6-12 Construction, Estimating and Bidding LEAVING OUT A CRITICAL PRICE A contractor that had never followed the practice of com- pleting a draft of its final recap the evening before the bid totaled its recap for the first time in haste during the last few minutes before the bid. It was missing one item of cost—which happened to be the HVAC, or 26% of the total price. It was cer- tainly surprised when it was 28% low—and had to beg the owner for relief from the contract and his bid bond. This seems ridiculous to prudent contractors, but it actually has happened many times. People often have a lapse of judg- ment when they are trying to evaluate the last proposal received from a subcontractor or vendor, and they can tem- porarily lose their judgment of the relative value of their overall bid price, 63 REVIEW BY MANAGEMENT ‘Throughout this text, there are statements regarding the role of management n the review of items and decisions to be made for the estimating process. The final decisions on the markup as a final adjustment to the bid price belongs entirely to management. Every bid is potentially a successful or disastrous ven- ind a subordinate to management should not be making the final decisions oon the bid price. There is no substitute for looking at the detail of the estimate during quiet times, such as the evening before the bid, when questions can be answered and rational decisions can be made. 634 EARLY INVOLVEMENT OF MANAGEMENT Management has the responsibility to monitor and track the estimate from the decision to bid to the release of the final price. Should management neglect its role in helping to plan the construction method and schedule, and should it choose to look at the final recap as its only insight to the project, it is taking ‘unnecessary risks. In such cases, management will usually defer to the lead Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid estimator for the primary decision on the potential risks and a reasonable ‘markup, but this should not be done unless the lead estimator is an officer or owner and part of management. 632 ‘THE COST OF WORK AS THE ESTIMATOR'S CONCERN The cost estimator must discipline himself to think only of probable lowest costs that can be achieved by the firm when he costs the work. The reason is simply that any person trying to evaluate the lowest cost, probable conditions and cireumstances, and probable best achievable cost for the conditions expect- ed has little time to divert attention to weighing probable risks against possible return. If the lead estimator follows the firm's policies, uses company cost his- tories, and solicits the best input available from knowledgeable persons in the firm, the cost of work should provide reliable information for management to use for determining a reasonable markup. i Even when the lead estimator is part of the firm's top management, his judg- | tment of a markup should be deferred until the final cost of work is almost i determined. The primary role of the estimating team is to convey ideas about i i i the expected costs, risks that may prevent the costs from being achieved, and any other pertinent information for management to use in determining the total estimated costs prior to determining the markup. Should management take the risk of losing the project because of an exces- sive markup, or take the financial risk of too low a price, the estimator must not | be overly concemed—as long as he has done his best to arrive at an accurate i cost of the work, and has communicated his concerns to management on a ii timely basis. i 84 HANDLING LAST MINUTE QUOTES Because of the time pressure caused by late bids from vendors and subcon- ti tractors, it may be necessary to employ additional persons to help receive and check proposals. A significant volume of written bids are expected on the morning of the bid day, and the telephones and fax machines will usually be stressed. Sometimes project managers or other personnel may be used to help 6-13 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterConstruction, Estimating and Bidding answer the telephones, make calls to expedite quotes from vendors or subco ‘actors, oF to check the mathematics of the cost sheets or recap. 644 CHECKING SCOPE OF WORK Each vendor and subcontract proposal should be checked to determine: *+ If any scope is missing from the proposal + If the proposal is too low to be considered + The effect of any qualifying statements + The best proposal for each item of work Quotes received with missing or duplicated scope should not be inserted with the other bids for the same work until the cost of the missing or duplicat- ed items can be determined. A spread sheet should be made to reconcile quotes from vendors or subcontractors that bid with different scopes of work, A spreadsheet, which is simply a columnar sheet, is used to list the vendor or sub- contractor proposals , followed with quotes (from other sources) of items miss- ing or added so the quotes can be adjusted to the same scope of work. Thus, cach quote is adjusted so that it is compared to others on an “apple to apple” basis. If this is not practical for a proposal (e.g. one that omits too many items), the proposal is not considered for use in the estimate. Sometimes a quote is so low that the lead estimator may call the party ten- dering the quote and tell them to review its estimate, This is a good faith call! ‘The estimator must be careful not to reveal to the other party any indication of how its quote relates to others, except