5.1 Introduction

Cost estimating is a function that is central and indispensable for every construction contracting business. Estimating can be defined as the estimator's making the best possible prediction of what the cost of performing a construction project will be, given the time and other resources available. Construction estimating involves the determination and analysis of the many factors that influence and contribute to the cost of a construction project. Estimating, which is done prior to the physical performance of the work, requires detailed study of the bidding documents, as well as a careful analysis of numerous factors that will have a bearing on construction costs. Estimators apply their knowledge and skills, carefully analyze the construction documents, and examine as many other factors and influences as they can foresee, and then, through the application of their skills, produce this prediction—the cost estimate.

5.2 General

Construction cost estimates are prepared for a variety of purposes, and much of the credit for the success or failure of a contracting enterprise can be ascribed to the skill and astuteness, or the lack thereof, of its estimating staff. If the contracting firm obtains its work by competitive bidding, the company must be the low bidder on a sufficient number of the projects it bids if it wishes to stay in business. However, the construction projects the firm obtains must not be priced and bid so low that the company cannot realize a reasonable profit from their performance. In an atmosphere of intense competition, the preparation of realistic bids requires the utmost in good judgment and estimating skill.

Although negotiated contracts frequently lack the intensity of the competitive element inherent in competitive bid contracting, the accurate estimating of construction costs nonetheless constitutes an important aspect of these contracts as well. In this environment, the contractor is expected to provide the owner with reliable advance cost information, and the contractor's ability to do so determines in large measure its continuing ability to attract owner-clients and to be able to enter contracts with them for the performance of their construction projects. In design-construct and construction management contracts, the contractor and the construction manager are called upon to provide expert advice and assistance with determining construction cost as the design is developed. The advance estimation of costs is a necessary part of any construction operation and is a key element in the conduct of a successful construction contracting business.

It must be understood that construction estimating bears little resemblance to the compilation of industrial “standard costs.” By virtue of standardized conditions and close plant control, a manufacturing enterprise can predetermine the total cost of a unit of production in an almost exact way. Construction estimating, by comparison, involves determining prices for an environment that is far more variable. The absence of any appreciable standardization of conditions from one project to the next, coupled with the inherently complicating factors of weather, materials, labor, transportation, locale, and a myriad of others, makes the advance computation of exact construction costs a matter much more complex than in a more controlled environment. Nevertheless, on the whole, construction estimators do a remarkably good job, despite the numerous variables of all kinds with which they are confronted on almost every project.

While the fundamentals of the estimating process are consistent and do not change, it should also be recognized that every estimator has his or her own unique approach to the estimating process, as well as his or her own subtle variations in procedure. In addition, the policies and procedures of the construction company or of its estimating department, will determine some aspects regarding the preparation of the estimate. It has been said, therefore, that estimating is partly an art and partly a science.

There are probably as many different estimating procedures as there are contractors. In any process involving such a large number of intricate determinations, innovations and variations will naturally result. The form of the worksheets, the order of procedure, and the mode of applying costs all are subject to considerable diversity, with procedures being developed and molded by the individual estimator and the individual construction company to suit their own needs. However, in a move designed to eventually introduce a measure of uniformity to construction estimating, two national trade groups representing estimators have agreed to produce a set of uniform standards for the practice of construction estimating. The American Society of Professional Estimators (ASPE), representing estimators who work for contractors, and the American Association of Cost Engineers (AACE), made of up estimators working for large industrial owners, have agreed to a joint effort in this regard.

It should also be noted that computer hardware and software play an indispensable role in the estimation of construction costs in construction professional practice today and that there are numerous different elements of hardware and software in widespread usage by contractors. However, the basic component elements of producing an estimate are the same; different computer applications simply manage the data in different ways. This chapter presents and discusses primarily the fundamentals of estimating terminology and procedure. Computer applications of the estimating process are discussed later in the chapter.

5.3 Types of Estimates

Estimates are prepared by contractors for different purposes, and in response to different needs of architect-engineers, developers, and owners. These different types of estimates likewise produce different degrees of accuracy in their prediction of construction costs.

5.3.3 Lump-Sum Estimates

Two forms of detailed estimates are widely used in the construction industry. These are the lump-sum estimate and the unit-price estimate. Cost estimates in the field of building construction are customarily prepared on a lump-sum basis. Under this procedure, a fixed price is compiled, and if a contract is entered, the contractor agrees to perform a prescribed package of work in full accordance with the drawings and specifications and the other elements of the contract documents for the lump-sum price that was derived from the estimate and will be written into the agreement as the contract price. The contractor agrees to carry out its responsibilities so as to fully comply with all of the elements of the contract documents, even though the cost may prove to be greater than the stipulated amount, and therefore he is said to be at risk for the contract amount that was derived from the detailed estimate.

Lump-sum estimates are applicable only when the exact nature of the work and the quantities involved are well defined by the bidding documents. From the owner's standpoint, such a contract can have many advantages. For example, the contract amount fixes the total project cost, a condition that can be useful when the owner is making the financial arrangements for the project. Additionally, if the drawings and specifications clearly describe the work and therefore define exactly what it is that the owner will receive, then the lump sum competitive bid method of contracting places contractors and subcontractors in competition with one another for the award of the contract, thus yielding the lowest construction cost for the owner.

A prime contractor's detailed lump-sum estimate consists of six components: materials, labor, equipment, indirect cost, subcontractor quotations, and markup. The estimator will make a determination of his best prediction of the project cost for each of the first five components, and then will determine and enter a markup amount. The lump-sum cost estimate, that is, the amount to be entered onto the proposal, will be the total of these six components of the estimate. Figure 5.1 illustrates this process in graphic form.

When a prime contractor is preparing a lump-sum proposal, he will typically require the subcontractors to submit lump-sum proposals for their specialty items of work. Subcontractors will use the same procedure in determining the amount of their proposal. For a subcontractor, the estimate will consist of five components (unless the subcontractor plans to sub-subcontract a portion of the work), which are totaled in order to arrive at the lump-sum amount of their proposal.

Lump-sum estimating requires that a “quantity survey” or “quantity takeoff” be made. This is a complete listing of all the materials and items of work that will be required. Using these work quantities as a basis, the contractor computes the costs of the materials, labor, equipment, indirect cost, and subcontracts. The sum total of these individual items of cost constitutes the anticipated overall cost of the construction. Addition of a markup yields the lump-sum estimate that the contractor submits to the owner as its price for doing the work. The quantity takeoff process will be discussed in greater detail in subsequent sections of this chapter.

5.3.4 Unit-Price Estimates

Engineering construction projects are generally bid, not on a lump-sum basis, but rather as a series of unit prices, and the contract that is awarded is a unit-price contract. In engineering projects where the unit-price method of contracting is commonly employed, often quantities of the materials and the actual amount of the work activities cannot be determined in advance of contract formation with sufficient accuracy to permit the use of lump-sum contracts. Therefore, the estimate is based on the contractor's unit prices, dollars per unit of quantity, for named activities and items of work as defined by the architect-engineer, and in an approximate quantity estimated by the architect-engineer during the design. A unit-price contract is formed, with the contract stipulating that each of the activities and work items to be performed will be completed by the contractor in such a way as to fulfill all of the requirements of the contract documents, at the unit prices that have been set forth in the contractor's proposal.

The bidding schedule in Figure 5.2 shows a typical list of unit price activities or work items, which become bid items in a unit price proposal. An estimated quantity is shown for each item. As was noted earlier, these quantity estimates are those made by the architect-engineer as the design is produced and are not guaranteed to be accurate.

When unit-price proposals are involved, a somewhat different estimating procedure from that described in the previous section must be followed. A quantity survey is made, much as for a lump-sum estimate, but in this method a separate survey is needed for each bid item. This survey not only serves as a basis for computing costs but also checks the accuracy of the architect-engineer's estimated quantities. A total project cost, including labor, equipment, materials, subcontracts, indirect cost, and markup is compiled, just as in the case of a lump-sum estimate. However, in this method, all costs are kept segregated according to the individual bid item to which they apply. More information on this process is presented in sections that follow in this chapter.

When computing unit prices, the contractor must keep several important factors in mind. The quantities, as listed in the schedule of bid items, are estimates only. The contractor will be required to complete the work specified, in accordance with the contract documents, and will be paid on the basis of the quoted unit prices, whether quantities are greater than or smaller than the designer's estimated amounts.

Sometimes this requirement is modified by provisions in the contract that provide for an equitable adjustment of a unit price when the actual quantity of an activity or work item on the proposal varies more than a stipulated percentage above or below the quantity first estimated by the architect-engineer. Values of 15 to 25 percent are often used in this regard.

In unit-price contracting, all items of material, labor, supplies, or equipment that are not specifically enumerated for payment as separate items, but are reasonably required to complete the work as shown on the drawings and as described in the specifications, are considered as subsidiary obligations of the contractor. No separate measurement or payment is made for these items. Rather, the owner expects to pay, and the contractor expects to be paid, solely on the basis of the activities and work items set forth in the proposal, and at the unit prices that were proposed, and which then became part of the contract.

5.4 Preliminary Considerations Prior to Commencing the Estimate

General contractors may learn of the existence of a project that has been designed and for which proposals are being sought, through seeing an advertisement for bids, or by receiving an invitation to bid. Additionally, contractors may be contacted by an owner or an architect-engineer to make them aware of the existence of a forthcoming project. Contractors may also learn of the project through one of their professional associations or from a plan room operated by one of these associations.

5.5 Set-Asides

It is possible that when the contractor examines the bid documents and contract documents, he may discover that he is not eligible to bid on certain public projects. This can occur on those projects that have been “set aside” for only those contractors who can satisfy specific criteria. For example, under regulations of the U.S. Small Business Administration (SBA), certain federal construction projects are set aside specifically for small contractors. In such an instance, a contractor must conform to certain measures of annual business volume in order to be eligible to bid on such a project. In addition, under certain SBA programs, some federal construction contracts are removed entirely from competitive bidding, and contracts are negotiated with socially and economically disadvantaged small business firms (SDBs) as defined by the SBA.

Another example is afforded by public construction work at the federal, state, and local levels that is set aside for disadvantaged business enterprises (DBEs) or minority-owned business enterprises (MBEs). To be eligible to bid such projects, a construction company must be able to provide evidence that it is owned and controlled by minorities, women, or historically disadvantaged groups, and the company meets prescribed certification criteria. There are also some public construction projects that are set aside and reserved for locally based contractors.

5.6 Qualification

Bidder qualification is most often based on experience, competence, and financial criteria, and is entirely separate from set-asides as discussed in the previous section. Many states have enacted statutes that require a general contracting firm wishing to bid on public work in those states, to be qualified before the firm can be issued bidding documents or before it can submit a proposal. Other states require that the contractor's qualifications be judged after it has submitted a proposal. The first method is called prequalification, and the second is called postqualification. Many other public bodies, including agencies of the federal government, require some form of qualification for contractors bidding on their construction projects. While the relative merits and drawbacks of the qualification process are subject to debate, it is a matter of fact that qualification in some form has become almost standard practice in the field of public construction. The obvious purpose served by qualification is to eliminate the incompetent, overextended, underfinanced, and inexperienced contractors from consideration.

Prequalification requirements apply almost universally to highway construction, and in certain jurisdictions all construction projects financed with public funds require contractor prequalification. In those states in which contractors' licenses are required, contractors must be licensed prior to applying for prequalification. To prequalify, the contractors must submit detailed information concerning their experience, equipment, finances, current projects in progress, references, and personnel information, as set forth by the architect-engineer or owner. Evaluation of this information results in a determination as to whether the contractor will be allowed to submit a proposal. Highway contractors usually submit qualification questionnaires at specified intervals and are rated as to their maximum contract capacity. Their construction activities are reflected in their current ratings, with bidding documents being issued only to those who are determined to be qualified to bid on each project. The prequalification certificate may also limit the contractor to bidding on certain types of work, such as grading, concrete paving, or bridge construction.

Although the foregoing description of qualification is centered on publicly financed projects, the same procedures can be and frequently are also utilized on private projects as well. In prequalification and postqualification, the architect-engineer and owner typically request financial information, the contractor's history of past projects performed, names and contact information of owners for whom the contractor has constructed projects, names and qualifications of the contractor's management personnel, and so on. It is increasingly common for the architect-engineer and owner to request information regarding the contractor's safety program, workers' compensation EMR rating, training program, and quality management program as well.

A somewhat different procedure, often used in closed bidding, is for the contractor to submit an individualized qualification summary or portfolio to accompany its proposal. This is essentially a sales document and contains information designed to enhance the contractor's status in the eyes of the owner.

In jurisdictions that require postqualification, the contractor is called upon to furnish certain information as specified by the owner along with its proposal. The information requested has much the same form and content as that required for prequalification, but it serves the qualification purpose only for the particular project being bid.

5.7 The Decision to Bid

After learning that proposals are to be taken on a given construction project, and usually after obtaining and thoroughly studying the bid documents and contract documents, the contractor must make a decision as to whether it is interested in submitting a proposal for the project. The decision is momentous. If the contractor decides not to bid, obviously he has no chance of obtaining a contract award for the project. If the contractor decides to prepare and submit a proposal, he must be prepared to commit to the estimating process, which will result in a proposal.

In a general sense, the “bidding climate” prevailing at the time has a bearing on the contractor's decision to bid or not. The decision to bid involves a study of many interrelated factors, such as his opinion of the owner and the architect-engineer, the nature and size of the project as it relates to company experience and equipment, the amount of work presently on hand, the location of the project, the time of year, the bidding period, the duration of the project, the terms and conditions set forth in the contract documents, the contractor's bonding capacity, the probable competition, labor conditions and skilled labor availability, and so on. It is certainly to a contractor's advantage, and assuredly a good business practice, for the contractor to make as comprehensive and thorough an investigation of all aspects of a project as possible, before the firm expends the considerable time, effort, and money required to compile and submit a proposal. Because it involves such a substantial commitment of resources to prepare a proposal for a project, it goes without saying that once an affirmative decision to bid has been made, the contractor will exert every effort to be the successful bidder.

5.8 The Bidding Period

The bidding period is defined as the time between the announcement of the project and availability of bid and contract documents to the contractors, and the time when proposals are due for submittal to the owner. During the bidding period, the contractor will very carefully examine all of the contract and bid documents, prepare his estimate of the cost of the construction, and prepare his proposal for submittal to the owner and the architect-engineer. The results of his detailed study of the bid and contract documents provide the contractor an overall concept of the total package of work and provide the basis for making the most realistic detailed estimate he can for the price of the construction of the project.

During the bidding period, it is not uncommon for the contractor to find errors, inconsistencies, and missing information in the bidding documents. It is the responsibility of the contractor to bring such imperfections to the attention of the architect-engineer or owner, so that suitable modifications might be made by the responsible party. The contractor will typically submit a number of requests for information (RFIs) to the architect-engineer during this time. The designer will respond, in writing, to each RFI. Sometimes the designer will issue an addendum to provide missing information, clarification, or interpretation of some element of the bid or contract documents. Addenda are more fully defined and described in Chapter 4.

A sufficient allocation of time in the bidding period on the part of the architect-engineer and the owner can be an important consideration. The contractor's estimating process takes considerable time and must be dovetailed into contractors' current operations. Careful study and analysis of the bid and contract documents on the part of the contractor will usually result in lower bid prices, and a more comprehensive and accurate proposal, and thus substantial savings for the owner.

The more complicated and extensive the project, the greater the dividends a reasonable bidding period will pay to the owner. Unless the work is truly of a rush or emergency nature, it is sound economics for the owner to allow sufficient time for the bidding contractors to make a thorough study and examination of the proposed work.

