Comparing Contractor Estimates – Part 1

Comparing Prices on a Stone Terrace
Comparing Prices on a Stone Terrace

One of the most frustrating experiences for a homeowner looking to do work on their home is to get estimates that differ wildly in price – especially when all the contractors are recommended by friends or neighbors.  This article is about how to compare the estimates when you’ve provided the contractor a drawing of what you want.  In a future article, we’ll talk about the more complicated situation where you haven’t provided a drawing.

In my experience, the primary reason that contractor estimates differ by a third, 50% or even 100% is that the scope quoted is dramatically different.  Contractors, small contractors in particular, will often provide a sentence or bullet points about what’s included.  But often fail to spell out clearly how they’ll do the job, what is being done by others, and what allowances or assumptions they’ve made.

I recently designed a basement media room including a wet bar.  The total price I quoted after the design was approved was $45,000.  The price was based on estimates from subcontractors on individual components including demolition, construction, plumbing, electrical, tiling, painting, installation of the new media equipment, plus my time for construction management and a 10% contingency.  The contingency, of course, would only be used if necessary.

Having been a client of home improvement contractors long before I ever became a contractor, my philosophy is a bit different from most contractors.  As the client I did not want cost surprises at the end of the job.  If I was told the job was going to cost $30,000, I didn’t want to end up paying $35,000 let alone $45,000.  So when I do job costing, I use assumptions – often called allowances – based on the client’s actual tastes and not assuming “builder” grade materials.  I also always include at least 10% contingency and often 15% to 20% contingency depending on the job and the age and general condition of the house.

My business model is different in another way from most design/build firms in that I separate the design and build phases.  Clients are free to take my design to others for bid.  That’s what this client did; he took the design to a carpenter he’s used in the past and got a quote of $20,000.  He asked me to talk with this other contractor to see if the lower bid made sense to take.

While at first blush it seemed like the homeowner could save a lot of money by using the other contractor, it turns out that the carpenter was really bidding only on the part of the job that he was comfortable doing – the demolition, construction, and tiling.  The bid did not include plumbing, electrical, electronics, painting, or construction management.  In addition, the carpenter assumed that the homeowner would purchase all the decorative items like tile, carpet, plumbing fixtures, drawer pulls, and so on.  And, of course, there was no provision for contingency.  When we added back in the other trades, the cost of materials, and the contingency, the difference in the bids was about $3,500.

When I asked the homeowner whether he was interested in performing the construction management role – sourcing and ordering materials, hiring and scheduling subcontractors, he indicated that he did not have time and wanted me to play that role.  When we added back in this time, the actual “bid” was just slightly higher than my original bid.  But the homeowner still wanted to use contractors that he had used before so I kept the build contract but subcontracted to the carpenter with whom the homeowner was already familiar.

When you have a good vision of what you want – and you share that vision clearly with a drawing – to contractors, the difference in price has to come down to 3 things:

1.    Scope:
A likely source of price differences comes from differences in scope.

Proportion of the full Job: When you get a quote that excludes portions of the full scope, you can’t evaluate that estimate until you also get estimates for all the work excluded.  Plus you need to think about whether you want to be in the position of construction management where you need to hire multiple trades and determine the appropriate sequence of work.

Construction Approach: Sometimes contractors will go about building the same thing differently.  I built a “stone” patio for a client where I used an underlayment to separate the movement of the deck from the stone tile.  I also “overbuilt” the deck to limit the amount of movement.  Another contractor could have produced the same look with less caution about making sure the stone tile didn’t crack.   My approach took more time and materials and therefore more money than another contractor might have charged.

You may need to ask sufficient questions about the construction process to identify that the approach is different and why each contractor is taking the approach they’re taking.  Ultimately, you’ll need to exercise judgment about whether the extra precautions taken by one contractor are “worth” the additional price.  Often the differences in construction approach are only noticeable in months or years as the work “wears” differently.

2.    Materials: Another source of price difference comes from either actual differences in material costs or assumed differences in material costs.

Allowances & Mark-ups:  Sometimes a contractor will include “builder grade” allowances for fixtures and materials in order to keep the estimate appearing low – even if they know that the client is likely to want to purchase more costly materials.  Material costs can add up to over 50% of the cost of the job.  So look closely at the contractors assumptions or allowances about material costs and how much the contractor “marks up” material costs.

Material Quality:  Most of us know that cedar decking costs more than pressure treated decking.  But there are lots of other less obvious material choices that can affect total price, maintenance, and longevity.  Staying with deck building, the price of galvanized hardware is considerably less than stainless steel hardware.  The price of azek bandboard is more expensive than pressure treated but requires less maintenance over time.

3.    Labor Rates & Business Model: If scope and materials are the same, the only other variable is labor.  Labor costs can differ either because one company charges more (or less) for the same work or because a company is also charging for additional supervisory or overhead time.  In my experience, there are 3 tiers in the remodeling business.  At the top are mid-sized construction or design/build companies.  Overall, their labor is often more expensive because the wage rate they charge for construction workers must also cover overhead and supervisory time.  On the other hand, they are often more able to respond quickly and can provide full-service including sourcing of materials and design assistance.  At the next tier are very small companies where management and labor is the same person – it’s one or two guys who quote the work, plan what to do, and perform the work.  These are US-born men or women who work for themselves and who are putting kids through college and saving toward retirement.  Their wage rate reflects a middle-class vision of themselves.    The next level are also very small firms but they are often foreign-born workers whose wage level keeps a roof over head and food on the table but who might not be saving for college or paying a mortgage.  All 3 models can produce identical work for differing costs.  However, the homeowner is sometimes required to know more and to take on more of the sourcing and management when using the the 2nd and 3rd business models described here.

I strongly advise homeowners when faced with widely divergent price bids to take the time to figure out what’s driving the difference.  If the difference is in scope or materials, you will either end up with something different than you expected or will end up paying more than the low quote implies.  Either result will be very frustrating.  If the difference is in labor rates and business model, then you need to consider what’s being expected of you in terms of sourcing or construction management and whether you’re prepared to undertake these additional burdens.

It’s absolutely true that you can find terrific workers who charge a fraction of what larger companies charge for the same work.  I routinely use a mason who does work for about 1/3 less than larger masonry companies.  In exchange for the less expensive – but exquisite – results, I have to secure the permits myself, to keep a flexible schedule since the owner is not good at communicating work schedule, and I often have to use hand-signals or find a friend who speaks Spanish to communicate nuances of what’s wanted.  The product though is as good as I’ve seen in this area.

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