possibly “you appear to be quite low." or “we wonder if you have the complete scope of work.” Quotes from vendors or subcontractors often have statements accompanying. them with conditions and restrictions that are not expected from the bidding | documents. Each statement may be “the quote is conditioned on payment in | full immediately upon completion of the work,” or “the quote is conditioned on i the seller's terms of payment.” These qualifying statements must be carefully | checked to see if they are reasonable, and if they have a significant effect on the value of the proposal 6-14 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid ‘When someone is assigned to help the bid team, he must be briefed on his role in the estimating process. He should never communicate with vendor or subcontractor bidders on subjects with which he is unfamiliar and should not be scoping unfamiliar items of work. 642 POSTING BEST PRICES TO RECAP If the best quotes from subcontiactors or vendors are entered on the recap as, soon as they are checked for scope and evaluated as the best quote received at the time, and the plug numbers are still in place for items where no proposals have been received, the recap can be totaled at any time and thus give an updat- ed indication of the final quote, It is advisable to establish specific times for making interim checks of the total of the recap. A photocopy should be made of the recap and marked with a record of the time the copy was made and who did the checking. These copies can be used for quick audits of later entries and changes to the recap and should help prevent significant mistakes. Itis always important that late entries to the recap be made by the lead estimator only and that all costs are posted early enough for a thorough check of the math, as well as for a check for missing or duplicated items. All other bid team members will be shielding the lead estimator from the telephone and supplying him with scope checks and recommendations on the lowest or best quotes from vendors or subcontractors. 643 FILING AND HANDLING PROPOSALS ‘The vendor and subcontractor proposals should be filed in such a manner as to make them readily accessible to each member of the estimating team. The proposals should have the apparent low or best proposal on top of the file with the second-best proposal below, etc A systematic way of handling, storing, filing, retrieving, and re-filing the late bids should be carefully planned, practiced in a dry-run, and its procedures maintained for every bid. It is helpful for all proposals and file folders con- taining proposals to be identified boldly with the division and description of the item (possibly with colored memo sheets stapled to the proposals or files). Each drawer or shelf for the proposals should also be identified so proposals can be filed and retrieved with ease and without confusion. 6-15 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter 1 |6-16 Construction, Estimating and Bidding ea THE BID ROOM ENVIRONMENT It is important that the bid room is arranged to enhance the ability of the estimating team to handle the late surge of prices and accurately finalize the recap without undue distractions. No one except the estimating team should be allowed in the bid room on bid day, and separate rooms should be used for meeting and talking to subcontractors and vendors. An ideal bid room would be a dedicated place to be used only for price tak- ing and finalizing of bids. But an ideal room is not available in most contrac- tor’s offices, as the bid room is often used for quantifying and other purposes on other days. Frequently, there are papers left laying around the bid room that are not related to the project being bid. These should be cleared from view so they do not add to the confusion. It is useful to have all papers connected with the preparation of the bid kept in specific places. Also, a color code for identifying bidding papers is useful Proposals received by mail and faxes are not expected to be color coded, but these can be identified if memo sheets of the color used are stapled to these papers as they arrive. The memo sheets are also useful for making quick notes regarding the proposals without marking on the proposals themselves. Ifa new bid room is constructed, it must be planned and tested for acoustics It should be arranged so that the estimating team can work together efficiently when finalizing the bid without interfering with each other. The room may be equipped with booths or baffles for sound dividers to help privatize the phone calls. It is important that persons talking on the telephones do not distract oth- ers in the room, and it is particularly important that a person on the other end ofa telephone cannot unintentionally pick up a price or other information. The bid room should be equipped with the computer, fax machines, tables, lights, calculators, adding machines, and file cases—each located to enhance, not distract from, the finalizing of the bid. A clock should be centrally located to be viewed by the team, and the accuracy of the clock checked each bid day by someone not working with the bidding effort 65 DETERMINING THE BID PRICE A time must always be established for closing the posting of the estimated «costs to the final recap. The designated time to stop posting may vary but will Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid usually be from thirty to sixty minutes before the final bid price must be given to the bid delivery team, 65.4 