When an insufficient bidding period is allotted, many of the best prices will not have been received by the contractor in time for inclusion in its proposal. In addition, when a short bidding period and unreasonable bidding deadline is imposed, and the contractor does not have time to thoroughly understand and properly estimate all of the components of the work in the project, he will inevitably compensate for his uncertainty and the resultant increase in the amount of risk he perceives by including additional dollars in his estimate.

Additionally, from the contractor's point of view, the owner should avoid setting any day following or preceding a weekend or holiday as the date for receiving bids. Such times impose undue hardships on the contractors and other bidders and greatly restrict the availability of prices and other information. Afternoon hours for proposal submittal deadlines are much preferred. As far as is practicable, a bidding date should not conflict with other construction bid openings.

5.9 Prebid Meetings

During the bidding period, two different types of prebid meeting are commonly conducted. The first is a prebid meeting initiated and conducted by the architect-engineer and the owner. Early in the bidding period, the owner and designer typically meet with the contractors who are planning to submit proposals for the project. Subcontractors and materials suppliers also frequently attend these meetings. The purpose of this prebid meeting is to provide the designer and the owner an opportunity to review the project requirements with those who will be submitting proposals, to emphasize certain aspects of the proposed work, to clarify or explain difficult points, and to answer questions and to provide clarifications for those who are engaged in preparing proposals for the project. This type of meeting can be very beneficial and is especially appropriate when the work will be complex or when it will involve unusual procedures.

Many contractors believe it is desirable to also hold an internal prebid meeting for projects on which they are planning to submit proposals. These meetings are typically attended by the estimators and the persons who will occupy the principal supervisory positions on the project if the bid is successful and a construction contract is awarded. The exchange of information between those who are estimating the costs of the project and those who will perform the work on the project can be extremely beneficial. Such meetings can be used to explore the alternative construction procedures that might result in a competitive advantage and/or to make tentative decisions regarding methods, equipment, personnel, and time schedules. This information can be very beneficial for the estimator, to assist in preparing a more accurate and competitive proposal.

5.10 Work to Be Self-Performed and Work to Be Subcontracted

Prior to beginning preparation of the detailed estimate, the contractor's estimating and management staff will make a determination of which items of work on the project the contractor plans to perform with its own craft labor forces under its own supervision, called self-performed work, and which items of work the contractor will plan to perform with subcontractors. For those items of work the company plans to perform with its own craft labor, the materials, labor, and equipment costs will be estimated by the contractor.

For those items of work the company plans to perform by subcontracting, subcontractors' proposals will be sought, and will be incorporated into the prime contractor's estimate. Each subcontractor's proposal is expected to include the subcontractor's determination of all materials, labor, equipment, indirect costs, and markup necessary to complete its work to satisfy the requirements of the contract documents.

Early in the bidding period, the contractor will usually send bid invitations to all material dealers and subcontractors who are believed to be interested and whose bids would be desirable, as well as to those subcontractors and vendors with whom the general contractor has had a favorable working relationship in the past. The general contractor advises of the project under consideration, the item for which a quotation is requested, the deadline for receipt of proposals by the prime contractor, the place where bids will be accepted, the name of the person to whom a proposal should be directed, the place where bidding documents are available, and any other special information or instructions that may be necessary. Specific reminders concerning the status of addenda, alternates, taxes, and bond requirements are typically included as well.

General contractors typically maintain a file that lists names, addresses, contact information, and other pertinent information regarding material suppliers and subcontractors. These files are maintained both by geographic area and by specialty. Therefore, when a contractor is planning to bid a project and has made the determination regarding which work on the project he will plan to subcontract, he has a ready source of subcontractor information.

5.11 Site Visit

Following his initial examination of the contract and bid documents, the contractor will usually visit the construction site. Information will be gathered concerning a wide variety of site and local conditions. Examples include:

• Project location, and physical address.
• Probable weather conditions and influences the weather may bring.
• Availability of electricity, water, telephone, and other services.
• Access to the site and access considerations at the site.
• Location and proximity of emergency services.
• Local codes, ordinances, and regulations.
• Conditions pertaining to the protection or underpinning of adjacent property.
• Space available for storage and for laydown areas and onsite fabrication.
• Surface topography and drainage.
• Subsurface soil, rock, and water conditions.
• Underground obstructions and services.
• Transportation and freight facilities nearby.
• Conditions affecting the availability, hiring, housing, and per diem expenses for workers.
• Material prices and delivery information from local material dealers.
• Facilities for rental or lease of construction equipment.
• Local subcontractors.
• Demolition and site clearing.
• Facilities for disposal of debris and location.

It is important that an experienced person perform this site inspection, particularly in locations that are remote from or relatively new or unfamiliar to the contractor's organization. The visitor should become familiar with the project requirements in advance of the site visit and should take with him a set of drawings and specifications for reference. It is desirable that the information developed during the site visit be recorded in a signed report or on a form the contractor may have developed for this purpose, which will become permanent reference information for use throughout the preparation of the project estimate.

It is usually helpful to have available a camera, tape recorder, measuring tape, and other aids appropriate to the occasion, perhaps to include items such as an earth auger and hand level. Photographs and sketches should be used to augment the site visit report. It is not uncommon that a follow-up visit be made on very large or important projects, or when the estimator discovers the need for an important fact or verification of some feature of the site.

When access to the site is restricted for some reason, visits to the site may have to be coordinated with other bidding contractors, a representative of the owner and/or the architect-engineer, and the primary sub-bidders. Site conditions where remodeling or renovation work is included can be especially demanding, involving such considerations as use of existing elevators, control of noise and dust, matching existing materials and finishes, and maintenance of existing services and operations. Experience has shown that the advance preparation of a checklist of items to be investigated during the site visit can be extremely valuable.

5.12 Project Time Schedule

Prior to beginning the detailed estimating process, the estimating staff will carefully evaluate the project duration. The duration is defined as the number of days allotted for completion of all of the requirements of the contract documents for the project following signing of the contract, as stated in the contract documents. The project duration is a very important consideration in the estimating process.

In order to predict construction costs, the contractor must prepare at least a preliminary construction schedule, which is the contractor's plan, on a timeline, for completing the requirements of the contract documents within the specified duration. If the project duration permits, the contractor will most likely plan to perform the work on a five-days-per-week, eight-hours-per-day schedule. However, as indicated by the duration and the amount of work to be performed on the project, the contractor may find it necessary to work on weekends and/or to work overtime, and perhaps even to work in consecutive shifts, in order to complete the project on time. These determinations will have a profound effect upon the cost of the construction, and must therefore be reflected in the estimate.

In some cases, the contractor is required to indicate on the proposal form its own time requirement for completing the project. In either case, construction time becomes a contract provision, and failure to complete the project on time is a breach of contract that can subject the contractor to significant damage claims by the owner, or to the necessity of paying liquidated damages to the owner, as is typically included in the contract language. Liquidated damages are discussed in more detail in Chapter 6.

An approximate construction schedule is also needed for pricing purposes because a number of items of project overhead expense (to be discussed in more detail in a subsequent section of this chapter) are directly related to the duration of the construction period for the project. These are referred to as time-related overhead costs.

In addition, a general schedule of the major segments of the project provides the estimator with valuable information concerning weather conditions to be expected. This provides a basis for decisions regarding equipment and labor productivity, hot and cold weather operations, and other similar considerations.

In cases where the contracting firm believes the stipulated contract time will be inadequate for project completion using normal construction procedures, it may request that the owner and architect-engineer reconsider the duration that they originally established and allow a longer construction period. Otherwise, the feasibility of overtime or multiple-shift work must be investigated.

5.13 Preparing the Estimate

For every construction project to be performed, whether an engineered project or a building construction project, when the contractor prepares a detailed cost estimate, there are six components of cost to be tabulated: materials, labor, equipment, subcontractor proposals, indirect costs, and markup. Although these elements were depicted in Figure 5.1, they are repeated in Figure 5.3 for convenience.

5.13.1 Estimating Materials Costs

5.13.1.1 Quantity Takeoff

The estimator's first step in estimating materials is to identify each material that will be required in the performance of the work in constructing the project. For purposes of discussion in this text, the term materials is construed to mean everything that becomes a part of the finished structure. This includes electrical and mechanical items such as elevators, boilers, escalators, air-handling units, and transformers, as well as the more obvious and traditional items such as lumber, structural steel, concrete, and paint.

Identifying the materials that will be necessary for the performance of the work so as to fulfill the requirements of the contract documents will be determined from the estimator's analysis of the drawings and the specifications for the project. Most of the materials that will be required in a building construction project are not called out in the contract documents in the form of a list or a table; rather, the drawings and specifications show and describe what the finished construction product will be. Therefore, the estimator must analyze all of the components of the contract documents in order to identify all of the materials that will be required to construct the project and to fulfill contract requirements.

On most engineered projects, some of the materials are listed in the unit-price bid items. However, the estimator must determine exactly what the characteristics and properties of those materials are required to be, in order to fulfill the requirements of the contract documents. In addition, the estimator must determine what other materials may be necessary to accompany, or to complete, the proper installation of the bid item materials.

When the requisite materials have been identified and listed, the estimator must determine from the contract documents, the quality levels in which the materials must be furnished as set forth in the contract documents. Most of these requirements will be found in the specifications. Many construction materials such as lumber and plywood are available in a number of different grades; others, such as portland cement concrete or asphaltic concrete, have varying compositions and proportions of ingredients; others such as metals, have different metallurgical properties, various levels of strength, or different finishes specified.

The estimator must infer from the description of materials requirements in the specifications, and from information that may be provided on the drawings, all of the pertinent elements of quality for each material that will be necessary for the construction of the project, so that the end product will comply with the requirements of the contract documents.

The estimator's next step will be to determine the quantity of each material that will be required for the project. This step in the estimating process is usually referred to as the quantity takeoff (QTO) or the quantity survey. The amount of each material needed to perform the work must be quantified in the unit of measure in which the material or product is produced and marketed: cubic yards of cast-in-place concrete, sheets of plywood, bank cubic yards of soil to be excavated, and so on.

Some materials such as concrete are quantified by calculation, based on dimensions in the drawings. Other materials, which are of identical kind, size, and description, such as door units, lighting fixtures, windows, and the like, are quantified by counting the number of identical items as indicated in different parts of the project, as shown on the drawings. Such items are referred to as count items in estimating.

Following the quantification of each material in its appropriate unit of measure, the estimator will determine the amount of each material that will actually need to be purchased in order to complete the work. This is called determining a waste allowance or overage allowance. For some materials, such as framing lumber, the estimator must allow for the fact that the stock lengths in which lumber is sold will be cut by the carpenters to the exact lengths required for the work. Thus, more lumber will need to be purchased than the precise quantity that has been calculated as being necessary for the finished product. For other materials, such as electrical switchgear or air-handling units in the mechanical system, the waste or overage factor will be expected to be zero. The amount of waste or overage allowance to be applied will come from the estimator's experience and judgment.

Additionally, for some materials, the contractor must know the stock sizes in which the material is produced and marketed, and then must calculate the quantity that will need to be purchased to complete the work as required, based on those stock sizes and the language in the specifications. For example, carpet is produced and sold in standard rolls that are 12 feet wide. The drawings and/or specifications will frequently indicate where seams may be made in certain rooms, or they may indicate the maximum number of seams allowable in certain rooms. From this information, the estimator must determine the quantity of carpet that will actually need to be purchased in order to complete the work in compliance with the specifications.

It should also be noted that there are some materials for which contractors do not typically determine quantities. In these instances, contractors rely on vendors or fabricators to determine the quantity necessary. Reinforcing steel and structural steel are commonplace illustrations of this practice.

5.13.1.2 Estimators' Quantity Surveys

Although the bid documents for a unit-price project customarily provide contractors with estimated quantities of each bid item, these are approximate quantity determinations only, and the architect-engineer typically assumes no responsibility for their accuracy or completeness. Architect-engineers' quantities are sometimes computed only within so-called paylines, and may not be representative of work quantities that must actually be done to accomplish the bid item. In addition, more detail is usually required for accurate pricing of the work. Consequently, contractors customarily make their own quantity takeoffs, even on projects for which estimated quantities are given.

In making quantity surveys, the estimator must be able to visualize how the work will actually be accomplished in the field, given the description of the activity or work item on the unit-price proposal form. Correspondingly, many contractors believe that some appropriate on-the-job experience is a necessary prequalification, or at least a significant advantage, for construction estimators.

The quantity survey provides the contractor with valuable information during the construction period, as well as for the initial estimation of project cost. For example, it can provide the contractor with data concerning time that will be required in the field for work accomplishment, crew sizes, and equipment needs. The quantity survey provides purchasing information as well, and serves as a reference for various aspects of the field work as it progresses. Additionally, it is often useful in providing the owner with a variety of costs pertaining to the work.

5.13.1.3 Professional Quantity Surveyors

There are a number of proprietary firms whose principal business is making quantity surveys and cost estimates of selected construction projects. Such firms provide these services on a fee basis. This may be done after the design of the project has been completed, or the firm may act as a cost adviser to the owner and architect-engineer during the design stage. The services of such companies are engaged mostly by owners and architect-engineers as a means of monitoring costs during design so as to keep project costs within budgets and to get the most for the owner's construction dollar. Companies engaged in this form of business are commonly called quantity surveyors.

It has long been standard practice in the United States for bidding contractors to make their own quantity takeoffs. This results in considerable duplication of effort since the owner and architect-engineer may already have determined materials quantities to meet their needs during the evolution of the design. Nevertheless, contractors seldom utilize the services of professional quantity surveyors for purposes of preparing proposals. Contractors prefer to prepare their own quantity surveys, in which they have a sense of confidence. They maintain a staff of experienced estimators whose reliability and accuracy have been well established. During the takeoff process, the estimator must make many decisions concerning procedure, equipment, sequence of operations, and other such matters. All these decisions must be considered when costs are being applied to the quantity surveys. In addition, work classifications used in quantity surveys must conform with the contractor's established cost accounting system.

It is interesting to note that in Great Britain, the quantity surveyor is an established part of the entire construction process. This party is hired by the owner at the inception of the project and makes cost feasibility studies, establishes a construction budget, makes cost checks at all stages of the design process, and prepares a final quantity takeoff. This takeoff is submitted to the contractors who will be bidding the project, and the contractors then use the quantity surveyor's information as the basis for their pricing of the work. Additionally, the quantity surveyor advises the owner on contractual arrangements and compiles certificates of interim and final payment to the contractor who is performing the work. In some ways, the duties of the British quantity surveyor and the American construction manager, especially when the construction manager is acting as an agent of the owner, are quite similar.

5.13.1.4 Materials Pricing

After determining the quantity and quality of materials the contractor will need to purchase for the project, the estimator will next determine prices for each of these materials. The estimator will contact materials suppliers, distributors, or manufacturers and will solicit price quotations for each of the materials to be purchased. The estimator will furnish information to the materials suppliers regarding the exact description of the material, the quality level in which the material is specified, and the quantity of each material to be purchased. Materials suppliers will provide price quotations in response to the estimator's request, and the estimator will tabulate the price quotations, and then will compare them and determine the price to be included in the estimate for each material.

The estimator will compile this information for each material, and will then determine the dollar amount that the company will expect to pay for the material when the project is performed. The estimator must include in the materials price determination, details such as applicable taxes, shipping fees, delivery fees, special handling requirements, and so forth, for the materials, all of which will add an increment of cost to the original quoted price.

In addition, suppliers will often include the designation FOB in their price quotations, which translates literally to “free on board” or “freight on board.” The FOB designation in a price quotation will be accompanied by a specific location or destination, as stipulated by the vendor (e.g., “FOB my loading dock, Kansas City, Missouri”). This location is the designated place where the supplier will have the material located for the contractor when the material is purchased. This location might be the supplier's or manufacturer's location, a warehouse, or a port facility. Or it could be the contractor's job site. This is also the location to which the supplier assumes responsibility and the point at which the contractor assumes responsibility for the material or product at the price that has been quoted. Additional information regarding the FOB designation is provided in subsequent sections of this book.

