Beware: Underbidding Is Real And Could Cost You Thousands!
As a child, my dad regularly said, “Son, you get what you pay for.” When it comes to building your forever home, this generational adage is 100% accurate.
Underbidding is an estimating methodology businesses or contractors may use to undercut their competition to snatch business or obtain a project at any cost, even if the contractor knows a project cannot be completed at the estimated bid. Underbidding extends above and beyond the normal interaction between a homeowner and contractor working together to reduce costs in order to meet the homeowner’s budget constraints.
Significant underbidding is generally used by shady contractors who will underbid a housing project by 15-50% just to win the business, knowing he/she can never complete the project at that cost and plan to make as much money as he/she can before the truth emerges or the money runs out.
Generally, the contractor will say, “We can complete this project for around x dollars, but I can’t make any promises and you’ll need to cover any additional costs.” On the surface, this comment sounds fairly harmless, but when you are building a $500,000 to $2,000,000 forever home, additional, unplanned housing construction costs can easily add up to $200,000+.
Hiring a contractor who has underbid your project quickly results in higher home building costs because your project has been budgeted at a lower amount, the contractor has received payment, and cannot finish the project for the amount promised. If a homeowner has found themselves in an underbidding situation, the homeowner will be forced to take one of the following paths:
- Pay the existing contractor for the undisclosed costs to finish the project, or
- Obtain a new contractor.
When a homeowner becomes the victim of a contractor who has underbid the project, I always recommend finding a new contractor. 99.9% of the time, if a contractor deceived the homeowner to obtain the business, what else is he/she hiding from the homeowner? This could include skimping on materials and processes, skipping key construction processes or phases, or providing poor or cheap construction craftsmanship and quality.
Even though finding a new contractor will add lost time, additional holding costs, increase material and construction costs, and redundant expenses for the new contractor to catch-up to speed, fix problems, and going through the same steps as the previous contractor such as working with the city on permits, revisions with the architect, and buying materials, it’s best to bite the bullet as soon as possible and hire a contractor of integrity who discloses all home building costs up front.
Here Are Seven Action Steps A Homeowner Can Take To Ensure They Don’t Fall Prey To Contractor Underbidding:
1. Obtain An Accurate Estimate
As you begin to obtain estimates from potential home builders or contractors, communicate with them up front that you would like an accurate estimate that includes all aspects of the building cost within the estimate. Some contractors will provide you a general price such as cost of materials plus 25 to 50% for contractor labor. Once you narrow down 2-3 contractors you would like to work with based on general pricing and overall credentials, ask him/her to provide a detailed estimate based on your architectural plans. Some high-quality contractors will charge you a small fee to do this, but you’ll have an accurate estimate before construction begins.
2. Include A Contingency Budget
Ensure your budget has a contingency budget section. This is usually 5-15% of the overall construction budget which is for additional costs that may arise during construction. Let’s face it; there is always the possibility for unforeseen costs. It’s best to prepare for them in the beginning.
3. Ensure Your Construction Bids
Are “In Line” With Your Other Bids
As you review your top two-three home builder’s bids, ensure they are all in-line with each other such as within a 10-20% margin difference. Each builder is going to charge a little different based on his/her quality of work, experience, and demand; however, all the bids should be within a similar range for the size of your home and scope of work. This process will also allow you as a homeowner to confirm you are including all your needed costs because one contractor may include a line item that another contractor missed.
4. Ensure All Aspects of Building Process Are Included In The Estimate
After you review your estimates, ensure the contractors have included all costs for your home building project such as building permits, materials, and labor. Always compare apples-to-apples when reviewing bids. One contractor may include landscaping while the other doesn’t. Thus, the home builder that has landscaping will most likely provide a higher estimate. And, research how much and what type of landscaping is included? Is it sod only or does it also include plants, trees, mulch, and outdoor lighting?
5. Discuss Potential Material Cost Changes Based on Market Conditions
Discuss the possibility of increased building material cost during the construction phase. Because it takes 9-15 months to build a new home, it’s possible any number of material costs can increase. If lumber material costs increase 3% between the original estimate and the framing phase, your lumber costs could easily increase by $1,500 to $3,000. An experienced contractor will help homeowners understand market conditions and potential changes.
6. Ask Your Home builder Or Contractor To Explain Change Orders
A change order is a process in which the homeowner informs the builder or contractor after the project has begun that he/she would like to make a change to the existing design, predetermined material choices, or add home features. This is a very common outlet for allowing the homeowner to make changes along the way, but also understand the costs to change the design, materials, or features. Discussing this process and costs involved in change orders before construction begins will increase communication and peace of mind moving forward for both the home builder and homeowner.
Lastly, always require a well-written contract between the builder and homeowner that details expectations, cost, payment schedule, and change orders. A good contract will advance the communication between the homeowner and builder to ensure everyone understands his/her commitments moving forward.
When undercutting becomes a methodology for doing business, everyone loses, including both the contractor and the homeowner. When building your forever home, trust your project to a reliable, trustworthy, and credentialed home builder or contractor.
Mockingbird Builders specializes in providing customers with an accurate home building estimate before construction begins. Are you ready to design and build forever home?
Contact us today to discuss your new forever home!
Randall Patterson, LEED AP
Owner & Founder