FINAL CHECK OF RECAP ‘The recap is closed by filling every space designated fora cost with the best ‘uote received atthe time, including the markup and bond (if required), so that the expected final bid price may be checked. Some items may sill have plug amber if no quotes have been received, but the recap must be given a fine check for accuracy of addition (preferably across and down) and completenmea 652 CUTIADD SHEET When the recap posted to a cut/add sheet, and final adjustments may be made to the bid price by adding or subtracting the net change determined on the cul/add shece [Ihe specific layout ofa cuvadd sheet will vary with different individuals, fo ai ae tothe bid price. I is important thatthe cuv/add sheet has a place for identifying “who” and the price from the recap that is being changed, and {he “who” and the price that is being substituted, and then the net differen or the change in either a cut or add column, Ir the markup is changed for any reason, the revision is entered on the cuv/add sheet as if it were a change to a price. The adjustment procedure ean he ‘peated if necessary, if a premature final adjustment was made, and subse, {quent cost estimates come in, 653 FINAL ASSESSMENT OF RISKS ‘The initial assessment of the risks expected on the project starts with the fudy of documents and site but should be intensified the evening before the bid. The final assessment of risks is made afterall elements of cost have bony determined. 6-17 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter6-18 - Construction, Estimating and Bidding As soon as a recap is completed with plugged numbers, management has a tool for determining the items of greater or lesser risks than are considered nor- mal for the type of project. At this time, the major items of cost are assumed to be known, particularly the labor, equipment, and open material costs, This is a good time for thinking about how the risks appear and for judging the risks “objectively before the time pressure becomes a major factor. ‘When the estimate of the firm’s cost of work to be performed by their own forces is determined, along with a reasonable estimate of the total expected cost of the vendors and subcontractors, the items that may require special insurance should be determined and the risks of seasonality and time are considered, The adequacy of required resources should have been determined earlier by man- agement, including required finance, project supervision, trade labor, equip- ‘ment, and general supervision. The estimate of indirect costs will require spe- cial checking at this time, since several major indirect cost items are tied directly to time and seasonality. ‘The only unknowns at this time, other than the final markup, are names of selected subcontractors and vendors and any special risks which may be incurred if one or more of these quotes are unstable or undesirable. The deter- mination of such risks can only be made during the last minutes before releas- ing the bid, at the time the final adjustment to the bid price must be made. Risks should be identified which are not inherent in the type of construction project being bid. When such special risks are identified, decisions are required to determine if the risks identified can be reduced by: * Special insurance + Subcontracting the work to others + Some other means If none of the above are reasonable to alleviate a special risk, the ultimate ‘overrun of costs which could occur should be determined, and part of or all of this possible overrun should be added to the estimated costs. When the risks are consequential and it is expected that there is a high probability that significant ‘overruns will occur, consideration may give to aborting the bid, or adding a sum which would render the bid noncompetitive. Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter |Finalizing and Submitting the Bid RISKS ON LABOR-INTENSIVE PROJECTS labor cost is a major risk, as human nature and many conditions and faerone tmay change labor production drastically. Labor Unit Costs, which have bees from 25% to well over 50%. Therefore, the allowance or estimate of additicn) {abor Coston labor intensive projects may be determined primarily a5 pos, centage of labor risk Consideration for overrun of labor costs is not generally a separate markup, but would be a factor included in the estimate of costs, RISKS ON EQUIPMENTINTENSIVE PROJECTS Joan rmued Percentage of time thatthe equipment will be working during the ‘Year. Equipment does not demand overtime pay, but it also does not stop being an on-going cost when it is not working. When equipment is leased, the rental contract may call for payment for the only, He tom the leasing agency, or it may require payment for working time Ghly. The terms not only affect the rates that are charged, but affects the risk of the contractor, Estimating and cost accounting of construction equipment is a complete subject by itself. and the authors donot intend to analyze the considerations af knowledgeable contractors in this text 619 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter6-20 Construction, Estimating and Bidding EXTRAORDINARY RISKS There are many extraordinary risks, and they come in differing forms on individual projects. Most contractors will recognize them as soon as they start planning the project method and schedule. The definition of an extraordinary risk is simply “a risk not ordinarily inherent or encountered on the projects exe- ccuted by the contractor on an every day