When all of the elements of the cost of each material have been finalized, all of the prices for all of the materials needed for the project are totaled by the estimator. This total becomes the materials cost subtotal in the estimate.

While this process may seem direct and straightforward, there is actually a considerable degree of uncertainty, and therefore risk, in this materials price determination. First, there is no relief for the contractor if the estimator's identification of the materials required or his determinations of the necessary quantities are inaccurate. The contractor is required to provide and install the materials necessary to fulfill the requirements of the contract documents without regard to whether this is the quantity determined by the estimator.

Additionally, some materials prices are stable, while others fluctuate. Time will elapse between the taking of the price quotation from the supplier, and the point in the future when the material is actually purchased for the project. Materials prices will often change during that time.

Sometimes materials suppliers will guarantee their materials price quotations for a specified period of time following their initial price quotation, but often not. Therefore, the price that the estimator includes in the estimate at the time of its preparation must reflect, as nearly as possible, the price for which he or she expects the company to buy the material on that date in the future when that material is actually purchased for the project.

While materials are frequently purchased from suppliers or distributors as previously described, there are times, especially on engineered projects, when the contractor produces its own materials, for example, when a contractor is producing its own aggregate as required for a highway project. In such an instance, the contractor would determine its own cost of production, per cubic yard or per ton, by determining the costs of drilling, blasting, crushing, screening, stockpiling, and delivering the required aggregate to the several portions of the project. Similarly, highway and heavy construction contractors frequently install their own batch plants on the site for the production of portland cement concrete and asphaltic concrete for the project.

5.13.1.5 Materials Price Summaries

Upon completion of the quantity survey by the estimator, most contractors enter the materials prices onto some type of summary sheet or into their estimating spreadsheet or software. Usually, the total amount of each work classification is obtained and listed. Figure 5.4 presents a form of summary commonly used for a lump-sum project. For this type of contract, a similar summary is prepared for each major work classification. Figure 5.4 contains final quantities of concrete and formwork materials on the Municipal Airport Terminal Building, a hypothetical project that will be used in this text to illustrate selected procedures.

Similar summaries are prepared for all of the other principal work types. When the total quantities of work for each classification have been entered, the summary is then used for the pricing of materials.

Figure 5.5 shows an example of a materials summary for an engineered project where a unit-price contract is employed. For this type of bidding on an engineered project, a summary is prepared for each bid item. As illustrated in Figure 5.5, all work types associated with the accomplishment of that bid item are listed on the summary, which often includes several different work categories. With the work quantities obtained from the takeoff, the contractor uses the cost summary to obtain the total direct costs of that bid item. The summary sheets for unit-price projects customarily serve for the computation and recording of material, labor, equipment, and subcontract costs. Figure 5.5 illustrates this point as well.

It should be noted that each work classification entered on a summary is typically identified by a cost account number. These numbers are the company's standard cost account numbers, which are basic components of its cost management system and historical information database system. Each estimate is broken down in accordance with the established cost accounts. Chapter 12 discusses the essentials of a contractor's project cost management system.

5.13.1.6 Alternate Materials

As discussed in Chapter 4, the material specifications on certain projects require that a specifically named product be furnished (closed specification), while sometimes providing the bidding contractor the right to propose a less costly substitute as an alternate in its proposal. When the contractor determines the amount of its bid, the cost of the specified product is used. However, the proposal also identities the substitute product proposed for use and the difference in price to the owner if the alternative product is approved.

5.13.1.7 Owner-Furnished Materials or Items

It is not unusual for the bidding documents to provide that certain materials will be supplied by the owner to the contractor at no charge. These materials are referred to as owner-furnished materials or owner-furnished items.

For these items or materials, no material costs per se need to be obtained by the contractor or be included in the project cost estimate. However, all other costs associated with such materials, such as job site storage and protection, and handling or lifting, as well as installation costs, must be included.

5.13.1.8 Allowances

On occasion, the architect-engineer or owner will designate in the bidding documents, a fixed sum of money that the contracting firm is directed to include in its estimate to cover the cost of some designated item of work. This is called an allowance and is often used with regard to materials such as finish hardware, face brick, or light fixtures. Such an allowance establishes an approximate material cost for bidding purposes in those instances in which the designer does not prepare a detailed material specification, or where a selection of the exact product to be used has not been made, in advance of bidding.

The contractor does not solicit material prices for these items, but rather simply includes the designated allowance amount in the bid. After the contract is awarded, at some point a final material selection is made by the owner or architect-engineer, and the contractor purchases and installs that which has been selected.

The inclusion of an allowance in the proposal does not necessarily mean the contractor is entitled to receive payment in the amount of the allowance. The contract documents typically provide that, after the completion of construction, an adjustment in the contract amount will be made for any difference between the designated allowance amount for an item and the final actual cost of that item.

5.14 Estimating Labor Cost

5.14.1 Direct Labor

As noted earlier, the estimator will ordinarily calculate labor costs for the craft labor that the contractor plans to self-perform, that is, to perform with craft workers on his payroll. Having decided what parts of the work will be self-performed and what parts of the work will be performed by subcontracting, the estimating staff will determine the labor cost of the contractor's craft labor forces that will perform work on the project.

While there are a number of different approaches to the process of labor estimation, many estimators believe that the best approach is for the estimator to “build the job in his mind” and to estimate labor in doing so. In building the project in his mind, the estimator will determine all of the activities that must be performed in order to complete the work. Activities are defined as elements of work that are identifiable and quantifiable and that consume resources.

Next, the estimator will envision the number and the classification—how many journeymen, apprentices, crew leaders, and so on—of craft workers necessary to perform each defined activity. This is referred to in estimating terminology as making the work breakdown structure (WBS).

The next crucial step is determining, literally estimating, the number of man-hours necessary for the crew and each of its craft workers to complete each activity that has been identified. This component of the labor estimate is both vital and, at the same time, filled with uncertainty.

This determination of craft labor hours is vitally important because this is where labor man-hours are quantified. Obviously, this determination will form the basis for the quantification of labor cost on the project. On building construction projects, labor cost is typically the largest single component of the total cost of a construction project.

At the same time that the quantification of labor craft hours, and therefore labor cost, forms the basis for the largest component of the cost of a project, this determination is also the most uncertain and therefore the most risky component of the estimate. This is true because estimating labor man-hours is literally based on estimating the productivity of the craft labor on the project. It is one of the ironies, and also one of the elements of difficulty associated with cost estimating, that labor is both the largest component of cost within an estimate and at the same time the most difficult and therefore the most risky-to-estimate component of construction cost.

There are many factors that influence what the labor productivity will be on a construction project, and many of these factors are difficult to predict in advance. Additionally, their impact on labor productivity is difficult to quantify. A few examples will illustrate this point.

Weather has a profound influence on labor productivity. Hot and cold weather, high humidity, wind, and precipitation all have an influence on the rate at which craft labor can perform the work. While general weather trends can usually be predicted, the daily weather and its variability, as well as sudden and unforeseen weather events such as storms or precipitation, certainly affect productivity but cannot be predicted with accuracy.

Additionally, factors such as geographic location of the project, the composition of the construction team—owner, architect, general contractor personnel, subcontractors, building officials, and so on—all have a bearing on the craft labor productivity on a project. Likewise, the composition and management abilities of the contractor's team—supervisor, superintendent, project manager, and office staff—also have an influence. All of these various factors exert an influence on how craft labor does its work and how productive the craft workers will be.

While other factors could be listed that may impact labor productivity, it should now be clear that the estimator faces a daunting task in his endeavor to quantify and to determine the cost of craft labor and its performance of the construction work on a project. Nonetheless, the estimator must make the best prediction possible of the cost of labor to perform the project, given the time and other resources available.

To accomplish this task, there are several different methodologies that may be employed. Both of the methods described here make extensive use of the historical cost information that the contractor's cost estimating, cost accounting, and cost control system has developed. This is, in fact, the very reason for the contractor's compiling and maintaining this file of information. While the system or cycle of cost accounting and management will be further discussed in another chapter, the relationship of this cycle and its historical cost information database to the process of estimating labor is shown in Figure 5.6.

The historical cost data is a tabulation of the contractor's costs of performing work, by project and by activity, on past projects. This information is generated as each project is performed, and is stored in a systematic manner in the historical cost database. This database is one of the contractor's most important and most closely guarded assets.

By one estimating philosophy and methodology, the estimator “builds the job in his mind” and estimates construction costs as though this database of information did not exist. He proceeds with estimating labor as we have described, envisioning activities to be performed, determining the WBS, and estimating craft labor man-hours for the performance of the work. Periodically during the development of the estimate, or sometimes when the labor estimate is complete, the estimator will then check the values he has derived in his estimate, against labor man-hours for the same activities on similar or comparable projects that have been completed on the past, as stored in the historical cost information. This comparative analysis allows the estimator to determine his comfort level with the values he has derived in this estimate, as a function of how these values compare to the contractor's experience on similar activities and projects that the contractor constructed in the past.

A second method for estimating labor is the converse of the first. By this approach, estimators consult the historical information first, and based on the activities to be performed on the project currently being estimated, they then extract from the historical information the number of man-hours in the performance of these activities on past projects. The estimate being prepared presently is then structured accordingly. Finally, the estimators adjust the man-hours or production rates in the current estimate in such a way as to reflect their best determination of what the man-hours or production rates will be on the project currently being estimated, in order to reflect current conditions or influences on this project.

Certainly, individual estimators, as well as different construction company owners, have their opinions regarding which method of estimating labor yields the best results. In the final analysis, however, the conclusion is the same: the estimator must utilize his skill and judgment, and the best tools and resources available, to include the historical information database, to estimate with the greatest degree of certainty attainable, the cost of the craft labor in performing the construction work on the project.

Following the determination of all the activities to be performed in completing the work on the project and the estimation of the number of man-hours of craft work necessary to complete each activity, the estimator will develop totals for labor man-hours by craft and by skill level. The total number of master carpenter hours, journeyman carpenter hours, carpenter apprentice hours, ironworker hours, cement finisher hours, and the like will be determined.

The labor cost to be included in the estimate will then be calculated by multiplying the craft man-hours estimated for each craft, by the rate (dollars per hour) at which that craft and skill classification will be paid on the project. The total dollars determined by this process is referred to as the direct labor dollars.

In a variation of the process described above, estimators may also use historical cost information from past projects to produce production rates for different activities. Labor production rates, in turn, can be expressed in a variety of ways. One of these methods is to determine the man-hours or crew-hours required to accomplish a unit or prescribed number of units of a given work type. As an example, six hours of carpenter time and six hours of carpenter-helper time may be required to assemble, erect, plumb, brace, strip, and clean 100 square feet of rectangular concrete column forms.

To obtain the estimated labor cost for a given quantity of such work, the labor hours required per unit of work are multiplied by the appropriate wage scales per hour for the craft, and then are again multiplied by the total number of units of work of this category as obtained from the quantity survey.

A different way to express this type of labor production rate is the number of units of work accomplished per working day by a worker or by a crew in a certain craft. Another version of labor production rates is total man-hours or total crew-hours to complete a given job of work.

When estimating the costs of construction labor, a cost per unit of work, or a unit price, can be useful and convenient. For example, if carpenters earn $28.35 per hour, and a carpenter-helper's wage scale is $21.50 per hour, the rectangular column forms cited previously will have a labor unit cost of $2.99 per square foot [($28.35 + $21.50) × 6 ÷ 100]. These “labor unit costs” are quick and easy to apply, as illustrated by Figure 5.4. However, the estimator must ensure that his labor unit costs are kept up-to-date and that they reflect the probable levels of work production and the applicable wage rates.

Certainly, the most reliable labor productivity information is that which the contractor obtains from its own completed projects, stored in his historical cost database. Information on labor productivity and costs is also available from a wide variety of commercial sources. However, while information of this type can be very useful at times, it must be emphasized that labor productivity varies greatly from one geographic location to another and is further modified by seasonal influences and many other factors.

Estimators must be very circumspect when using labor unit costs that they have not developed themselves. For the same work items, different estimators will include different expense items in their labor unit costs. It is never advisable to use a labor unit cost derived from another source, without knowing exactly what it does and does not include.

5.14.2 Indirect Labor

The total labor dollars on the project will include the determination of both direct labor and indirect labor dollars, as illustrated in Figure 5.7. Indirect labor is also frequently referred to as labor burden.

Indirect labor dollars are defined as dollars that the contractor must pay, expressed as a fraction or percentage in several different categories, for each direct labor dollar of labor cost. Examples include federal withholding taxes, Social Security taxes, workers' compensation insurance premiums, unemployment insurance premiums, union fringe benefits, employee medical care, and employer-furnished fringe benefits such as paid vacation time, pension plans, health and welfare funds, and so on.

Each of these elements of indirect labor cost is typically defined as a percentage of direct labor dollars. Most contractors will tabulate the total of all of the indirect labor components to be included for each craft and skill level and will then apply that percentage as a multiplier to the direct labor for that craft and skill level. While the amount will vary by location and by contractor, the indirect labor is frequently in the range of 40 to 50 percent of the direct labor amount.

Indirect labor costs can be included in the cost estimate in different ways. For example, labor unit costs or hourly labor rates that include both the direct and indirect costs of labor can be used. However, this procedure does not always interrelate well with a contractor's cost accounting methods. For this reason, direct and indirect labor costs are often computed separately when job costs are being estimated. One commonly used method is to add the proper percentage allowance for indirect costs to the total direct labor cost, either for the entire project or for each major work category. Because of the appreciable variation of indirect costs from one labor classification to another, it may be preferable to compute indirect labor cost at the same time that direct labor expense is obtained on the summary sheets. The 39 percent and 43 percent additions to the labor column of Figure 5.4 represent the total indirect labor costs associated with the concrete placing and forming, respectively.

5.15 Estimating Equipment Cost

The estimation of equipment cost begins with the estimator's determining what items of equipment will be necessary for the performance of the work on the project being estimated. Equipment will be defined in this sense as machinery that is necessary for the contractor's performance of the work. First, there is sometimes confusion regarding the term equipment and its definition as machinery necessary for the performance of the work on a project, as contrasted with equipment that is to be installed in the project, such as heating, ventilating, and air conditioning equipment.

Machinery that is necessary for the performance of the work may include cranes, backhoes, materials lifts, temporary elevators, track hoes, earthmoving equipment, and so on. As used herein, equipment refers to a contractor's equipage used for the physical accomplishment of the work on construction projects.

It should also be noted that the management of the construction company will have done some decision making in the development of the company's estimating and cost accounting systems regarding its definition of equipment. Most contractors define equipment as noted earlier, with the additional element of definition to include the fact that equipment usually is defined as a capital expenditure subject to depreciation.

In most contractors' organizations, the concept of capital equipment is what distinguishes equipment from other similar elements necessary for the performance of the work, such as tools. While a pan scraper earth-moving machine would certainly be a capitalized piece of equipment, concrete vibrators, circular saws, electric drills, extension cords, sledge hammers and other hand tools, and so on would be most commonly be classified as tools. Tools, in turn, will typically have their costs accounted for and will be included in the estimate as project indirect cost items, which will be discussed in a subsequent section of this chapter.

Sometimes tax laws govern the determination of the classifications of capital equipment, as contrasted with tools. When legislation does not provide the distinction, the contractor will make internal company definitions of equipment and tools classifications. Sometimes standard accounting practice will also indicate how these classifications are structured.

