Negotiated Contracts vs. Competitive Bid

Keeping Costs in Line When Building Your Custom Home

Negotiated Contracts versus Competitive Bid

Nearly 84% of Americans view home ownership as a good financial move. Home buyers are in a position to go after their own custom-built home, and take on a complex long-term project with many details and decisions. With careful planning and preparation, you can build your dream home without outpacing your resources.

How you put together your custom home team is one of the first and most critical steps. Some people choose the negotiated contracts approach for their custom home projects. Others will solicit competitive bids from contractors.

While the negotiated method is much more common for custom residential construction, depending on the situation, competitive bids could be a good fit. Both approaches can prove financially sound, but how do you keep the costs and your time in line?

Here is a closer look at the pros and cons of each approach.

Negotiated Contracts

With the negotiated method, the homeowner selects one contractor to work with through the entire process, thru pre-construction to construction.

This is relationship-based selection giving priority to how well you think you can communicate and get along with the individual you will be working with from start to finish.

That contractor is often found through referrals, an interview process, and reviewing qualifications.

For example, your friend's custom-built home left you in awe. You want something with similar quality, so you reach out and connect with their contractor. You explain the broad strokes of what you're looking for and ask about their availability and start looking at all the specifics.

You may already have an architect working on the design and specifications — or your contractor can recommend an architect as well as an engineer to finalize the design. You will work with your contractor to determine budget and timeline for your project and sign a contract. 

With the negotiated method, which is typically the way Coastal Craftsmen works, the contractor acts as a consultant to help guide the owner along through design and construction and provide cost feedback along the way.

Competitive Bids

The competitive bid process works a little differently. Typically, you do not have a specific contractor in mind for the project. Instead, you contact a number of local contractors who then work from your existing plans to develop an overall bid for the project. Each contractor submits their bid for your review. You compare bids and choose the one that fits your budget. 

The competitive bid method is most effective when the documents are fully developed with plans, specifications, soil reports, fully-designed Air Conditioning, Electrical, Plumbing designs, as well as finishes and materials selections finalized.

Generally, since most prospective custom homeowners do not want to invest the funds upfront that are required for their design team to assemble a fully-designed set of documents (which is ideal for getting accurate, apples-to-apples competitive bids), this approach is rarely used for home builds. 

The important thing here to remember is that without fully developed plans and specifications, you are not likely to get apples-to-apples bids, therefore clients must be very careful before making decisions based purely on a number where the details are not well spelled out.

Keeping Home Construction Costs in Line

Keeping costs in line proves very different depending on which approach you take.

With the negotiated contract, you control costs through an ongoing dialogue. Since the contractor works with you throughout the whole process, they can provide practical advice about where you can save money. They can also advise you about where it's a bad idea to try and save money. 

For example, while you may be able to reduce costs with engineered wood flooring instead of solid hardwood, you should avoid skimping on roofing materials.

With competitive bids, keeping costs in line boils down to the initial bids you reviewed and whether they are realistic. If you choose the lowest bid, you will likely face extra costs during construction because the lowest bidder may have underbid by omitting items or including lower cost items that may not fit your desired level of finishes. 

If you go with competitive bids, look closely at the bids that fall somewhere in the middle of the price range. Those are more likely to reflect a realistic view of the project.

Final Thoughts

While you can opt for either a competitive bid process or a negotiated contract approach, the main deciding factors for going either direction are cost and the level of homeowner involvement throughout the construction project.

The negotiated method works best for those who want to have more control through the process of design and construction, and who can be available regularly to make decisions. One of the advantages of negotiated contracts is having the ongoing communications and working relationship to tap into your contractor's wealth of knowledge to help managed costs throughout the build. 

This is the method of choice also for those who do not want to spend up front for a complete design but will also want to know with a reasonable degree of certainty what their home will cost.

The competitive bid method works best for those who are willing to spend money upfront for a complete design and who wish to make all the necessary selections ahead of time. 

With competitive bids, we strongly suggest you select your contractor on a fully qualified bid so as to ensure you know what you are purchasing. Even the best laid out documents can see contractors make unsolicited substitutions for finishes that you may find later are not to your liking. 

We also suggest to try to get at least 3 different bids. That should provide a prospective client the best possible market value of the design at hand. If each bid is in a close range but well above your target budget, you know there have to be some concessions made somewhere in order to bring the budget back in line with what you might expect to reasonably pay.  

Coastal Craftsmen Construction specializes in custom-built homes in Southwest Florida. For more information or to discuss a project, contact Coastal Craftsmen Construction today.