The Principal’s Corner: Exploding the Myths of Construction Pricing

Over my career representing architects and owners, often in disputes against contractors, I’ve come to understand how the construction industry has successfully propagated several myths about how contractors develop project pricing. In my book, Broken Buildings Busted Budgets, I described how contractors thrive on asymmetry of pricing information. According to this belief, only contractors are in control of the pricing for the many products bought for a construction project. This allows them to set any price for change orders triggered during the course of a project, with owners having little leverage to negotiate because they don’t have similar access to the actual market cost of typical products.

The more that design professionals and owners come to recognize the importance of securing price transparency to corroborate project costs, the sooner that each owner and its design team will regain greater control over the final cost of their projects.

Here are the biggest myths I continue to see repeated in industry publications and encounter on building projects of all scales:

1. Construction pricing reflects the “true” marketplace for products.

In most locales, there is no real market for construction pricing. Thanks to highly fragmented, intensely local contractor/supplier and exclusive distributor territories, most design professionals and owners must select from a few qualified choices for bidders and suppliers. A real marketplace like Amazon has created for almost everything (construction products being a major exception) would envision a system where the owner/purchaser would have access to an array of verified suppliers, vendors and contractors who would be competing on a regional, or even national, level. If design professionals and owners had access to easily compare products and pricing during the design and bid phases, such a marketplace would help ensure that their performance specs would result in more competitive, transparent bidding.

2. Contractors bid all elements of a project to secure the best price.

A GC/CM maintains a stable of “go to” subcontractors they are accustomed to working with. While they may solicit bids from multiple subs for a particular trade, they often know who they want to work with on a particular project and most will admit privately that they steer the award in that direction. On the next project, they may award the bid to someone else on their list of favorites. This keeps everyone relatively content in the CM’s local ecosystem. Feeding the subcontractors and suppliers work like this enables contractors to charge owners what they believe a particular owner will pay, padding some trades and keeping others lean. And because every project is unique in scope, scale, and site it’s very difficult for design professionals and owners to research or maintain relevant pricing data. As a result, owners and their design teams don’t have a clue how to calculate what a set of design documents will cost to construct until the bids come in and the project needs to be redesigned to meet the budget.

3. Owners and design teams can get a good idea of the cost of a set of design documents from an independent cost estimator.

There are many good independent cost estimators that can be relied upon to assist owners and architects to “price” their design documents. However, one must first understand the sources being used by these independent cost estimators: they almost always go to the same subcontractors and suppliers in their communities that the CM will be using. As such, these cost estimates don’t reflect a truly regional or national marketplace but tend to reinforce the opaque pricing being supplied by the CM.

4. Fast-Track is the most cost-effective method of construction.

In my experience, there is nothing so mislabeled and misleading in the construction world as fast-track. This methodology continues to be presented by CMs to owners as the most efficient way to save months off a typical construction schedule. Yes, time is money. But things can go wrong quickly when trades are awarded and construction begins before the design is complete and coordinated. It’s only a matter of time before a fast-track project is plagued by change orders and delay claims that raise the final construction cost 20%, 40% or more. On your next fast track project make sure you look into one of the trailers being used by the CM. You will certainly find one or two full time employees churning out a regular package of delay notices emanating from design errors and omissions made by the architect and engineers on the project.

Utilizing a digital information platform like Arazoo can help design professionals, owners, and even contractors by enabling them to better organize product and material research, including pricing, performance characteristics, and previous usage. Having all this information accessible in a couple clicks enables individuals and teams to make more informed decisions around product comparison and specification. And as Arazoo welcomes Verified Manufacturers™ to our platform this year, we will begin to see the potential of a truly national marketplace for the specification and purchase of products and materials. Stay tuned!