It is important to know that while both equipment and tools as described thus far have costs associated with their purchase and use, the matter of where and how the cost is tabulated and estimated is not as important to understand as is the realization that every component of cost, no matter its name or its classification in an accounting sense, comprises a component of the cost of performing construction work and must be included in the contractor's estimate. Many contractors utilize the expression, “If I need this item in order to perform the work, and if I do not have its cost included in the estimate, then I will be furnishing it to the project free.” This is hardly a good business procedure. Therefore, every effort is made by the estimator to include a cost in the estimate for everything that will be needed in terms of equipment and tools, in order to perform the work on the project.

Equipment costs, like labor costs, are difficult to evaluate with exactness. Equipment accounts for a substantial proportion of the total cost of most engineering projects, but is typically somewhat less significant as a fraction of the total cost in building construction work.

When the nature of the work (usually engineered construction) requires major items of equipment such as bulldozers, pan scrapers, motor graders, concrete plants, draglines, and so on, detailed studies of the associated costs must be conducted. In his determination of what elements of equipment will be needed to perform the work, the estimator must first carefully assess the exact characteristics the equipment must have, in order to effectively perform the work on the project being estimated. Factors such as lifting capacity, height or depth of reach, production rate, mobility, and many other factors determine the suitability of the particular equipment to meet the specific needs of the work to be done.

If the contractor owns the equipment having the characteristics needed for the project being estimated, and if the plans are to use this equipment on the project being estimated, the estimator will proceed with determining its cost to the project by calculating the contractor's ownership and operating costs for each piece of equipment, and ascribing those costs to the project based on the amount of time the machine will be needed on the project. The production rate for each machine will also enter into the estimator's calculations of equipment cost. If the contractor does not own a piece of equipment whose need has been identified for a project, he may consider purchase, or he may rent or lease the necessary equipment. If a purchase decision is made, the estimator will proceed with determining ownership and operating costs.

If the contractor does not own the needed equipment and decides not to purchase, then the equipment will be rented or leased for the project. While there certainly are differences between equipment rental and lease agreements, for purposes of understanding the estimating process, the process of estimating the costs of equipment rental or leasing will be considered as being the same.

In this case, having determined the needed characteristics in the machine to be rented or leased, the estimator will contact equipment rental or lease agencies in order to obtain price quotations. These quotations are usually stated by rental or lease agencies as a rate—dollars per hour, per day, per week, and so on. The estimator will determine the amount of time the equipment will be needed on the project, based on the quantity of work to be performed and the production rate of the equipment, and will multiply by the best rate quoted to obtain the equipment cost.

The estimator must add to the quoted equipment rate his consideration of the cost of other typical elements of the rental or lease agreement such as delivery and pickup charges, setup fees, loss and damage waivers, and the like. Additionally, operating and maintenance costs, as well as the cost of the equipment operator, must usually be determined and included as additional elements of the cost of the rented equipment. The estimator will tabulate all of these elements of the cost for the rented machine and will then include these costs in the estimate.

For equipment the contractor already owns that is needed for a project, the estimator will determine the rate, also known as the internal rate, for the machine that is needed. The internal rate is the sum of the contractor's ownership and operating cost for the machine, as illustrated in Figure 5.8. This cost is typically expressed as dollars per unit of time—dollars per hour, per day, per week, and so on. Ownership and operating costs for equipment the contractor owns will have been determined by the cost accounting system the contractor has developed for his business.

Ownership costs can be defined as costs that continue to accrue, whether the machine is in use or not. Examples include financing costs for buying the machine (or sinking fund contributions for replacing the machine at the end of its useful life), and depreciation. Operating costs, as their name indicates, include costs associated with the operation of the machine. Examples include fuel, lube, hydraulic fluid, filters, tires, scheduled maintenance, repairs, and so on.

To determine ownership and operating costs, most contractors utilize their historical cost database or perhaps a separate ledger account for equipment. Machine costs are tabulated over a period of time, stored in the historical cost database, and then converted to the internal rate.

The estimator will determine how long the piece of equipment is needed on the project whose cost he is estimating, based on the machine's production rate and the quantity of work to be done with the machine. He will then multiply the amount of time the machine is needed by its internal rate in order to determine the cost of utilizing that machine on the project. In the future, as the project is constructed, revenue received for the performance of the work will be allocated, on an internal accounting basis in the contractor's office, to pay for the ownership and operating costs of the contractor's owning this machine and furnishing it for use on this project. Additionally, as the project is constructed, the costs of the machine performing work on the project will be tabulated and stored in the historical information database.

The estimator will also determine the cost of the machine operator in the project cost estimate. The operator's hourly rate will be multiplied by the time he or she will spend operating the machine on the project, in order to determine dollars of operator cost for the estimate, for each machine, for the time it is used on the project.

It should be noted that, although equipment operator costs are estimated as noted, these costs are usually tabulated in the labor cost section of the estimate. Though it is logical to assume that the equipment cost should include equipment operator cost, the inclusion of operator costs in the labor cost section of the estimate simply facilitates calculations of indirect labor costs, which are based on labor payroll dollars.

5.15.1 Equipment Expense

To estimate the expense of major equipment items as realistically as possible, as noted previously, management decisions must be made concerning the exact equipment sizes and types that will be required and the manner in which the necessary units will be provided to the project. A method sometimes used by contractors when the duration of the construction period will be about equal to the service life of the equipment is to purchase new or renovated equipment for the project and then sell it at the end of construction activities. The difference between the purchase price and the estimated salvage value is entered into the project estimate as a lump-sum equipment expense.

The most common manner in which equipment is provided to construction projects is where the contractor owns the equipment and uses it on a succession of projects during its economic lifetime. Rather than a lump-sum equipment purchase expense or cost of rental or lease, ownership costs and operating costs are tabulated and included in the estimate in this instance.

Ownership cost is of a fixed nature and accrues whether the equipment is working or not, and includes considerations such as depreciation, interest on investment or financing cost, taxes, insurance, and storage. Operating costs include such expenses as fuel, oil, grease, hydraulic fluids, filters, repairs and parts, tire replacement and repairs, and maintenance labor and supplies. The calculations for the determination of a contractor's ownership and operating costs for a bottom-dump hauling truck are illustrated in Figure 5.9. Note that the calculations result in a cost per hour for the contractor's ownership and operation of this piece of equipment. As noted previously, this is referred to as the internal rate.

The direct labor cost of a given work type is computed by combining a labor production rate with the applicable hourly wage scales and total work quantity. Most equipment costs are calculated in much the same fashion, except, of course, that equipment production rates and hourly equipment costs must be used. The hourly wage rates of various labor categories are immediately determinable from applicable labor contracts, prescribed prevailing wage rates, or established area practice. However, this is not true for equipment.

As noted previously, for equipment the contractor owns, ownership cost and operating cost are tabulated by the contractor in order to establish the internal rate, expressed as dollars per unit of time. Additionally, the production output of each machine is determined from historical records maintained by the contractor, and is expressed as the production rate for the machine. Contractors establish their own hourly equipment costs, as well as their equipment production rates. Ownership cost is combined with operating cost to derive an estimated total cost per operating hour for most items of production equipment. Power shovels, tractor-scrapers, and ditching machines are examples of equipment whose costs are usually expressed in terms of hourly rates.

However, the costs of some classes of a contractor's production equipment are frequently expressed in terms of expense per unit of product produced. Portland cement concrete mixing plants, asphalt-paving plants, and aggregate plants are typical examples. The logic for tabulating the costs of such equipment is the same as that expressed earlier; the contractor must develop a method for determining his cost of owning and operating the equipment, and must include those costs in the estimates of the projects where that equipment will be used.

Additionally, it should be noted that there are some types of equipment, normally referred to as support equipment, for which it is more appropriate to express costs in terms of time units other than production rates. Air compressors, welding machines, and cranes of various types are examples of equipment required on the job site on a continuous basis during particular phases of the work, and production rates have no real significance with regard to determining the cost of furnishing such equipment to the project. Costs per week or per month are much more appropriate for such equipment items.

Move-in, erection, dismantling, and move-out expenses, also called mobilization and demobilization costs, are independent of equipment operating time and production and are not, therefore, usually included in equipment hourly rates. These equipment expenses are separately computed for inclusion in the estimate, often as an item of project overhead.

The preceding discussion assumes that equipment accounting is done on an individual machine basis. However, contractors vary somewhat in how they maintain their equipment accounts, some preferring to keep equipment costs by categories of equipment rather than by individual unit. These firms use a single account for all equipment items of a given size and type, and compute an average budget rate based on the composite experience with all of the units included. Thus, the same expense rate is applied for any unit of a given equipment type regardless of differences in age or condition. When estimating equipment costs on a future project, there may be some logic in using an average actual hourly cost rate for any given equipment type and capacity, because it is often not possible to predict exactly which equipment units will be placed on a particular project.

There are many external sources of information concerning ownership and operating costs for a wide range of construction equipment. Manufacturers, equipment dealers, and a large assortment of publications offer such data. It must be realized, however, that these are typical or average figures, and that they must be adjusted to reflect contractor experience and methods and to accommodate the specific circumstances of the project being estimated. Climate, altitude, weather, job location and conditions, operator skill, field supervision, and numerous other factors can and do have a pronounced influence on equipment costs.

When a new piece of equipment is procured for which there is no cost history, equipment expense must be estimated using available sources of information considered to be reliable. When estimating equipment costs, an excellent reference is the Contractor's Equipment Cost Guide, published by the Associated General Contractors of America and Dataquest, Inc. Another source of ownership and operating costs for construction equipment is the guidelines for federal construction projects and the values predetermined and used by the federal government when paying a contractor for its equipment costs incurred in contract modifications. Methods such as these are applied when the contractor cannot establish its own equipment hourly costs from actual accounting records.

5.15.2 Ownership and Operating Costs

Hourly expense rates are computed and periodically updated for each major piece of production equipment a contractor owns. Figure 5.9 illustrates a commonly used procedure by which these tabulations are done, using a bottom-dump hauler as an example. The average annual usage of this hauler is approximately 1,200 hours, and it is assumed that the useful life of the machine will be a total of 12,000 operating hours, or 10 years.

In Figure 5.9, the original price of the hauler, less tires, is depreciated uniformly over 12,000 hours. The cost of the tires is deducted from the original purchase price because the tires have a shorter service life than the mechanical equipment itself. Depreciation is equipment expense caused by wear and obsolescence, and allows for the recovery of the invested capital over the useful life of the equipment. The method by which the depreciation expense is spread uniformly over the total service life is referred to as straight-line depreciation. As discussed in another section, there are several different depreciation methods that may be utilized. Regardless of the mode of equipment depreciation a contractor may use for tax and other accounting purposes, the use of straight-line depreciation for estimating and job cost accounting is usual practice.

Taxes, insurance, storage, and interest on investment, together referred to as investment cost, are customarily based on the average annual value of the equipment. The example in Figure 5.9 assumes taxes at 2 percent, insurance and storage at 5 percent, and interest at 9 percent, for a total annual cost of 16 percent of the average yearly value. A standard way of computing the average annual value, based on straight-line depreciation, is by the equation:

where A	=	average annual value
C	=	delivered cost
n	=	number of years of useful life
S	=	salvage value

In Figure 5.9, with a salvage value of zero, the average annual value is calculated as follows:

The calculation above illustrates the determination of the average annual value ($57,997.50) of the bottom dump hauler, on a straight-line depreciation basis. This value is reflected in Item 2 of Figure 5.9, as a component of annual ownership cost for the equipment.

Operating costs are computed on the basis of the contractor's own experience, or by using available national averages. Equipment manufacturers and dealers provide typical ownership and operating costs. It must be realized, however, that these are average figures and that they may not reflect the conditions of the project being estimated. Job estimates must be based on individual job conditions, and the contractor's past experience is the best guide in this regard. Nevertheless, there are times when national averages can be very useful.

In the computation of tire replacement cost in Figure 5.9, a new set of tires is assumed to have a life of 3,500 operating hours. Costs of major repair and overhaul are not normally regarded as operating expense but are capitalized and treated as an element of ownership expense.

Figure 5.9 shows that for the bottom-dump hauler, the ownership cost is $15.33 per operating hour, and the estimated operating costs are $17.09 per operating hour. This piece of equipment operating in the field will cost the contractor a total of $32.42 per working hour, not including operator's labor.

It is important to note that ownership expense goes on whether or not the equipment is working. If the bottom-dump hauler actually works 1,200 hours or more per year, the owner recovers this cost. If the hauler works less, the contractor does not recover all the annual ownership costs, and the deficit comes out of general company profits. Operating costs are, of course, incurred only when the equipment is actually being used.

When equipment is leased or rented rather than owned, there is no ownership cost involved. Rather, the lease or rental cost, expressed on an operating hour basis, is used. Operating costs apply as before, with the sum of the two again providing the rate for the item.

The costing of smaller equipment items the contractor owns and is capitalizing, is done in a somewhat similar manner. A common example might be the calculation of the expense of an electric concrete vibrator whose initial cost is $840. Suppose the service life of this vibrator is approximately four years and about $240 per year must be spent on servicing, repairs, and new parts. With an annual investment cost of approximately $67, this translates into a total cost of $2,068 spread over 48 months, or $43 per month. If concrete pouring on a project will extend over four months, the equipment expense to be added into the estimate for this project for the concrete vibrator will be $172.

5.15.3 Equipment Production Rates

In addition to equipment cost, equipment production rates are also needed for the computation of equipment cost in a construction estimate. Applying equipment hourly expenses and production rates to total job quantities enables the estimator to compute the equipment cost for the project. Equipment unit costs, equipment costs per unit of production, can also be determined.

Equipment production rates, like labor production rates, are subject to considerable variation, and are influenced by a host of different jobsite conditions. In addition, some equipment production rates must be computed using specific job conditions such as haul distances, grades of inclines to be traversed, and rolling resistance. Estimators must consider and evaluate all of these factors when they are determining equipment costs for a project.

There are several sources of equipment production information. The most reliable by far are the contractor's production records from past projects. Additionally, input from the equipment operators can be very useful at times. If a new piece of equipment is involved with which there has been no prior experience, production information provided by the equipment manufacturer or dealer can be of assistance.

There are many rules of thumb and published sources of information concerning average equipment production rates. “Stopwatch spot checks,” made to obtain the productivity of specific equipment items at a moment in time, may be of value. In this regard, however, it should be noted that production rates of equipment used for estimating purposes should be average values taken over a significant period of time. Daily job production tends to be variable, and this is a drawback of using daily values and stopwatch spot checks. Production records from past projects produce good time average values.

Production rates may be applicable to a single piece of equipment, or may be determined for an equipment spread, which is an aggregation of a number of pieces equipment items working together as a group to accomplish a given aspect of the job. Figure 5.10 illustrates how a production rate and equipment unit cost are obtained for earth hauled by the bottom-dump haulers.

As is true for all such production equipment, the manufacturer of the bottom-dump hauler provides the contractor with much valuable information concerning its capacity and its performance characteristics. As illustrated by Figure 5.10, the contractor can use this information, together with operating characteristics of the power shovel which is loading the bottom-dump hauler, as well as the length, grade, and condition of the haul road, to determine the hauling production rate of the bottom-dump unit.

Applying the cost figures derived in Figure 5.9 to the production rate in Figure 5.10 results in a determination that the equipment unit hauling cost is $0.40 per bank cubic yard for a fleet of four such units. “Bank measure” refers to soil in its original, undisturbed condition, as compared to “loose” measure, which applies to the soil after excavation. Bank soil generally is more dense and has less volume than the same soil after it has been excavated. If an equipment unit cost that includes both loading and hauling is desired, the cost of the power shovel per bank cubic yard must be obtained and then can be added to the hauling cost.