basis.” Example of some extraordinary risks include shedule so tight that the work is unrealistically impacted. *+ Schedule requiring work to be performed in unseasonable conditions. + Type of work the contractor has never experienced. *+ Using a subcontract price which is much lower than others. + Using a subcontract price when the subcontractor is known to be finan- cially unstable. *+ Using a subcontract price when the subcontractor with known substandard performance record, 654 DETERMINING THE MARKUP After the contractor has calculated its estimated costs, it must now determine how much markup will be added to those estimated costs in determining the bid price. The contractor should consider the elements of the work (labor, ‘materials, equipment, subcontracts, and services and other expenses) when determining markup. Markup is defined as the amount or amounts added to the estimated cost of construction in determining the bid price. The amounts to be included in the markup are to cover a portion of the general and administrative expenses (this term will be discussed and defined in the next section) of the Company, and contribute to the profit of the Company. GENERAL AND ADMINISTRATIVE EXPENSES ‘There continues to be significant confusion as to the proper definition of a contractors general business operating expenses. These operating expenses are usually not related to a project but are incurred in the operation of the business. Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid ‘They include: estimating cost, marketing, business development, advertising, olficer/ administrative/office salaries and benefits, rent and related office facil ities costs, general office supplies and related expenses, telephone and fax costs, professional fees, and all other general operating expenses. These gener. al business operating expenses, with numerous different titles, are often cate. gorized as follows + Home Office Overhead + Overhead Expenses + Operating Expenses + Selling, General and Administrative Expenses * Selling, Administrative and General Expenses * General and Administrative Expenses {ian attempt to limit the confusion with the different titles as shown above, we will assist the reader in obtaining a more meaningful, useful and less con, {using definition of the general business operating expenses of a contractor, We Will aso provide detail for the reader to better understand the major items of expenses that should be included in this expense category ‘The AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) in its Audit and Accounting Guide for CONSTRUCTION CON. TRACTORS and the related STATEMENT OF POSITION (published in 1981 with amendments through 1998) provides guidance to the accounting profes- sion and the construction industry as to the specialized accounting and finan: cial reporting within the construction industry. As part of this guide, sample financial statements were prepared to provide guidance to the industry with recommended disclosures to be presented in the financial statements of the construction contractor. The sample financial statements, as part ofthis guide, Fecommend that the term SELLING, GENERAL AND ADMINISTRATIVE EXPENSE be used in reporting a construction contractors results of operations ( income statement for percentage of completion financial reporting). In other sections of the guide the term general and administrative expense is used. 6-21 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter6-24 Construction, Estimating and Bidding series of transactions, Since a contractor is in the business to make a profit it ‘must generate its profit from a series of transactions. For simplicity sake, we will define these transactions as jobs. Consequently, each job must contribute share of profit to the Company's retained earnings or the contractor will not be able to grow by meeting its future equity and working capital needs or stay in business, How much profit should be generated from cach job cannot be defined, since it is up to the individual contractor to determine how much profit will be included in the markup. Some of the factors the contractor uses in determining the amount of markup include—competition, length of the project, additional work from this owner, resources to be used on the project, other projects to be bid, and general economic conditions. Summary Both of the above factors—portion of G&A, and a portion of profit must be considered in the calculation of the Markup for a project in determining the company’s final BID PRICE. $6 — SUBMITTING THE BID 6.6.1 CHECKING THE BID FORM The bid form is one of the first items in the bidding documents that must be studied, usually before management makes the decision to bid. The Instructions to Bidders should also be checked very early, to allow time to ask the AVE to clarify any ambiguous language by addenda, if necessary, and to col- lect the information or detail that is required with the bid in a timely manner. ‘Typically, the bid envelope or bid form will require the following (or even more): * Project identification in a certain form on the outside of the bid envelope * Bid security ( bid bond or certified check) + Detailed information on the bidding firm (telephone, fax, address, etc.) + A financial statement * A listing of other projects that the contractor has currently under contract Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid * A statement that a performance and payment bond will be executed by a i surety company. + Space on bid form for lump-sum