, like kitchen cabinets where the GC has budgeted say $6000 for X linear feet of uppers and  lowers. Then the homeowner looks at a big box store and finds the same amount of cabinets can be had for $4500 for example. Then I hear screams of Overcharging.  Hang on a minute, the GC has to make a profit to stay in business number one, so its possible GC has built $1500 of profit on the kitchen  cabinet piece of the job. Second there is the  cost of shims to even  them, tools to install them, screws to hang them onto the wall and sales tax on them GC pays to mention just a few. 

Understand the GC  has to make money and a GC may add to the cost of certain materials to disperse profits across some or all categories of work.  After all none of us can afford to work for free. So while I know any of us can buy during a sale or buy online to save money, that's NOT the  point. If you hijack the GC built in profit then most of the time the  GC will have no choice but walk away. Then you have an unfinished rehab on your hands. 

A better approach is to understand that a GC's profit and overhead ( tools, insurance, truck costs, license fees, salary, supplies, gas, computers, cell phone, etc.) has to be IN THERE SOMEWHERE. Then work with the GC to adjust and be sure to understand the level of quality and type of materials to be  used. But once a contract is SIGNED at specific price points do NOT start shopping the sales and gleefully come to the GC and say what a better deal you got and  he can take out that money and you can use it to buy  other stuff. NO dont try that because you AGREED in the contract signed to exactly those costs which contain the GC's profit.

In my work with rehab  loans we do not allow any post-closing "shopping" to save money for these exact  reasons, this is where and why the GC  took the job and signed the Contract to do it because the profit is dispersed across all these items. If you want to shop do it BEFORE you commit to a GC. Ask where they have their profit, ask if they make 10% ,20 %, 50% or whatever and then decide if thats appropriate for you or go on  to then next GC bid.

Originally posted by @Erik D. :

Question for everyone - so on a rehab project, of course you should get multiple bids. Ea     ch time a general contractor comes out for a bid, they spend about an hour on the property. Then, even more time making phone calls to their electricians, plumbers, even making further site visits with their subs to put together a bid. I have never been asked to pay for a bid, but if there are, let's say, three contractors spending hours and hours of their time getting me a bid, only one will be chosen.

Have I burned bridges with the other two general contractors? Should I offer to at least pay them for their time? Or is this just part of the business and I'm thinking too much about it.

Not necessarily but maybe. Contractors are an interesting breed and each has their way of how they like to do things as well as type of projects/people they want to take on. I generally try to get a feel for how a contractor works, price points, etc on a few standard items and give him insight on me before I ask him to spend a bunch of time pushing a pencil. i.e. does he work with investors/builders or does he generally do homeowner projects. I am upfront about this as well, some appreciate and like it, others it seems like it bothers them. I haven't figured out why potentially helping them save time bothers them yet though. I've called some after not giving bids and they were happy to hear from me and we worked together on something else while others didn't return my call. 

@Erik D. From my experience, and not to waste all the time in the world, it is best to hand a paper with a scope of work to bid, per room per scope if needed. Residential contractors do multiple bids all the time and might underbid your project because they forgot the scope. If there is a scope written when they take home or office, they could easily remember how to bid it correctly. On my commercial clients, I take 100 pictures on a 100k project, develop a scope of work summary per trade, share a dropbox link, and have them do a table bid. The difference is, my clients provide at least a set of plans. Now as far as residential bids are concerned, you can do this as well, I have attached a dropbox link, check the folder SB County Guasti Waterslide, this is a project that took me 15 mins to read and send a bid, a 15k opportunity with 3k profit in 15 mins is worth my time. Most reputable contractors know how to bid and know how their subs price them, they don't even have to call or very minimum. For example, I have an asphalt project coming up that I know will not take my contractor 2 hours with 4 guys plus a mobilization fee, I pickup the phone, ask them "What is your minimum price for a 150sf 4" asphalt patching, compacted and slurried in 91789 zip, this is classified as service call" the estimator over the phone says "$1,200", I could get 5 bids in 30 mins, or I could simply go with that because I have a 1,500 budget. As to if you pay, if you think it will help you patch bridges to pay, go ahead, but be upfront, you can go like this, "I have to get 3 bids due to amount of work, but I'm willing to pay 200 for you to fill this scope sheet per line item regardless if you get it or not" -- if it were me, I could get away with "our policy needs to get me...." --. This might be different in your take, but I get more responses with "I have a 5k budget for this, can you meet it or go under?" and I have a 6k budget, this takes the games away, they get the business, I get the discount, usually works for suppliers and estimators/commercial contractors, not sure about residential contractors -- sometimes they are too sensitive about pricing.