Equipment production rates, whether provided by the manufacturer or observed on the job, are usually those that occur when the equipment is producing its maximum possible output. It should be noted that such rates are seldom maintained continuously, and allowances must be made for time losses and delays. The “50-minute hour” is commonly used, and was used in the calculations in Figure 5.10, with regard to excavating equipment as well as for other forms of production equipment. This term means that, on the average, the equipment is productive for a net time of 50 minutes per hour. The remaining time is consumed by nonproductive actions such as shifting position, operator delays, waiting, fueling, greasing, minor repairs, routine maintenance, etc. The application of the 50-minute hour is illustrated in Item 7 of Figure 5.10.

5.16 Indirect Costs

Indirect costs are also referred to as overhead costs. Indirect costs can be defined as costs a contractor incurs, and dollars the contractor must pay, for elements that do not contribute in a direct way to the completion of a project, in the sense in which materials and labor and equipment do. Indirect costs are often referred to as costs for items that support the work being performed on the project.

Indirect costs are subdivided into two categories: project overhead and office overhead. Project overhead costs may also be referred to as general conditions costs, or as project indirect. Office overhead costs may also be referred to as company overhead, or as general overhead.

5.16.1 Project Overhead

Project overhead costs, as the name implies, refer to overhead costs incurred on the job site. These costs are typically a significant item of expense on a project and will generally contribute from 5 to 15 percent of the total project cost, depending somewhat on where and how certain project costs are included in the cost estimate.

Project overhead costs can be estimated with reasonable accuracy, and are compiled and included in the estimate by the estimator. Project overhead costs should be computed by listing and costing each item of overhead individually, rather than by using an arbitrary percentage of project cost. This is true because different projects can and do have widely varying job overhead requirements. The only way to arrive at an accurate estimate of job overhead is to analyze the particular needs of each project and determining the cost.

Typical items of job overhead are listed in Figure 5.11. This list is not represented as being complete, nor would all the items necessarily be applicable to any one project. The project overhead items listed in Figure 5.11 show that the prime contractor normally provides and pays for temporary job utilities and standard site services for use by the entire construction team.

Usually, the salaries of project supervision, foreman and superintendent, are included in project overhead, and sometimes the project manager's salary is included here as well. These project overhead costs for a project may be determined by direct estimation. More typically, however, these costs are extracted from the contractor's historical cost database and are then included in the estimate.

5.17 Subcontractor Proposals

For those items of work on the project that the contractor does not plan to perform with his own craft labor forces, he will plan to award subcontracts. Quotations from subcontractors are an important element in the compilation of a project estimate, especially in building construction, where subcontracting is typically utilized more extensively than on engineering or industrial construction projects. It is commonplace for 70 to 85 percent of the dollar value, and sometimes more, of a building construction project to be performed by subcontractors.

Most contractors will maintain a file of subcontractors in a variety of specialty trades whom they know and have worked with in the past. The estimator will inform subcontractors in trades whose work is included on this project that the contractor is planning to submit a proposal for the project, and will invite subcontractors to prepare and submit proposals for their part of the work to the contractor in advance of bid day. In addition, it is common for subcontractors who have learned of the existence of the project being proposed to inquire of a number of general contractors whether they are planning to submit a proposal and whether they would accept a subcontractor proposal.

Each subcontractor will follow an estimating process parallel to the one being employed by the general contractor. The subcontractor will analyze the contract documents, primarily the drawings and specifications, for those elements of the project that pertain to his trade. The activities or items of work to be performed by the subcontractor are referred to as his scope of work, often referred to simply as scope. As is illustrated in Figure 5.12, the subcontractor's estimator will estimate materials, labor, equipment, indirect cost, and markup, in order to arrive at a price to be entered onto a subcontract proposal for the subcontractor's defined scope of work.

When they prepare their estimates, prime contractors do not ordinarily concern themselves with making quantity surveys for all work categories, but limit their takeoff to items that they may reasonably expect to carry out with their own forces. The specialized categories of work performed by subcontractors are not usually investigated in detail nor estimated by prime contractors. However, at times prime contractors may analyze any of these categories as a check against the possibility that they may be able to do the work for less money than the best available subcontract bid. In addition, they may determine an estimated price for a given trade specialty, either to check sub-bids received for reasonableness or when no subcontractor quotations have been submitted.

The subcontractor will prepare a subcontract proposal that includes a scope statement, a listing of items of work included in the proposal, and items of work excluded from the proposal, along with the proposal amount, which is usually in lump sum form. The scope statement will provide definition for the work the subcontractor will perform in descriptive format, and often will include a listing of the Construction Specifications Institute (CSI) division numbers of the proposed work.

Subcontractors will submit their proposals to one or more general contractors, in time for the general contractor to include the subcontractor's proposal in his estimate prior to the time his proposal is due to the owner. The general contractor will receive all of the subcontractor proposals for each category of the work on the project that he does not plan to perform with his own craft labor forces. He will analyze each proposal and will compare the proposals for each category of work, considering completeness of scope versus price for each subcontract proposal.

The prime contractor's estimator must be sure to ascertain exactly what each sub-bid includes and what it does not, a matter that can require considerable checking and analysis, especially when a number of sub-bids are involved. It is not unusual for a subcontract quotation to provide labor only and not to include the cost of any materials. Additionally, the inclusion of taxes and surety bond, as well as the acknowledgment of addenda must either be stipulated on the quotation or determined by the general contractor.

On building construction projects in particular, many items of work must be checked with the bidding subcontractors to be sure of their inclusion. For example, the prime contractor must check with the plumbing and electrical subcontractors to see whether their bids include an allowance for connecting temporary water, sanitary, and electrical power and temporary lighting services. Another consideration is the need to make a background check and financial check on those subcontractors hitherto unknown to the general contractor.

Following his receiving and analyzing all of the subcontractor proposals, the general contractor will then select the proposal in each category of work that is the most complete and most competitive, and will include that proposal price in his own estimate as the estimated price for that component of the work on the project. In this manner, the proposals of the plumbers; electricians; heating, ventilating, and air conditioning specialists; roofers; and all of the other subcontractors who will perform the work that the general contractor is not planning to self-perform with his craft labor will be entered into the general contractor's estimate and will become a component of his proposal price.

Subsequently, when the general contractor's proposal has been accepted by the owner and the prime contract has been formalized, the general contractor will notify those subcontractors whose proposals have been accepted. A subcontract agreement, commonly referred to as the subcontract, will be entered between the general contractor and each of the subcontractors, after the general contractor has signed the agreement with the owner. The subcontract agreement will contain the scope of work and the subcontract price in accord with the proposal the subcontractor submitted at the time of making the estimate.

5.18 Markup

Markup, also referred to as margin in some construction companies, and sometimes referred to as profit, refers to the number of dollars included in the estimate, which the company plans to have for itself, as its return for performing the work, after all of the costs associated with the performance of the project have been paid. The markup determination is typically the last component to be determined and included in the estimate when the estimate is finalized.

While some may refer to this component of the estimate as profit, others submit that the term profit refers to dollars the company has earned after all project costs have been paid. At the time the estimate is being prepared, consideration is given to how many dollars the company would like to have earned or anticipates having earned after all costs have been paid. This is the rationale for the usage of the term markup, rather than profit for this component of the estimate.

The amount of the markup to be included in the estimate for the project is typically determined by company executive management or by the chief estimator. The decision is momentous.

In a business sense, the company should expect to earn sufficient markup to justify the business enterprise and the effort and the risk of performing construction projects. In the competitive environment of the construction industry, however, the company cannot overprice its expected markup to the extent that it then is not sufficiently competitive to be awarded the contract.

Additionally, the markup determination is tempered by a number of other considerations. These include the amount of confidence that management or the chief estimator have in the other components of the estimate. This thought is based in the realization that if the company is awarded the construction contract, and if some component of construction cost exceeds the estimated amount when the work is performed, those additional costs can be recovered in only two ways. Either the construction of some other element of the project must be completed at a cost less than the estimated amount, in order to compensate for the overage, or the cost overrun must be compensated by reduction in the amount of the markup the company will receive.

Other factors that influence the markup determination include composition of the project team, the owner, and architect; who the other contractors are who are competing for the contract award (which the company may or may not know at the time of preparation of the estimate); and the company's assessment of how urgently it needs a contract award for a project, in order to maintain its operations or to keep its key people employed. Also to be considered are the time of year and expected weather during the time the construction will be performed; market conditions relative to the availability of craft labor, materials, and subcontractors needed to construct the project; and so on.

The single concept that seems to best describe in summary fashion the factors that determine the amount of markup the contractor will include in the project estimate is summarized in the term risk. Where the contractor sees or perceives risk in the contract documents or in the conditions in which the work will be performed, he will add dollars in his estimate to compensate for his assuming the risk. The greater the risk the contractor perceives in the project in all of the many forms it may take regarding the project, the greater the amount of markup he will include in the estimate, in order to compensate for the risk.

5.19 The Lump-Sum Recap Sheet

The preparation of a detailed cost estimate results in the determination of a great many separate prices that are scattered throughout a number of work sheets of various kinds, in hard-copy form, on a spreadsheet in the computer, or, more typically, in an electronic estimating software. All these costs are finally brought together and entered onto a summary sheet, which is referred to as a recapitulation or recap sheet. Figure 5.13 illustrates a typical recap sheet for a lump-sum bid.

The costs associated with work items the contractor proposes to carry out with its own forces are posted from the summary sheets and entered in the appropriate material and labor columns. Equipment costs are brought forward from either an equipment sheet or from the individual summary sheets. The equipment unit cost as determined in Figure 5.10 would be multiplied by the quantity of work to be done by that piece of equipment and entered into the “Materials” column on the recap sheet. Alternately, the recap sheet could include an equipment column where this information is brought forward from the worksheet(s) to be included in the recap sheet, and then into the proposal. Project overhead costs are entered from an overhead sheet, with wages placed under the labor heading and the total of all other expenses in the material column. General overhead is entered as a lump sum item. The subcontract bids selected for use are shown under the subcontract heading. The contractor's bid price is determined by the inclusion of final changes, appropriate taxes, and markup.

Taxes applicable to construction projects vary widely from one locality to another, and can differ between public and private projects. A common tax provision requires the contractor to pay a gross receipts tax or sales tax on its total business volume.

5.20 The Unit-Price Recap Sheet

In a manner similar to that described for a lump sum bid, all costs associated with a project being bid as unit prices are accumulated and summarized on a final recap sheet. Figure 5.14 illustrates a typical recap sheet for a unit-price bid. To produce a separate bid value for each item designated in the proposal form, this recap sheet must maintain all costs of each bid item separately. The costs associated with each bid item are entered from its summary sheet onto the recap sheet.

In Figure 5.14 the total direct cost of the entire quantity of each bid item is obtained by adding its labor, equipment, material, and subcontract costs. The sum of all such bid-item direct costs gives the estimated total direct cost of the entire project ($7,194,789). To this are added the job overhead, markup, bond, and tax, which produces a total bid price of the total bid price ($8,918,488). Dividing the total project bid price by the total direct project cost gives a factor of 1.241. By multiplying the total direct cost of each bid item by this factor, the total bid amount for that work item is obtained. Dividing the total bid amount of each work item by the quantity yields the unit price on a unit-price basis for that bid item, with overhead and markup embedded uniformly in unit-price bid items.

There are instances in which projects are bid as a combination of lump-sum and unit prices. An example of this might be a powerhouse, built under a single contract, where the foundation was bid on the basis of unit prices and the structure itself was bid lump-sum. Another instance occurs when the proposal form of a building being bid lump-sum requires the submittal of unit prices on certain items of work as well as the lump-sum price. This might be done when some changes to the work during the construction phase appear likely, and bid prices are requested on a unit-price basis for the possible later addition or deletion of work items such as concrete or excavation.

5.21 Bid Changes

The recap sheet must be totaled and checked at a time when the contractor needs a dependable method for incorporating last-minute price revisions into the final bid amount. Some contractors use a “bid change sheet” similar to the example in Figure 5.15. Change sheets of this kind, in paper form or electronic form, are commonly used by estimators to list and summarize such changes and as a means for adding in items previously forgotten or overlooked.

Estimating softwares and spreadsheet programs, which are typically used in preparing proposals today, contain features which make it relatively easy to input changes, and to track those changes through the other portions of the sheets and totals in the estimate which are affected. Most of these softwares contain features whereby the estimator can determine when and where a change was made, and can track the influence of that change on other parts of the estimate.

5.22 Finalizing the Estimate

The contractor will double-check all of the components of his estimate for completeness and accuracy before preparing and signing the proposal and submitting it to the owner. This process is referred to as closing out the estimate.

The proposal form is then completed in exact compliance with the stipulations set forth in the instructions to bidders, and is then submitted to the owner. The general contractor's proposal will be analyzed by the owner following its submittal, in competition with the proposals of the other contractors who are seeking the award of the contract for the construction of the project.

A prime contractor will be selected by the owner to receive the contract award, and will sign the agreement, which formalizes the contract between the owner and the prime contractor or general contractor. The general contractor will proceed with completing subcontract agreements and materials purchase orders.

Subsequently, the contractor will receive a letter of intent, or a notice to proceed, from the owner. These documents denote the beginning of project duration. The contractor will then immediately occupy the construction site and will commence work on the construction of the project.

5.23 The Proposal

A bid, more properly referred to as a proposal, is a written offer, tendered by the contracting firm to the owner, which stipulates the price for which the contractor agrees to perform the work described in the contract documents. A proposal also contains a promise that, upon its acceptance by the owner, the contractor submitting the proposal will enter into a contract with the owner for the amount of the proposal. Thus, if the owner accepts the contractor's proposal in timely fashion, the proposal is binding on the contractor.

When open bidding is being used, a prepared proposal form is usually included with the bid documents and must be used by the contractor to present its bid. Failure to do so will normally result in disqualification of the contractor. The prepared proposal form is both desirable and necessary so that all bids will be presented and can be evaluated by the owner and the architect-engineer on the same basis. It facilitates the detection of omissions and other irregularities, and makes the comparison and analysis of the figures an easier matter for the owner and the architect-engineer.

A typical example of a lump-sum proposal is shown in Appendix F. The usual basis of contract award, assuming that all bidders are considered to be qualified, is the base bid plus or minus any alternates accepted by the owner, with the lowest valid or lowest responsible proposal usually selected for acceptance by the owner.

In cases where there has been an error in multiplication or addition by the contractor in preparing the proposal, there is often question as to whether the unit price amount, the extended line amount, or the total amount of all line items prevails in terms of what the contractor is proposing and what the owner is accepting. On public projects, statutes often provide the procedure to be followed. Otherwise, the bid documents should, and usually will, specify which amount prevails. A common provision in this regard is for the unit price to control, and the corrected total sum to govern identification of the low bidder.

Contractors sometimes find that they would very much like to include certain information concerning their bid that is not provided for on the proposal form. This is often in the nature of some form of limitation on the bid, either placing certain restrictions on owner acceptance, or establishing special conditions pertaining to the conduct of the work. Under such circumstances the contractor may be tempted to “qualify” its bid. In general, this is not permissible on public bidding, and any bid qualification will make the bid subject to rejection. A private owner generally has more latitude regarding proposal qualifications. However, many owners and architect-engineers in private construction likewise include statements in the instructions to bidders to indicate that any qualification of the contractor's proposal may be cause for rejection of the proposal.

When closed bidding is in use by the architect-engineer and owner, the form of the proposal submitted is frequently left up to the individual bidder. In such biddings, the contract is not necessarily awarded to the lowest bidder, but may be negotiated by the owner from among the two or three lowest bidders. Consequently, the wording and content of the proposal are typically structured by the contractor to meet the circumstances and to put its bid in the best possible light with the owner.