bid price + Form for alternates to the base price *+ Form for unit prices for adjustment for changed conditions { + Form for listing subcontractors for the major divisions of the work *+ Form for listing the manufacturers of major material items Except for the last five items, which usually come from information from the final recap and the estimating team, other management persons can telieve the team from concer about the preparation of the bid form. One person should always check the executed final copy of the bid form to insure that all prices, signatures, information, and enclosures required by the Instructions to Bidders are in place. Failure to execute properly or insert all the required items on the bid form may be cause for the bid to be needlessly declared nonresponsive. Bid form security. Many proposals are signed prior to entering the final bid price, or unit prices, on the bid (proposal) form. This may be necessary when the bid delivery team needs to depart for the point of delivery long before the late subcontractor and vendor prices are received, Therefore, itis important that the signed and partially executed copies of the bid form be kept in a secure place until time to make the final check of the bid form and turn over the enve- lope to the bid delivery team. 662 DELIVERING THE BID Most bid destinations will be far enough away to require that the bid enve- lope and contents be in route before the last prices are received or other bid form information is finalized. The practice of vendors and subcontractors hold- ing prices quotes until an hour or so before bid opening time is not desirable and should not be encouraged, but itis such a common occurrence that con- tractors must adjust their procedures to accommodate these late prices. The last legitimate time for accepting a price quote isthe latest time the estimating team can incorporate another change on the bid form and still deliver the bid to its destination on time 6-25 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter6-26 Construction, Estimating and Bidding Bid delivery team. The bid delivery team should be appointed soon after the estimating team is established. The bid delivery team should always include ‘one person who has been a member of earlier bid delivery teams. Even though the chore of delivering the bid appears simple, too much is invested by the firm in the estimating process for a bid to be aborted because of poorly planned and executed delivery procedures. The team should always be coached and should perform a dry-run practice if they have not performed this chore before as a team or if the bid site is unfamiliar to them. Securing the delivery of the bid. At least two persons should be used to deliver a bid! With two persons, one can stay with a stalled vehicle while the other hires a cab, or they can hire someone fo transport them to the bid site. Or ‘one person can stay in the car if parking space is not readily found, while the other heads for the delivery point. Alls, it is desirable to have someone to check the person receiving the final ‘numbers over the telephone to ensure that the correct bid information is put on the proposal form. This is most important when the bid form is complex with alternate prices, unit prices, or other required information, ‘A photocopy of the proposal form should always be in the hands of the delivery team as a work copy, giving the delivery team something on which to write numbers or information as received over the telephone. The actual bid form then can be cleanly copied. Using a telephone. Everyone must be cautious when talking over any tele- phone, as many phones may have “ears.” Someone can lift an extension, pick ¥up a cordless call on another phone, or simply hear through paper-thin walls of an office. Therefore, telephone conversations should always be guarded, and no real numbers should ever be stated on the telephone. A code price should always be used for communicating base bid prices between the estimating team and the delivery team on the road. The code price may be higher or lower than the expected final bid price. It should be carefully recorded by both the delivery team and the lead estimator before the team departs. To communicate a price using a code number, the lead estimator will say add to the code price the amount of SXXX (or deduct an amount of $XXX). This code price should not be a round number, which could easily be recognized by another bidder, but neither should it be a complex num- Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid ber. The failure of either party to remember the code price can result in a trag- A party hearing information can undercut the bid because of the information heard, and there is no recourse available to the party giving up the information. The estimating and delivery teams should never use a code price for anything except the base bid price, however, as the use of code numbers for alternates or Unit prices would only make communications too complicated and could invite a major mistake. ling in prices before finalizing the bid. When a long list of unit prices or alternates is requited to be entered on the bid form, as much of this infor- mation as possible should be filled in on the final bid form before the delivery team leaves. Even though some prices may finally be too high or low and some must be changed, the amount of information transferred to the bid delivery team by telephone must be minimized. It may be necessary for the contractor to risk using unit