Can You Afford the Cheapest Contractor?

Question

An investor once told me he had saved $30,000 on a rehab. Three bids. One contractor came in about $30,000 below the others.

Easy decision, right? For a little while.

Then came the change orders. Deadlines slipped. Some work had to be done again. The project sat while everybody argued about whose responsibility something was. That beautiful $30,000 saving disappeared.

There's a lesson here that I learned from a completely different business: recording studios. In a professional studio, the clock is always running. Every hour costs money. Sometimes every minute feels like it costs money. So if you need a guitar player, engineer, technician, producer - whatever - you learn very quickly what actually matters. Get somebody fast and good. Not somebody cheap.

If one guy costs twice as much per hour but walks in, understands the problem and solves it in 30 minutes, while the cheaper guy spends three hours figuring out what he's looking at, who was cheaper? In the studio business, fast and good wins 99% of the time.

Construction isn't exactly the same, but I've come to think the lesson travels remarkably well.

There's an old triangle: FAST - GOOD - CHEAP. Pick two. Nine times out of ten, you don't get all three.

Fast and cheap probably won't be good. Good and cheap probably won't be fast. Fast and good probably won't be cheap.

And for an investment property, I increasingly think fast and good is the right starting assumption. Why? Because “cheap” is only cheap if you pretend time costs nothing. It doesn't. A contractor who takes three extra weeks isn't merely three weeks slower. That's three more weeks of interest. Insurance. Utilities. Taxes. Maybe hard-money costs. Three weeks without rent. Three weeks before the property can go back on the market.

Then there's rework. A $5,000 mistake doesn't cost $5,000 if somebody has to tear it out, order new material, schedule another crew and delay everything behind it. Suddenly the contractor who was $30,000 cheaper is doing an excellent job of spending my $30,000.

So here's a deliberately provocative starting assumption: of three credible bids, I would initially expect the expensive contractor to be fast and good. Not because expensive automatically means good. It absolutely doesn't. I've seen expensive incompetence too. But now I want to investigate why he's expensive. Maybe I'm paying for an established crew that actually stays on my job. Maybe I'm paying for somebody who knows how to estimate instead of giving me the number I want to hear and recovering his margin through change orders later. Maybe I'm paying for organization. Maybe I'm paying for subcontractors who answer his calls. Maybe I'm paying for a realistic schedule. Maybe I'm paying for somebody who finds the problem on Tuesday and tells me Tuesday - not somebody who covers it up and lets me discover it six months later. Maybe what I'm really buying is fewer surprises. That's worth money.

Of course, the opposite can also be true. Maybe the expensive contractor has a beautiful office, three new trucks, a marketing department and overhead that I'm about to help pay for. Maybe the cheaper contractor owns his equipment, runs a lean operation and happens to be excellent. Great. Then he may be the bargain I'm looking for.

So I don't think the lesson is: Never hire the cheapest contractor. And it certainly isn't: Always hire the most expensive one. It's this: Stop treating price as though it's the thing you're buying.

I'm buying a finished project. The real price is what it costs me to get from today's unfinished building to that finished project - including time, mistakes, delays, change orders and aggravation. That's why, when I see $120,000... $135,000... $150,000... I don't immediately ask: "How can I save $30,000?" I want to know: "What am I getting for the extra $30,000?" And then I want to see what happened on the contractor's last five jobs. Because his estimate tells me what he says this project will cost. His track record tells me what his projects actually cost.

Fast. Good. Cheap. Pick two. I'll take fast and good. Then we can talk about the price.

Josh Handler · Answer

I'm on the other side of this. I own a construction company and I read bids all day, and the thing I'd push on is the framing that those were three prices.

They almost never are. Three bids thirty grand apart are usually three different houses. Same address, three different sets of assumptions about what's behind the walls, and the spread is mostly a list of things one guy included and another left out. Before you decide what the extra thirty is buying, put the bids side by side and read what each one EXCLUDES rather than what it totals. That page tells you more than the number does and almost nobody reads it.

The mechanism under your story isn't dishonesty either, and that matters because it changes the fix. Finding out what's actually wrong with a building costs real money and time before anybody has committed to anything. Pulling the panel cover, scoping the drain line, getting somebody under the floor. A contractor who does that during the bid then has to price what he found, and he loses the job to the guy who didn't look. So the market quietly pays people not to look. The cheap bid usually isn't a liar's number, it's an uninformed one, and it turns into a change order in week one because week one is when the information finally arrives.

Which is why I don't think the answer is to start from the expensive bid. The answer is to buy the scope separately from the work. Pay somebody to write down what the building actually needs, then hand that same document to all three. Now the spread is real and you're comparing prices instead of comparing imaginations. That costs a small fraction of thirty thousand dollars to find out.

One friendly disagreement on the fast half. Speed in construction is mostly queue position, not skill. The established crew that stays on your job stays on it because your job is the biggest thing on their board right now. Book the same company in their busy season and you're the one getting slotted around somebody else's project. So I'd rather ask a contractor what else he's running this month than assume the higher price bought me priority.

The studio analogy holds up better than you'd expect, though. The expensive engineer is expensive because he's heard the problem before. That's exactly what you're paying for on a rehab. Not labor. Pattern recognition.

Drago Stanimirovic · Answer

Great point: three bids may really be three different scopes, not three different prices. Buying the scope separately first makes a lot of sense - then everyone is pricing the same job.

And you nailed my studio analogy better than I did: you’re paying for pattern recognition. My question is: who would you trust to write that independent scope?

Can You Afford the Cheapest Contractor?

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