5.24 Bidding Procedures

The procedures, rules, and requirements that pertain to the bidding process that will be followed on public and private construction projects vary from one public agency to another, and from one owner to another in private construction. Each is controlled by different aspects of law. It is sometimes difficult to establish whether a given project is public or private. There are many instances when a private owner is involved but the financing is supported by, or guaranteed by, some level of government or a government agency. Additionally, public-private partnerships for the performance of certain types of construction are becoming much more prevalent in construction contracting. In cases such as those described here, bidding rules are often mandated by the public agency involved, or by statutory requirements.

Public contracting procedures are prescribed by various procurement statutes. These controlling statutes dictate rules and regulations that must be followed by the public owner. In a general sense, the public authority does not have the right to modify or waive these statutory bidding procedures. Even where a public owner is given discretionary powers, specific procedures must usually be followed in making any exception to standard directives. Public bidding statutes are designed to protect the public interest, not that of the contractor or architect-engineer. Their essential purpose is to protect public funds; to prevent fraud, collusion, and favoritism; and to obtain the best quality construction at the most reasonable and fair prices for the public body.

Private bidding procedures are normally conducted by rules and regulations established by the owner, with the advice and assistance of the design professional. The bidding procedures can be modified, altered, or waived at the discretion of the owner.

For both public and private projects, the instructions to bidders, prepared by the architect-engineer, and provided to contractors along with the other bid documents in accompaniment to the contract documents, will set forth all of the provisions, in general and in detail, regarding preparation and submittal of the prime contractors' proposals. The instructions to bidders are more fully discussed, along with other bid documents, in Chapter 4, and an example of a set of instructions to bidders is included in Appendix A.

5.25 Submission of Proposals

It is the responsibility of the contractor to deliver his proposal to the proper place, and in the proper form, and in the designated format and manner, prior to the deadline time designated in the instructions to bidders. The completed proposal form, together with the bid security and other necessary supplementary information, is usually required to be sealed in an envelope that is addressed as directed by the instructions to bidders and clearly labeled as a proposal for the project being bid.

Bids may be submitted usually at any time prior to the deadline scheduled for their acceptance by the architect-engineer. If feasible, it is usual practice for the contractor to personally deliver the sealed bid shortly before opening time.

However, proposals sometimes may also be dispatched by letter, telegraph, or messenger service. Sometimes facsimiles may be accepted. A common problem associated with the delivery of competitive bids, whether in person or via one of these other mechanisms, occurs when the bid arrives after the established time for submittal of proposals. Almost always, in both public and private work, all proposals that have not been submitted by the time indicated in the instructions to bidders are rejected.

Statutes and policies that regulate bidding on public projects almost always require that at the bid opening, after the deadline for submittal of proposals has passed, all proposals shall be opened publicly and read aloud. This process of open bidding is also commonly used on private projects. Bid openings are usually well attended by the bidding general contractors, subcontractors, material vendors, and other interested parties. The ceremony consists of the owner or architect-engineer opening each bidder's sealed envelope, noting the type and amount of bid security, verifying receipt of addenda, and reading the amount of each proposal. Other bid formalities may also be noted for the record.

At some bid openings, the estimate of cost prepared by the architect-engineer or owner during the design process is also read or distributed to those attending. In addition, bid tabulation forms are typically made available to those present by the architect-engineer, so that they can record the bids of other contractors for comparison purposes. Bid tabulations are defined as a listing of all of the contractors who submitted proposals for a project, and the amount of their bid.

It is customary and usual that the opening will adjourn without an official announcement concerning the identity of the successful bidder. Sometimes the architect-engineer will make announcement of the “apparent low bidder” before the bid opening ceremony is adjourned. This is because, before the contract award can be made, and even before any “official” acknowledgment regarding the low bidder is made, all of the proposals must be carefully evaluated and analyzed by the owner and architect-engineer. This process sometimes referred to as canvassing the bids.

After the bids have been opened and read at the bid opening, the contractor communicates the results of the bidding and the bid tabulation to its surety company. This information is incorporated into the surety's permanent file for the contractor and constitutes an important part of the contractor's record of performance.

In closed bidding, the amounts of the bids typically are not disclosed. Following delivery of the proposals to the owner and architect-engineer by the contractors, the owner and architect are free to use the proposals in any manner they see fit, so as to serve the owner's best interests. They can select any of the bidders they choose, or they can reject all bids. The owner often makes a final selection of the successful contractor in this bid system, only after extensive negotiations.

5.26 Responsive Bid and Technicalities

On competitive bid construction projects, an acceptable proposal must be “responsive” to the invitation for bids, and in particular, to all of the requirements set forth in the instructions to bidders. Responsiveness is determined by whether the bid as submitted is submitted on time and in a format and manner consistent with the instructions to bidders, and consists of an offer to perform, without exception or qualification, the exact work as called for by the invitation, and upon acceptance will require the contractor to enter a contract to perform in accordance with all the terms and conditions of the contract documents.

A bid is referred to as being nonresponsive if it contains any qualifications or conditions not in the invitation, or if it contains language that varies from the invitation or from the instructions to bidders. Additionally, a bid may be nonresponsive if it does not conform to the technical bidding requirements established in the instructions to bidders. This means that the proposal must conform with all of the standards, requirements, and conditions listed in the contract solicitation and in the instructions to bidders and must not deviate from the criteria in any material way.

The instructions to bidders set forth specific requirements for the preparation submission of the proposal. Any deviation from any of these requirements on the part of the contractor constitutes a bidding informality or irregularity that may result in rejection of the proposal. A clause is sometimes included that allows the owner to waive a minor informality or irregularity and to accept the bid as being responsive. A private owner has considerable latitude in this regard. Public owners are often bound by statute or policy not to permit such waivers, and will generally insist on strict compliance with all bidding technicalities. As noted earlier, many private owners and architect-engineers will insist on strict compliance as well.

5.27 Bid Spread

It is commonplace, after bids are received and opened at a public bid opening, to determine the bid spread. Bid spread refers to the amount of money between the lowest bidder, who ostensibly is a valid bidder and is expected to be named the apparent low bidder and eventually the contract recipient, and the amount of the second-lowest bid. The bid spread is often expressed as the percentage difference between the two, as well. The contractor who submitted the amount of the low bid is often heard to use the expression, “I left x dollars on the table,” meaning that he could have bid higher, up to the amount between his bid and that of the next lowest bidder, and would still be low bidder, and would still be expecting to receive the contract award.

Bid spread is also sometimes expressed in terms of total spread, or total bid spread, meaning the dollar or percentage difference between the low bid and the highest bid received. If the total spread is greater than normal competitive bidding on a project of this kind would indicate, the owner and the architect-engineer are left to wonder why some bidders saw so much more in the project than others did or how and why the low bidder was able to determine a price so much lower than that of others.

The bid spread and the total spread are of great interest to others besides the bidding contractors. The owner and architect-engineer will also very carefully examine the bid spread, especially if it is more than a few percentage points. The question in their minds is whether the difference reflected in the bid spread is the result of good practice and finding a competitive advantage on the part of the low-bidding contractor, or whether his low bid is the result of an estimating error or oversight on his part, which might make it difficult or impossible for him to satisfactorily complete the project for the amount indicated in his proposal.

Surety companies likewise decidedly take an interest in bid spreads and total spreads on projects where a contractor for whom they have provided bonds has submitted a proposal. If their contractor is low bidder, the surety will have the same questions as the owner and architect-engineer regarding the sufficiency of the bid. Even when their contractor is not the low bidder, the surety is interested in where their contractor's proposal ranked in the competitive bidding, so as to derive an indication of the effectiveness of his estimating processes as well as his overall business practices.

5.28 Out of the Money

When proposals have been received and tabulated by the owner and architect-engineer on bid day, sometimes the lowest proposal amount received exceeds the owner's budget for the project. This is commonly expressed as the project proposals being “out of the money.”

This occurrence is, of course very troublesome for the architect-engineer and owner, and for the bidding contractors as well. Following the bid opening, the owner and the architect-engineer will carefully analyze both all of the proposals received and also their own position, in order to decide the owner's next course of action. Typically, the owner will select from the following options:

• Reject all proposals and announce that no contract will be awarded.

• Sometimes the announcement is accompanied by an announcement that the owner and the architect-engineer will redesign certain parts of the project, and will rebid the project at a later date.

  Some owners will have provided for this possibility by having included a clause in their contracts with the architect-engineer to indicate that if the owner exercises this option, the architect-engineer must redesign, issue new contract documents, and again assist the owner with receiving and analyzing proposals on a future date, at no additional cost to the owner.

• Endeavor to value-engineer the project with the low bidder, or sometimes with the lowest two or three bidders, in order to reduce the proposal amount to a sum within the owner's budget, and then negotiate a contract with one of these contractors.

5.29 The Acceptance Period

The bidding documents normally contain a provision that provides the owner a stated period of time after the opening of bids for the owner and architect-engineer to make acceptance. During this period, the contractor cannot withdraw or change its bid except under penalty of forfeiture of its bid security. An acceptance period of 30 to 60 days is common, although other periods of time may be specified.

During this waiting period, the subcontractors and material dealers are presumably obligated to the general contractor to stand by their price quotations, just as the prime contractor is obligated to the owner. If the owner does not accept one of the proposals within the acceptance period, any of the bidding contractors are free to withdraw or to adjust their proposals at their discretion.

Contractors are sometimes requested by the owner to grant an extension of the acceptance time. The contractor is generally willing to oblige, but sometimes in its eagerness to get the contract award it will agree to such an extension without giving the matter sufficient consideration. Contractors must exercise care in this regard. Such action means that the completion date of the project will be set back by a length of time equal to the extension of the acceptance period. Increases in labor wages or materials prices may occur during the additional time. Also, the extension means that the placing of orders for fabricated materials such as reinforcing steel will be delayed, with the ever-present possibility of price increases. Another important consideration in this matter is that a subcontractor or supplier, having submitted its price based upon the specified acceptance period, may not be willing to stand by the price for a longer period of time, especially if it submitted what it now considers an excessively low price.

All these factors represent potential elements of additional cost that the contractor may have to assume should it too hastily grant an owner additional acceptance time. When increased costs are anticipated and the contractor does not wish to absorb them, he can consider offering a reasonable additional amount to the owner in exchange for extending the acceptance period.

5.30 Rejection of Proposals

The bid documents and/or the contract documents typically reserve for the owner the right to reject any or all bids. A prime contractor bidder may be rejected because of the owner and architect engineer's determination that he has insufficient finances to handle the project, lack of experience, unsatisfactory reputation indicating irresponsibility or unreliability, inadequate personnel or equipment, or failure to submit a responsive bid. Private owners are relatively free to ignore technical bidding inadequacies if it is in their interest to do so, but public owners must be careful to observe applicable regulations in this regard. Rejection of proposals on both public and private projects because of bidding informalities is relatively common.

Rejection may also be based on irregularities in the bidding procedure, collusion, flagrant unbalancing of bid unit costs (to be discussed in a subsequent section), not enough bona fide bidders, or unexpectedly high proposals. The lowest proposal sometimes exceeds the available funds in the owner's budget for the project, and the project must then be abandoned or revamped. Public contracts are subject to statutory regulations in this regard. For example, some states have regulations that on any bidding where the lowest bid exceeds the estimated cost by more than 10 percent, all bids shall be rejected.

In the event the owner wishes to reduce the project cost by a minor amount, it may elect to negotiate a final contract with the low-bidding contractor. If major savings are required, it is usual that all proposals are rejected. After redesign or other corrective procedures, the project is then readvertised, and new bids are taken.

5.31 Withdrawal of Bid by Prime Contractor

Under ordinary contract law, a person who makes an offer or a proposal can withdraw or revoke its offer any time prior to its acceptance by the other party. The situation is considerably different in construction, however. Despite the common law doctrine of revocability, a prime contractor's bid proposal is normally considered to be irrevocable after the bid opening and throughout the acceptance period prescribed by the bidding documents. This concept is based in many and varied statutes and local ordinances pertaining to public construction.

It is reasonable, therefore, for a general contractor to regard as normally impossible the withdrawal of its bid after the deadline for the receipt of proposals, without forfeiture of the bid security. (Bid securities are discussed more fully in Chapter 7.) The courts have long held that a bidder cannot unreasonably refuse to comply with its bid without penalty.

There is, however, one generally accepted legal basis for relieving the prime contractor from its bid: the doctrine of unilateral mistake. Prohibiting the withdrawal of bids, either by provisions created by the owner or by rules of law, is almost uniformly construed as inapplicable to prevent relief from the submission of a bid containing a gross error, provided the following conditions are met:

• The mistake is of such grave consequences that to enforce the contract as offered would be unconscionable.
• The mistake relates to a material feature of the contract.
• The mistake has not come about because of the violation of a positive legal duty or from culpable negligence.
• The owner is put in a position whereby he suffers no serious prejudice except the loss of its bargain.

When the preceding conditions apply and when the mistake is excusable and is an error of fact and not caused by a mistake in judgment on the part of the contractor, when the error is of a mechanical or clerical nature, and when the contractor acts promptly to notify the owner of the mistake and to rescind the bid, the courts almost unanimously permit withdrawal of the bid and the return of the contractor's bid security. Errors of a clerical nature include faulty addition, omission or erroneous entry of certain bid components, misplaced decimals, typographical errors, and transposed figures.

There are state statutes and provisions in federal procurement regulations that specifically provide for relief for the contractor from a unilateral mistake under certain circumstances. The criteria just discussed have served to relieve bidders from their obligations, both before and after the owner has accepted the bid. However, relief for the contractor will likely be denied where it proceeds with the work without first seeking recision of its bid.

In granting relief to the contractor, it must be noted that the courts rarely will allow the erring contractor to correct his bid, but rather will only permit the contractor to withdraw the proposal without penalty. However, it has been the policy of the federal government and some other public agencies to allow the bid to be corrected and not allow it to be withdrawn in the special case of where the bid, as corrected, remains the lowest bid. There has also been at least one case on the bidding of a federal project where the General Accounting Office (GAO) ruled that the second low bidder, which had discovered an error on its bid, could correct the error and displace the low bidder.

5.32 Withdrawal of Bid by Subcontractor

Occasionally, the general contractor is faced with a request from a subcontractor or material supplier to withdraw its quoted price. The legal question regarding the withdrawal of such a bid offer is a tangled one and is very much a matter to be decided by the specific facts of the case. Nevertheless, there are some general concepts that can be presented. The following paragraphs will provide some general guidance in this regard.

In general, a subcontractor can withdraw its bid any time before the prime contractor's bid is submitted to the owner and the general contractor has not indicated acceptance of the subcontractor's proposal. In many jurisdictions, the subcontractor can rescind its bid any time prior to its formal acceptance by the prime contractor. There are some exceptions to this, such as where informal understandings were made between the prime contractor and subcontractor prior to the award of the general contract. Oral acceptance of the subcontractor's proposal on the part of the general contractor may not be binding because of the applicable state statute of frauds that requires certain contracts to be in writing before they are enforceable.

Additionally, the courts have sometimes ruled that the general contractor and subcontractor did not intend to bind themselves contractually until a written subcontract agreement was executed. This entire matter is further complicated by the fact that the general contractor cannot reasonably accept a subcontractor proposal before the owner has made a formal award of the general contract. In light of these complications, it is not surprising that attempts by general contractors to hold low-bidding subcontractors to their bids on the basis of acceptance prior to withdrawal have met with variable results.

When the low-bidding prime contractor bases its proposal on a subcontract bid that is considerably lower than any other submitted, the withdrawal of this low subcontractor proposal can cause the contractor substantial loss. As a result of this condition, the courts have sought rationales by which subcontractors would be required to hold their prices firm for some reasonable time, such as the acceptance period specified in the bidding documents for the owner to determine the recipient of the prime contract. It is also noted that general contractors sometimes require subcontractors to provide a bid bond to accompany their proposals. In essence, these bid bonds stipulate that if the prime contractor accepts the subcontractor's proposal, the subcontractor will enter a subcontract agreement with the prime contractor, for the amount of its proposal. This matter is further discussed in Chapter 7.

