Questioning the "Three-Bid Rule"

James G Robyn0711The "Three-Bid Rule."

This is what clients have been told to do for years by consumer advocacy groups as the best way to get what they want for the lowest price.

I recently read an article by a custom homebuilder who posited the old Three-Bid Rule should no longer apply in the home building industry. His article was so well written that it struck a chord with me; it’s been one of my pet peeves for many years. In the pool business we are frequently requested to “turn in a bid” on a project, and it is always an exercise in futility. The clients who are simply looking for three bids are working on the least amount of information and the most amount of misinformation — to their peril — and the stories of problems, surprises, dissatisfaction and disappointment are ubiquitous. 

The point is probably illustrated more easily in the custom home building industry because most people are more familiar with the details and possible cost differences in home construction. For example, in requesting a quote on a new custom home, no thinking person would ask a custom builder, “Give me a bid on a 3-bedroom home with 2-1/2 baths and a 2-car garage with an automatic door opener.”

Yet I cannot tell you how many times I’ve had people ask me to give them a bid on “a 20-by-40-foot pool with a heater, a Polaris and an automatic pool cover.”

At least in the custom home building industry an architect will produce a set of plans that will define the project in a meaningful way. Dimensions, materials and many other requirements are called for, but it is what is not illustrated or specified on the plans that can constitute significant cost drivers.

The idea behind the Three-Bid Rule is that it assumes everything other than the cost of the competing builders is equal. However, not every builder assesses and calculates the scope of work, drawings, specifications and callouts in the same exact way. 

Every builder and contractor, whether they are experienced or brand new, will make assumptions, do analyses and come up with estimates in a different manner. The net result is that the actual estimate for the deliverables will be different from each of the parties; the differences may be subtle, or they may be significant, but they will always be there and will have a real potential to create confusion and misunderstanding.

In the swimming pool industry, we frequently don't even have a drawing to provide a basis from which we can come up with a meaningful estimate. When we do have drawings from landscape designers or others, the drawings rarely have sufficient detail that would allow for the client to truly do an “apples to apples” comparison. Even when drawings do have a wealth of detail, after 30-plus years in the pool business, I can always come up with lots of questions that would need to be answered in order to determine what a realistic and complete budget would be for the project. 

Many of these questions would be decision points that need to be made by the informed client based on my knowledge of the possibilities and alternatives, and how these decisions would align with the clients’ values and vision of the project. 

This lack of detail motivates the builder to make assumptions, i.e., to ignore potentially significant cost drivers in order to come up with a seemingly low bid number for the quote. This is not fair to the client, but the builder is motivated into taking this position because of the very nature of the Three-Bid Rule. (It’s also not fair to the builder because the client is not paying him for his time to produce the bid.)  

“You get what you pay for,” is the old saw, and a bid proposal for which a client has paid nothing is worth exactly what the client paid for it.

Because the builder is asked to provide a free bid based on incomplete information, and because he will be selected if he has the lowest number, his motivation will be to quickly write a bid that is a verbose but minimally responsive to the specifications. It will be a bid tat assumes the least expensive options will always be acceptable and that anything not specifically addressed need not be included. This is an excellent recipe for misunderstandings, hidden agendas and cost overruns once the project starts.

A better approach that is fairer to both the client and the builder is the negotiated contract. 

In this situation, the client pays the builder for his time to determine and understand what the client wants from the project. The builder subsequently reviews and comments on the drawings and specifications with the client and articulates the assumptions that could be cost drivers for the project. The builder develops a detailed, line-item budget for the project and negotiates with suppliers and trade subcontractors for the best prices commensurate with the specifications. The builder and client review the budget line items, identify any items that are vague or incomplete and intelligently decide how the project will proceed.

If the client initiates the negotiated contract with one or more builders, he will usually come to a conclusion as to with whom he feels most comfortable and trusts his builder understands his needs and the project.

The negotiated contract ensures the project has been completely thought through with the client by the professionals. It minimizes any surprises and confusion during the project execution and allows for project management that brings the mutually agreed upon project to completion, on time and on budget.

After all, that is really what the client wants.

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