prices that are unac- ceptable to one or more subcontractors. Usually, the only security a contractor has, in such cases, is the use of unit prices that are on the high side-since many ‘owners or A/Es will reject high-unit prices before an award is made. But even though unit prices that are too low are usually pounced upon by owners or AEs, the contractor must beware of using safe, or high-unit prices, which are designated for both extras or credits, as an owner may want to use the higher unit prices for credit, if he sees a bargain. ‘Some special conditions of the contract contain restrictions on the use of unit prices. But when few limitations restrict the owner, the unit prices in the proposal may be held over the head of the contractor and his subcontractors during any negotiations so that the unit prices will favor the owner. There is ‘actually no easy way to handle very complicated and extensive bid form data, and the lead estimator must weigh the consequences of writing in some infor- imation before receiving all prices. Modifications of bid. Public agencies and many other construction users will accept proposals delivered by the U.S. Postal Service (Consider sending certified mail with a return receipt). The normal requirement is that the bid must be postmarked before bid-closing time and completely executed. Modifications may be made by telegraph, as long as they are in the possession 6-27 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter6-28 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction, Estimating and Bidding of the owner by bid-closing time. The modifications must never state the price, or prices, but only the added or deducted amounts. Although it is desirable for the written bid to be in the owner’s possession before bid-closing time, this usually is not a stipulation, The modifications may raise or lower a price, but contractors usually try to submit a price or prices in writing that are expected to be high so the modifications will lower the bid price or prices on the actual bid form, Faxed bids and modifications. Some private construction users will accept faxed bids, just as the bidding contractors accept faxed subcontractor and ven- dor bids. But this is not allowed by public agencies. Some agencies or owners will allow faxed modifications, with the same restrictions and conditions as are required for telegraphic modifications. Briefly, that means that an added or deducted amount can be faxed to modify a mailed proposal postmarked before bid time, but actual bid prices cannot be stated in the fax. 6.7 OTHER ITEMS REQUIRED WITH THE BID 67.1 BID SECURITY Bid security is often required in the form of a bid bond or certified check, in the amount of 5% to 10% of the bid amount. Bid security is required to ensure that the bidder will execute a contract when offered. Bid security is usually required on public projects and is optional on private projects. The purpose is to reimburse the owner for costs that may be incurred when he is relying on the contractor to proceed with the contract work when notified that the contract is being awarded. Some costs that may have been incurred by the owner before signing a contract are: cost of prematurely selling bonds, interest prematurely starting because a construction loan has been signed, re-advertising and receiv- ing new bids, or similar items of cost. Bid bonds have traditionally been written by surety company’s and fur- nished free to contractors, as the surety company expects to write the firm’s insurance or their performance and payment bonds. In recent years, some sure- ty companies have started the practice of charging for writing a bid bond. In cases where the bid bond is forfeited, the surety company only warrants to the ‘owner that payment will be made and does not relieve the contractor of the Construction Education Committee CarpenterFinalizing and Submitting the Bid obligation for paying the entire amount of the bid bond. Issuance of a bid bond does not guarantee that a performance and payment bond will be issued by the i surety. 672 PERFORMANCE AND PAYMENT BONDS Performance and payment bonds are not to be confused with bid bonds. The Performance and payment bond (P&P) is an extension of credit to the contrac- tor for the benefit of the owner of the project. This P&P is a guarantee by the i surety that the contractor will comply with all the terms and conditions of the contract and that all laborers, vendors, subcontractors and suppliers will be paid. Ifthe contractor defaults then the surety must respond by completing the i project and paying all the costs of the project under the contract terms that the company entered into with the owner. Although separate bonds are usually ‘writen for performance and payment, they are usually associated and referred to as if they were one The bidding documents usually state that: (1) the contractor is required to furnish a P&P bond and shall include the cost thereof in his price: (2) the owner reserves the option to require a P&P bond and, if required, will reimburse the contractor for the cost; or (3) the contractor is not required to furnish a P&P bond. The contractor must insert the cost of the P&P bond in its estimate in the first instance only. In the second instance, which is common, the possible requirement of a P&P bond may affect a contractors decision to bid, but not its estimate of cost The cost of P&P bonds varies with surety companies and varies by the per- formance and financial rating of the contractor. The cost usually ranges between 0.75% and 1.5% of the contract amount for lump sum proposals when the AVE is under contract with the owner and substantially higher for designv/construct contracts. The cost of a P&P bond is classified as an indirect cost but is usually put on the recap sheet after the total cost of work plus the markup have been determined. The reason for this is that the percentage cost applies to the final contract amount, which is the last amount determined, P & P bonds on unit price work—The cost of the P&P bond must be di tributed on a prorata basis to each bid item on unit-price bids, The determina tion of the amount to be prorated is one of the uses of the summary of all costs, as shown in the flow chart in Par. 6.2.4. 