Probably the most common approach to the matter of holding a subcontractor to its bid is now based on the doctrine of promissory estoppel. This doctrine has been applied to prevent subcontractors from withdrawing their offers even though the offers were not accepted, and no contracts had been formed, and the parties had attempted to withdraw their offers. This doctrine avoids entirely the question of whether the subcontractor's bid was formally accepted by the prime contractor.

The elements of promissory estoppel can bind a subcontractor to its bid price if the prime contractor can prove the following:

• That it received a clear and definite offer from the subcontractor.
• That the subcontractor could expect that the general contractor would rely on the offer.
• That the contractor actually did rely on the offer and that such reliance was reasonable.
• That this reliance worked to the general contractor's detriment.

Where the general contractor can establish these points, a subcontractor's low bid is generally binding if the detriment can be avoided only by enforcement of the bid.

For the contractor to have the defense of relying on the subcontractor's proposal, it must notify the subcontractor when the bid is so low that it suggests a mistake might have been made, and must request the subcontractor to verify the bid's correctness. In addition, the contractor must accept the subcontractor's bid with reasonable promptness after its own bid is accepted by the owner. In accepting the subcontractor's proposal, the general contractor may not change the terms on which the initial bid was solicited.

Questions continue to arise with regard to just what constitutes acceptance of a subcontract bid by a general contractor. The law is not entirely consistent on this matter, but there have been court decisions to the effect that a general contractor's use of a subcontractor's bid or the listing of the subcontractor's name in the prime contractor's proposal to the owner does not by itself create a binding contract between the two contractors, and the prime contractor is not bound to award the subcontractor the work involved. This is in the absence of any prior agreement or understanding. The subcontractor's bid is an offer and does not become a contract until it is voluntarily and expressly accepted by the prime contractor.

It is to be noted, however, that some states and the federal government have enacted statutory regulations concerning the listing of subcontractors. For example, some of these public regulations require a subcontractor listing with the contractor's proposal, and these subcontractors must be used to accomplish the work unless a substitution is permitted by the owner because of special circumstances.

5.33 List of Subcontractors

It is a requirement on some projects, especially some public projects, that the prime contractor must submit a listing of the subcontractors whose bids were used in the preparation of the prime contractor's proposal as an accompaniment to his proposal. In some cases, the dollar amounts of the subcontractors' bids must also be included. Details regarding this requirement vary considerably, but the owner and architect-engineer will typically require a listing of the subcontractors who are to perform the major categories of work (mechanical, electrical, plumbing, etc.), and typically will require that other subcontractors be listed if they are performing work in an amount comprising a given percentage of the bid. This listing requirement can serve the purpose of allowing the owner and the architect-engineer to approve the subcontractors and is also intended to limit the likelihood of bid shopping and bid peddling on the part of the general contractor.

The owner and architect-engineer typically require that this listing be included when the general contractor submits his proposal, or the general contractor's bid will be deemed nonresponsive. Typically, such requirements do not include the contractor's being required to name the material suppliers as long as they are not acting as subcontractors performing work on the job site.

Under some bidding requirements of this type, subsequent changes in the named subcontractors can be made only under certain designated circumstances and with permission of the owner. In others, the general contractor has a prescribed length of time after the bidding within which it can make changes to its subcontractor list. If a contractor violates the provisions of the listing requirement, the owner may either cancel the contract or assess a dollar penalty. In general, it can be said that subcontractor listing is favored by subcontractors and is opposed by prime contractors.

The listing of subcontractors can be troublesome on the bidding of projects with alternates. The problem arises because the identity of the low-bidding subcontractor for a given work specialty can depend on which alternates the owner may choose to accept or reject. In such an instance, the prime contractor will normally list its subcontractors on the basis of the base bid, excluding the alternates.

5.34 Contingencies Allowances and Subcontract Allowances

The architect-engineer may also state that a given sum is to be included in the estimate to serve as a contingency for extras that might be necessary as the work progresses. Such contingency provisions are sometimes utilized for remodeling and other types of work that have many uncertainties associated with them.

Occasionally, allowances are used for subcontracted work. For example, the owner may solicit bids from specialty contractors for specific portions of the project in advance of the date for the opening of the prime proposals. After the low-bidding subcontractors have been determined, the bidding prime contractors are advised of the amounts and nature of the sub-bids to be included within their estimates. As an alternative to this, the specifications may merely indicate a sum of money to serve as an allowance for certain subcontracted work that will be let after the award of the prime contract. Landscaping is a common example of this. In either case, however, the prime contractor must be cognizant of all conditions pertaining to the award of the subcontracts and the exact nature of the work covered by them.

Serious operational problems can develop when the general contractor does not select its own subcontractors, as may be the case with subcontract allowances. If the two parties should be incompatible or have had previous difficulties, job relationships can deteriorate badly. This situation can be especially troublesome when one is a union contractor and the other is not.

5.35 Disclaimers and Waivers

The prime contractor is required to bid under a form of contract that has been designed to protect the owner and architect-engineer and to provide for and protect their best interests. In their attempts to afford these parties protection against liabilities and claims arising out of the construction process, the writers of contract documents usually incorporate a great deal of language into contract documents, expressly for the protection of the owner and the architect-engineer, including disclaimers and waivers of one kind or another.

A common disclaimer provides that neither the owner nor architect-engineer assumes any responsibility for the accuracy or completeness of boring logs or other subsurface information submitted with the bidding documents, and that the contractor must assume full responsibility for any and all unknown physical conditions, including subterranean, that may be found at the construction site. Most of the court cases involving contract disclaimers pertaining to underground conditions have upheld them in the absence of fraud, warranty of the information by the owner, or deliberate failure to disclose all available information. As a general rule, the courts have placed the risk of unknown subsurface conditions on the contractor unless there are contractual provisions that give the contractor a right to make a claim for additional costs.

Other disclaimer clauses sometimes force the contractor to assume liability for almost all contingencies, some of which involve eventualities over which it would have no control whatsoever. For example, provisions are found in some contract documents that require the contractor to waive any claims for damages against the owner for damages caused by project delay, even delays caused through the owner's own fault or negligence. Provisions are sometimes included which indicate that almost nothing will provide a valid basis for an extension of project time. There may be contractual terms providing that the contractor waive all lien rights, provisions stipulating unreasonable change order and claims procedures, or clauses allowing the owner or the architect-engineer to render binding decisions in case of disputes.

It is again noted and emphasized, that it is imperative for the contractor to carefully read and thoroughly understand all of the language in the contract documents. Only after doing so, can he make an informed decision with regard to whether to prepare and submit a proposal for the project, knowing that if he does, and if the proposal is accepted, he will be required to sign a contract which contains these stipulations.

When such severe language is used in private contracts, the contractor can sometimes protect itself by inserting protective language on the proposal form or by submitting a qualifying letter with its proposal. This is not usually possible on public contracts, and in both public and private projects, places the contractor risk at disqualification of his bid.

When the general tone of the bidding and contract documents places the risk of the unexpected entirely on the contractor, the contractor, if he still wishes to bid the project and assume the risks if awarded a contract, is forced to give consideration to the inclusion of a contingency allowance in the markup amount which is included in his bid. As was noted earlier in this chapter, the single catchword for determining the amount of markup the contractor will include in his proposal, is risk—the amount of risk the contractor sees or perceives in the bid documents and contract documents.

It is debatable whether such one-sided and burdensome contract language of the kind discussed here truly serves the best interests of the owner. Qualified contractors who otherwise would have submitted a competitive proposal for the project may not bid the project at all after they have read such contract provisions which they consider to be onerous. Additionally, such contract terms can result in owners paying for contingencies that never happen.

5.36 Bid Ethics

How the general contractor handles its subcontractor proposals, and the manner in which he translates them into subcontract agreements, can involve a number of ethical considerations. When a subcontractor submits a proposal to a prime contractor the general expectation is, that the general contractor will hold that bid in confidence, that he will analyze the proposal in order to determine whether he will include this proposal for that specialty item of work in his own proposal to the owner, and that if he is selected by the owner to be the contract recipient, he will determine the best subcontractor proposal, and will then execute a subcontract agreement with that subcontractor.

Sometimes however, in an attempt to improve his bidding position, a general contractor may disclose to successive subcontractors the amounts of the bids of previous subcontractors, in an effort to extract a lower price. This practice is referred to as bid shopping, and is an unethical practice on the part of the general contractor. Subcontractors are greatly concerned that some unethical general contractors may “shop” their proposals. Their fear that their bids may be disclosed or shopped explains, at least in part, why subcontractors often wait until the last possible moment on bid day to submit their subcontract proposals to prime contractors.

After the bid opening, when the general contractor has been declared to be the apparent low bidder, and after he has signed the agreement with the owner he will then proceed to analyzing the subcontractor proposals, and making subcontract awards to the successful subcontractors. The prevailing concept of this process would be that the general contractor award subcontract agreements to those subcontractors whose bids were used in making up the general contractor's estimate. Thus, in most instances, the low-bidding subcontractor for a given portion of the project would be awarded a subcontract, except in those relatively unusual cases in which the low bidder was determined not considered to be capable or desirable, and therefore his bid was not used. Further, the general expectation is, that the subcontract agreement will be in the same amount as the subcontractor's proposal.

Sometimes however, general contractors employ a different logic. They may reason that the procurement of subcontractor services is no different than bargaining for any other commodity on the open market. Under this philosophy, the general contractor would feel no sense of obligation to those subcontractors whose prices were incorporated into its own proposal. Rather, after being declared the contract recipient, the general contractor may resort to bid shopping in order to obtain lower subcontract prices than those originally used in formulating the contractor's proposal. At this point, of course, the general contractor who was declared the successful low bidder for the project has a very strong bargaining position, and if he can extract subcontract prices lower than those that he originally incorporated into his proposal, he increases his potential markup.

The prime contractor may also at this point, attempt to persuade an original low-bidding subcontractor to reduce its quotation, or to get another subcontractor to underbid the original low bidder, an activity sometimes referred to as “bid peddling.” Subcontractors, in their zeal to be awarded the subcontract, may actually facilitate this process by reducing their original proposal amounts when approached by the general contractor.

These practices of bid shopping and bid peddling are obviously extremely distasteful to subcontractors. It often leads them not to submit their bids to those prime contractors who resort to such methods. Another action that subcontractors may take is to inflate their original bids when it appears there is going to be hard bargaining on the part of the general contractor at a later date.

Some government agencies have taken steps directed toward minimizing or eliminating bid shopping on public projects. Several states have passed legislation that imposes regulations on the bidding of state-financed projects. In some states, for example, the major subcontract items in building construction work, such as heating, ventilating, and air conditioning; plumbing; and electrical work on state-financed projects must be awarded as separate contracts and not as a portion of the overall prime contract. Another procedure requires general contractors bidding on a public project to name their subcontractors at the time they submit their bids to the owner, as discussed previously in this chapter. A system of bid filing is used on public contracts in some states. Under this system, subcontractors file their bids with the awarding authority. The authority then furnishes the prime contractors with a list of the sub-bidders and the amounts of their proposals. The general contractors then use these subcontractor proposals as they see fit, in the preparation of their own proposals.

It can be said unequivocally, that it behooves a general contractor to be, in all ways and at all times, as fair and as ethical as possible in all matters pertaining to subcontractors, including the important matters having to do with receiving, honoring, and accepting subcontractors' proposals and the formation of subcontract agreements.

To do otherwise compromises the contractor's professional ethics, and contributes in a disparaging way to his personal and professional reputation. It can be said, however, that subcontractors actively seek out those general contractors whom they know they can trust, and submit their best prices to those contractors.

5.37 Bid Depositories

By a rationale similar to that discussed in the preceding section, some private owners have used bid depositories as a means of avoiding some of the problems associated with the submittal and acceptance of subcontractor proposals, and sometimes for materials price submittals as well. The ethical considerations are momentous. Additionally, the last-minute submittal of price quotations, and the repetitive changing of the proposals that often accompanies, lead to very serious difficulties for the general contractor as he endeavors to finalize his proposal for submittal. This is even more burdensome on a project that contains bid alternates. Serious errors can result, which may well lead to even more difficulties for the general contractor.

While bid depositories may take different forms and may vary somewhat in the details of their operation, all depositories are designed to accomplish a central purpose. At its essence, a bid depository is a facility created by a group of contractors or by a trade association whose purpose is to collect written proposals from subcontractors and material suppliers, and then to convey these proposals to the general contractors who are bidding a project. Rules of bid depositories vary, but a common requirement is that quotations must be submitted to the depository before an announced deadline prior to the bid opening. Additionally, a typical provision is that after a subcontractor proposal or material price quotation has been submitted to the depository, it can be withdrawn prior to the deadline but cannot be changed, except in the case of correction of obvious errors or clarification of some entries on the proposal. After the deadline, these proposals and price quotations are transferred by the depository to the general contractors for their use in compiling their final cost figures. Many depositories tabulate the subcontractors' quotations after the bid opening and disseminate this information to the bidders.

Bid depositories are not a new idea, and while they have sometimes accomplished their intended purpose, their use has not been without difficulties. For example, some depositories have been found to be in illegal restraint of trade and in violation of antitrust laws. Rules prohibiting subcontractors that are members of the depository from submitting bids to general contractors that are not members, and forbidding general contractor members from accepting bids from nonmember subcontractors, have led to serious legal difficulties.

If the bid depository system is to be effective, it must have the support of the general contractors and subcontractors. However, some general contractors and subcontractors may make their own arrangements for the submitting and receiving of proposals, thus defeating the purpose of the depository. Additionally, subcontractors frequently may wish to submit different proposal amounts to the various general contractors who are bidding the same project, depending on the reputation of some of the general contractors and reflecting their past experience history with the general contractors. Bid depositories make this impossible. So while there is some logic to support the use of bid depositories, and while they have been used at times, they have in general met with very limited success.

5.38 Bid Rigging

Bid rigging, which may also be known as price fixing, involves an arrangement between contractors to control the bid prices for a construction project, or to divide up customers or market areas. Bid rigging can occur in a variety of forms, varying from prearranged agreements among companies, to casual or spur-of-the-moment actions. It can involve a series of projects over a period of time, or it may occur as an isolated incident. Such arrangements have at times been nationwide in scope, or they may be limited to a single locality. No matter their form, bid-rigging activities are both unethical and illegal. They constitute a restraint of trade and are violations of antitrust laws. Bid rigging is a criminal offense, and the project owner who can prove bid rigging can seek treble damages under the Sherman Antitrust Act.

An example of bid rigging occurs where a group of contractors decides to divide up the available construction contracts among themselves and to fix the amounts of the successful low bids for projects. To accomplish this objective, the participating contractors will meet during the bidding period and will discuss bids, and then will reach an understanding with regard to who the low bidder will be on a certain project and what the bid amounts will be for the project. Thus, these firms enter into a continuing collaboration wherein they allocate the available work and fix the amounts of the low bids for projects. All but the selected low bidder on a project will either submit noncompetitive, collusive bids or may refrain from bidding the project.

Another example of price fixing occurs when a contractor who is anticipating being the only bidder on a project, persuades other contractors who have no intention of bidding the project to submit bids higher than that of the initiating contractor. Thus, it will appear outwardly that the first contractor was the lowest competitive bidder. In such cases, the bid winner may even subsequently pay designated sums of money to the other participating contractors.

Recent years have seen a number of bid-rigging cases reach the courts in the United States and in other countries as well. Consequences have been most unpleasant for the convicted participants. Some very large construction firms and their executives have been found guilty of bid rigging, resulting in severe penalties including fines, imprisonment, and debarment from bidding future work. Projects where bid rigging has occurred include both public and private work involving highway, airport, power plant, and water projects.

