Negotiated Bids Construction: Mastering These Winning Contracts

Bidding is vital in the construction industry. For one, contractors strive to win more bids and increase their earnings. Project owners want the right contractors who finish on time, within budget, and with the expected quality. Hence, the project owner and contractor engage in a rigorous construction bidding process to agree on the best price.

Now, construction bids are never a one-size-fits-all. They vary depending on such factors as size and type of construction contract, delivery method, financing, profitability, and the bidding situation. 

In this quick guide, we focus on negotiated and competitive bids. Here, we examine these two main types of construction bidding processes and when to use each. 

Let’s get to it!

What is a Negotiated Bid Construction?

A negotiated construction bid entails the project owner identifying a single general contractor, inviting them to negotiate the project terms and costs, and subsequently awarding them the contract to execute the project. A flexible negotiated contract allows for changes and discussions on costs as the project evolves, but the final cost may vary. In contrast, a construction lump sum contract offers a fixed price, providing cost certainty but less flexibility for changes, with the contractor bearing the risk of any cost overruns.

Often, an architect assists the project owner in selecting the construction manager with unique expertise, experience, and integrity in handling the job. In turn, a negotiated bid is suitable for complex or urgent projects. 

Commercial Construction Project: Negotiated Vs Competitive Bid

Most clients rely on a negotiated bid process to hire suitable contractors for commercial construction projects like renovating high-end residential buildings and fast-tracking emergency road repairs after a natural disaster. In contrast, up to 97% of public projects are awarded through competitive bidding, where fairness and transparency are crucial. 

Competitive Bidding: Pros and Cons

A competitive bidding process entails inviting multiple contractors to bid on the project. Then, the project owner selects the lowest bid that meets all the project requirements and detailed specifications. Still, a general contractor with the highest price can win a competitive bid based on other factors like experience in the unique project type and a reputation for exceptional project execution and delivery. 

Below is a summary of the pros and cons of competitive bidding: -

The Pros

• Clients pick the most cost-effective option to keep tabs on overall project costs
• Competitive bids are openly received and reviewed for transparency
• Comparing multiple bids ensures fair competition
• Clear cost information helps compare and choose the best value bid

The Cons

• Competitive bidding takes time to prepare and evaluate
• Strict specifications and predefined terms and conditions limit bid flexibility
• A contractor change order can alter the design process and raise the initial fixed price
• Collaboration between the project owner and contractor is limited

Advantages of Negotiated vs. Competitive Bids

Negotiated procurement encourages collaboration between the project owner, architect and contractor. They chat, plan, and make complete and cost-effective project strategies.

Unlike in sealed bids, everyone dives into in-depth discussions to address important details and challenges in the negotiated contract.

Also, the seamless communication and problem-solving approach in a negotiated bidding process eliminates confusion while promoting teamwork and quick issue fixes.

Besides, project owners hold early negotiations with a single contractor to speed up urgent construction projects.

Bid Solicitation

Bid solicitation is the process by which organizations solicit competitive bids or proposals from prequalified contractors for an upcoming construction project.

The project owner or construction manager sends hard bid invitations or requests for proposals (RFP) to the shortlisted contractors who meet the desired professional qualifications. The bid package has a comprehensive overview of the project specifications, outlines the scope of work, and specifies the construction contract terms.

Next, the general contractors must submit their proposals within a set deadline. Upon receipt, the client evaluates all the bids based on various criteria like technical capabilities, experience, and final pricing, before awarding the contract to the absolute best bidder.

Value Engineering Keeps Budgets In Check

Contractors invest in value engineering to establish accurate cost estimates from the onset and minimize unnecessary change orders or delays, especially in competitive bidding.

For example, by identifying alternative materials, they can substitute expensive components with cost-effective ones. Likewise, they can standardize design specifications on multiple projects and leverage economies of scale. 

Still, all parties to the negotiated procurement contract should have clear expectations regarding such matters as the delivery method and guaranteed maximum price to make an informed decision. 

Other strategies include seeking efficiency improvements in the design layout and conducting risk assessments to mitigate associated losses.

Scenarios When Negotiated Bidding Suits the Project Owner 

Here are five ways a client gains from hiring a contractor through a negotiated procurement process:

• Renovating complex historical buildings to preserve the original design
• Constructing custom luxury suites whose delivery method is heavily dependent on negotiations on the client's preferences
• Collaborating with contractors in the design phase process of design-build projects
• Building manufacturing plants with intricate technical specifications
• Working on construction projects in areas prone to unforeseen challenges resulting in significant cost overruns

Instances When Negotiated Tendering is Well-Suited for Contractors 

Next, negotiated bidding favors the contractor when executing the following projects:

• Projects whose complex scope require specialized skills and ongoing collaboration between the contractor and client
• Executing projects in an ever-evolving environment
• Speeding up projects with tight timelines
• Trying out innovative ideas on projects with flexible schedules
• Repeat projects to build lasting relationships with project owners

The Keys to Success in Commercial Construction

Whether you prefer competitive bidding or a negotiated procurement process, the following keys to success are a must to win more bids in commercial construction:

• Schedule a visit to the client’s site to assess the prevailing constraints and work conditions against clients’ expectations. That way, you can bid the lowest price and still make a profit.
• Hold preliminary discussions with the client to understand their vision.
• Demonstrate your experience and expertise in handling similar past projects.
• Outline the scope of work, including deliverables and timelines in negotiated bidding.
• Prepare detailed cost estimates with elaborate figures on all items. The transparency builds trust since the client knows you do not cut corners.
• Offer contractor-based value-added services like regulatory compliance, value engineering, project management, and local community engagements.

Interested in Finding the Latest Construction Projects?

Stiff competition in the construction industry compels contractors to be innovative in exploring lucrative bidding prospects and increasing their bid-hit ratio. Here are ideas to give you a head start:

• Build and market your strong brand
• Network for referral business in local industry events and trade associations
• Collaborate with other contractors as a subcontractor or supplier on a bigger construction project 
• Search for competitive bidding opportunities on online public procurement websites 
• Keep tabs on industry trends
• Monitor local planning and zoning meeting boards

Final Thoughts

Competitive bidding selects the lowest bidder through an open and transparent process. Still, its contractor disadvantages, like limited flexibility and collaboration, make it less common in commercial construction. In contrast, negotiated procurement facilitates collaboration, in-depth discussion, and long-term client relationships. Either way, the winning bid must capture accurate cost estimates and guarantee a good ROI for all stakeholders.