6-29 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter6-30 Construction, Estimating and Bidding 673 ALTERNATE PRICES One of the most difficult tasks asked of a contractor when bidding a project is to include several alternate prices that include multiple trade items. Alternate bids. Estimates for major alternates must be handled by the esti- mating team exactly like bids on additional projects. When alternates are requested that affect several trades, a separate recap must be set up for each alternate, and in many instances all work for each alternate must have separate cost sheets used for costing the work. All procedures for estimating alternates are like additional bids since alternate prices actually are additional bids. Not only do alternate bids drastically increase the work of the estimating team, the risk of mistakes increases exponentially because people cannot give the same attention and care to two or more bids at the same time, When two or more major alternates are requested, it can make the task of the estimating team insurmountable since the team must receive the additional numbers and infor- mation from subcontractors and vendors and attempt to prevent them from making mistakes. AJEs should warn owners that contractors seldom bid their lowest or best prices on projects where significant alternate prices are required. Owners should always be discouraged from asking for major alternates. However, some AJE firms cause the alternates to be requested because they do not have the ability to assure the owner that the project is designed within the budget. ‘Owners want as much in the project as the budget will stand, and the A/E uses alternates as a way out should his design be over the budget. Minor alternates affecting one trade are not as significant a problem as the major alternates affecting all trades, but even minor alternates can be a prob- Jem for the estimating team. Sometimes, an alternate as simple as one that gives the difference in cost for changing the brand of plumbing fixtures specified can pose a problem. Some plumbing subcontractors may quote an “add” to change the brand, and another may quote a “credit” The contractor does not know if they are both right, or one has mistakenly quoted a credit when it should have been an “add” or vice versa. Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee CarpenterFinalizing and Submitting the Bid 74 UNIT PRICES ‘Some unit prices that are required to be quoted on the bid form to serve as agreed prices for changed conditions due to unknown underground conditions are justifiable, These unit prices may include, but not be limited to: piling, cais- sons, structure excavation (rock and earth), structure backfill, and footing or Pier conerete (separate unit prices for forms, concrete, and reinforcing). But the only equitable unit prices are when the contract allows for separate unit prices for larger quantities and separate unit prices for smaller quantities of work. Some project proposal forms, however, require long lists of unit prices for every conceivable kind of work. Unit prices should never be requested or used for design changes, nor should unit prices be required for items of work that are not in the original bid scope of work. The requirement to provide an enor- 4 ‘mous number of ridiculous unit prices prevails on certain types of work and with some AJE firms or owners think they will be able to get lower prices on changes from the contractor and its subcontractors in this manner. In reality, ‘most unit prices will never apply to significant changes, which must be nego- tiated in any case. When subcontractors are required to furnish many unit prices, there is usu- ally a wide spread in the prices for the same items. Although the contractor can easily list unit prices from one subcontractor, he may be forced to change to i another subcontractor at the last minute. The contractor then must somehow ! urge the low subcontractor to agree to the unit prices used on the bid form or | otherwise risk taking losses on unit-price items, which are usually only pass- H through items. | Ifa contractor cannot talk the owner out of asking for alternate bid prices or long lists of unit prices, it must decide whether to take the additional risk on the project and whether to tackle the addition time-consuming chores during the bid. The only alternative may be to drop off the list of bidders. 88 — CONCLUSION—WHAT WE HAVE LEARNED 1. The bid team must be disciplined to keep the process orderly, consistent, and efficient, if the team is to produce an accurate and competitive bid, 631 Construction Estimating & Bidding, Theory Principles Process (First Edition) Cercere, Swensen, VenderBloeman & White Estimating Task Force AGC Construction Education Committee Carpenter