5.39 Unbalanced Bids

On a unit-price project, a balanced bid is one where the unit price for each bid item includes its own direct cost plus its pro rata share of the project overhead, general overhead, and markup. For a variety of reasons, a contractor may increase the unit prices on certain bid items in the bid while proportionally reducing the prices on others, so that the total bid for the project remains unaffected. A proposal structured in this manner is called an unbalanced bid.

It is common practice, for example, for a contractor to increase certain unit prices for items of work that are accomplished early in the course of performing the construction projects and then to reduce proportionately the prices for certain bid items that will follow later in the project. This process serves the purpose of increasing the early progress payments that are made to the contractor in such a way that a minimum of the contractor's own capital is required to finance its initial operations. Such a structure that provides early overpayment is of considerable assistance to the contractor in recovering his costs of estimating and procuring the project, and recovering his mobilization, move-in, and other early costs incurred before the actual start of construction.

Unbalanced unit-price quotations may be submitted for other reasons as well. Sometimes, when the contractor detects what he believes to be a substantial error in the quantities listed in the proposal form, some unbalancing of unit costs is likely to be necessary in order that the fixed costs such as equipment and overhead will be properly distributed over the true quantities of work. Additionally, for cash flow purposes and for profit motives, the contractor may increase unit prices on items that he believes will substantially exceed the estimated quantities, and will then reduce his unit costs commensurately on other items. In addition, the contractor may simply modify certain unit costs in order to disguise the actual composition of its prices.

When submitting an unbalanced bid, the contractor must be willing to assume the risk of having its proposal declared unacceptable by the contracting authority. However, bid rejection because of unbalancing is rare, simply because it is difficult to detect and to substantiate. Some unbalancing is standard practice in most unit-price biddings for reasons of cash flow.

To illustrate some of the elements of unbalanced bidding, we will consider a numerical example. To understand the rationale behind unbalancing, two characteristics of a unit-price contract must be kept in mind. First, the low bid is determined on the basis of total cost, using the engineer's quantity estimates and the unit prices submitted in the contractor's proposal. Consequently, the raising of some prices and the corresponding reduction of others is normally done in such a way that the total amount of the bid remains unchanged. Second, the contractor is paid on the basis of its quoted unit prices and the quantities of work actually performed.

For the sake of illustration, we will consider two bid items. For one of these the contractor believes the estimated quantity on the proposal form is substantially in error. The engineer's estimate for ordinary excavation is 150,000 cubic yards, but the contractor's takeoff indicates the actual amount will be about 200,000 cubic yards. The contractor decides to unbalance its bid as illustrated in Figure 5.16 below.

Let us assume that when the project is performed, the quantity of ordinary excavation actually turns out to be 200,000 cubic yards and selected excavation is actually 100,000 cubic yards. Payment made on the basis of actual quantities of work done would then vary as follows between a balanced bid and the unbalanced bid the contractor decided to use, as illustrated in Figure 5.17.

As can be seen in Figures 15.6 and 15.7, the contractor's use of unbalanced bidding results in his receiving an increased payment of $50,000.

5.40 Complimentary Bids

A complimentary bid is one that a contractor submits to the owner, which the contractor himself did not prepare but obtained from another contractor. In another sense, a complimentary bid may be one that a contractor prepares and submits to an owner, which is sufficiently high in amount so as to assure the contractor not being low bidder, and thus not selected to be the contract recipient, yet low enough in amount so as not to seem unreasonable.

Complimentary bids can be utilized by contractors for a variety of reasons. For example, there are times when a contractor finds it impossible or undesirable to bid a project when asked to do so by an architect-engineer or owner. To maintain their goodwill and so as to be included in consideration for bidding future work, the contractor may submit a complimentary bid, which may also be known as a courtesy bid.

Where a contractor furnishes the complimentary bid, he makes it safely larger than his own but sufficiently reasonable that it will appear to be a genuine proposal. The contractor submitting the complimentary bid thus is assured of not submitting the low bid and has no knowledge of any other contractor's proposal amount, with no collusive action of any kind intended or involved.

Nevertheless, contractors who provide or those who use complimentary bids must be very cautious in this regard, especially on publicly financed projects. On these projects, complimentary bidding may be considered to be an unlawful form of price fixing. In addition, many public owners require that each bidding contractor certify that its bid is noncollusive, that it has compiled its bid independently, that it has not disclosed its bid to any other bidder, and that it has made no attempt to have any other contractor bid or not bid.

5.41 State Preference Statutes

Some states have enacted statutes pertaining to the award of their public construction projects that give preference to bidding contractors who are domiciled in that state or who have previously satisfactorily performed public contracts and have paid specified state taxes for a statutory period. These statutes typically provide that a preferred bidder will be awarded the contract for a state public work if his bid does not exceed the lowest proposal submitted by more than a stipulated percentage (5 percent is typical). Such laws do not apply where federal funds are involved. Similar provisions giving a bidding advantage to minority- and women-owned businesses and businesses operated by historically disadvantaged groups have been applied in some areas.

The motivation behind such protectionist actions is to have the tax expenditures on public works provide maximum benefit to the local citizenry. It is debatable, however, whether such procedures are conducive to obtaining quality construction at the best possible price.

5.42 Scheduling Bid Dates

The architect-engineer and owner should be mindful of the importance of scheduling bid dates conducive to the greatest number of contractors submitting proposals. Studies by the American Society of Professional Estimators (ASPE) have shown that the best time for owners to receive bids is between 2 p.m. and 4 p.m., Tuesday through Thursday. Days before or after holidays and those between Christmas and New Year's should be avoided.

5.43 Scope Bidding

A concept introduced relatively recently and which is an innovation in the competitive bidding of construction projects, is the use of “scope bidding.” Where scope bidding is used, the bidding documents notify the bidding contractors that the drawings and specifications do not necessarily indicate or describe all of the work required for full performance under the contract. The bidders are advised that the successful contractor must furnish all work and materials required for the proper execution and completion of the work, on the basis of the general scope indicated and described. In other words, the contractor is required to furnish all materials and all work required for the normal functioning of project parts and systems, whether or not they are shown on the contract documents. The architect-engineer or owner, who are responsible for the design, are given the authority to decide what work must be included within the general scope of the contract.

This contradicts the long-standing concept of competitive bidding, which holds that the contractor's cost estimate and proposal are based principally on a detailed quantity takeoff of work items as they appear on the drawings and are described in the specifications. The designer has produced a complete design and has described and communicated all aspects of the design in the drawings and specifications. The architect-engineer and owner expect to reap the benefits of competition among contractors for delivering the well-defined elements of the drawings and the specifications.

It is usual and has long been expected on competitive bid projects that the contractor be required to provide those items that are a normal part of its trade and are installed as a normal and usual part of its work. However, the scope bidding concept can be considerably more demanding and can involve the much greater risk of the contractor's being required to perform unanticipated work on the basis that it lies within the designer's view of the contemplated scope of the project.

Scope estimating has been used where performance specifications are written, and on negotiated work for the establishment of target estimates or guaranteed maximum contract amounts. However, competitive scope bidding can introduce an uncertainty and a severe element of risk for contractors and subcontractors involving their being held responsible for major work items that were not anticipated because they were not included in the contract documents.

5.44 Range Estimating

The estimating of future construction costs always involves a number of subjective judgments and a considerable degree of uncertainty. No estimate is ever exactly correct; therefore, it can be said that every project estimate is in error. The amount of the error and whether it is plus or minus is unknown until completion of the project.

There are certain probabilistic procedures that can be introduced into the estimating process which enable the estimator to establish the mathematical probability that the actual cost of the project will not overrun any particular figure. This technique of risk analysis, known as range estimating, is certainly not suitable for use in every estimate. However, it can be of considerable value to owners, architect-engineers, contractors, and construction managers on very large and complex projects.

In an effort to measure uncertainty, the estimator determines an upper and lower cost limit, as well as a target value, for each major element of cost in the project. Included with these determinations is a determination of the confidence level or the probability that the actual cost of the project element will be at least as favorable as the target estimate. In effect, this range of possible costs for each critical cost element of the project brackets the traditional single-value estimate or target cost. The results of these price distributions are analyzed by a computer algorithm that iterates through thousands of simulations of project cost and potential job experience, ranging from conservative to optimistic perspectives.

The results of the simulations are reported in the form of a profile that shows different total project costs along with the probability of overrunning each of these total costs. Thus, individual uncertainties in the estimate are combined in such a way that the uncertainty associated with the project's total cost is determined and presented for decision-making purposes. Range estimating can provide management with a means of determining and then coping with the problems that major project uncertainties may present.

5.45 Introducing Probabilistic Determinations into the Estimate

As has been noted, the objective of estimating all project costs and determining the markup to be included in the estimate is to include the maximum possible markup, and thus the maximum profit potential, while at the same time keeping the bid at a competitive level. Stated another way, the contractor wishes to be the low bidder but with a minimum spread between its low bid and that of the second-low bidder.

Procedures have been developed to assist the contractor in selecting markup figures that will maximize its profits over the long term. The two best known and most widely accepted of these “bidding strategies” are known as the Friedman Model and the Gates Model. The Friedman Model is the simpler of the two and assumes that all bidders are acting independently of one another. This means that the probability of underbidding a group of competitors equals the product of the probabilities of underbidding each competitor separately. The Gates Model assumes that bids from competing contractors are not totally independent of one another and procedures are applied to take this into account.

Not widely used in everyday construction contracting, mathematical simulations such as range estimating and probabilistic estimating may have a place in the analytical procedures of some contractors, especially on very large and complex projects. They are included here primarily for the sake of completeness, and for providing familiarity with the terminology, and perhaps for provoking further thought.

5.46 Computer-Based Estimating

Computers and specialized softwares are now very widely used by contractors as tools for assisting with their cost estimating functions. Computers are also used for tracking construction costs and schedules as construction projects are performed, and for maintaining the contractor's historical cost information database. Computerization provides the estimator with the necessary information to make the best possible decisions concerning the job being estimated and for making the best predictions with regard to what construction costs will be. The speed and accuracy with which computers can calculate the various elements of construction costs, and can reflect changes from one part of the estimate to the other affected parts, provide a tremendous assist to the estimating function.

Digitizer pens, digitizer tables, building information models, and other similar electronic devices enable the estimator to make a quantity takeoff from the drawings, with the measurements and counts being entered directly into the software as they are determined. The computer can convert the takeoff data into pricing units such as square feet and cubic yards. Using prices determined by the estimator or productivity and pricing information extracted from the database, the computer can perform the calculations to produce an estimate. The computer can calculate prices for labor and equipment by combining work quantities obtained from the takeoff with unit costs of production or with production rates and hourly costs from historical cost information.

A large number of estimating softwares have been produced to facilitate the estimating process. Construction firms typically assess the different program available, and then select for use the one that best fits their needs. The industry has seen a rapid evolution in the different forms of estimating software and the powerful features they provide.

The most recent technological advance in computerized estimating is building information modeling (BIM), which is also referred to as BIMS (building information modeling systems). This technology uses a three-dimensional model of the building design, developed and stored in the software, as the basis for producing an estimate of the cost of constructing the building. The software also produces a construction schedule, thus integrating the determinations of cost and time for performance of the project.

It should be recognized that BIM software determines the elements of cost by use of the same logic as described in this chapter. With all of the elements of the building design stored in digital form in the computer's memory, the machine can perform the calculations and can make the determinations necessary to calculate costs for materials, labor, and equipment. Subcontractor prices can be input as subcontractor proposals are received (with the subcontractors frequently having utilized the BIM data for the preparation of their proposals), and tabulations can be produced that show the subcontractors' proposal prices and items included and excluded from each proposal. The contractor can input project overhead, using the BIM model for determination of quantities for the elements of project overhead. When the contractor inputs his general overhead and markup determinations, the software tabulates the final price. When adjustments are made by the estimator, or when subcontractor proposals are changed during the bidding period, the software calculates the effects of the changed information wherever the original estimate has been impacted and calculates the updated price. The software can also produce an array of other summaries and tabulations the contractor may wish to have. Examples include summaries of prices received from minority-owned businesses for materials, and subcontractor quotations from firms operated by historically disadvantaged groups and the like.

It should also be recognized that computers, the variety of powerful softwares now available, and other technological advancements that are sure to follow cannot replace the human element in estimating. Computers are aids to and tools for estimating as performed by estimators. The experience, skill, and judgment of the talented people who are knowledgeable of the estimating process, as well as being knowledgeable of the construction process, are irreplaceable elements of the decision-making processes on the part of the estimator, consisting of his acquired learning and experience, which are essential elements of successful estimating. The computer assists but decidedly does not replace the estimator.

5.47 Summary and Conclusions

Cost estimating, pricing, and preparing proposals for construction projects are central and fundamental components of all construction contracting. The effectiveness with which a construction contractor performs these functions on an ongoing basis is critical to the profitability and to the survival of the construction contracting enterprise.

Chapter 5 Review Questions

1. Name the six components of a contractor's detailed lump-sum estimate.
2. Name, define, and state the typical usage of three different types of approximate estimates.
3. Define the term internal rate for estimating equipment cost, and describe its determination.
4. State five components of indirect labor cost.
5. Name and describe the two ways in which construction labor costs are stored in the contractor's historical information database, and describe the advantages of each.
6. What is an allowance, and why is it included in an estimate?
7. Explain why, when preparing a unit price estimate for a competitive bid project, a contractor will often prepare his own estimates of quantities, even though the owner and architect-engineer have provided quantities with each of the named activities and work items listed on the proposal form.
8. Define scope bidding, and describe its ramifications for a contractor.
9. Define an unbalanced unit-price bid, and discuss why a contractor might prepare such a proposal.
10. List five typical components of a contractor's project overhead.
11. List the steps in the estimator's determination of materials prices for a lump-sum detailed estimate.
12. General overhead, project overhead, and markup are typically included as line items on a unit price estimate or on the unit price proposal form. Describe how these items are included in a contractor's detailed unit price estimate.
13. Explain why estimators must develop a basic project schedule during the course of preparing a detailed estimate for a project.
14. List five components of a contractor's general overhead.
15. Name and describe two different types of prebid meetings that a contractor may take part in when preparing a detailed estimate for a project.
16. Name and define two different equipment depreciation methods described in this chapter. Discuss why equipment depreciation becomes an element of consideration in a detailed estimate.
17. Define complimentary bidding.
18. Define the term bid spread in its two connotations, and describe the significance of the term.
19. Why is equipment operators' time usually estimated with labor cost rather than as a part of the cost of the equipment?
20. Beyond the basic consideration of return on investment, what is the largest determinant of the amount of markup a contractor will include in his estimate for a competitive bid project?
21. Name and describe five items of information the owner and architect-engineer typically require contractors to provide as part of the prequalification process.
22. Explain why a contractor's bonding company will be interested to know the bid spread on every bid the contractor submits.
23. What are the options an owner may exercise if a project comes in “out of the money” on bid day?
24. Discuss the ethics of this situation: a general contractor was low bidder on bid day, and fully expects to be awarded the construction contract for a building construction project. During the bidding period, he received a subcontract proposal for the electrical work on the project from Spark Electric, a firm he has worked with many times in the past. He and Spark operate on the basis of mutual respect. Spark's proposal was the best received for the electrical work and the contractor included that price in his proposal for the electrical work. After the apparent low bidder was announced, and before any notifications were sent to any of the subcontractors indicating who was low bidder on any of the subcontract items, Ace Electric brings the general contractor a proposal for the electrical work on this project, and asks that it be considered. The contractor also has a good history of working with Ace, a reputable and reliable company. Ace's proposal price is significantly less than the price submitted by Spark. What do you think the general contractor should do? Explain.