How To Get Lower RFP Prices From Contractors

October 2011, Vol. 238 No. 10

Ric Hinkie, Contributing Writer

Getting the lowest possible bid prices from contractors – consistent with safety and quality – is the goal of every utility, pipeline or other infrastructure owner. But how can the client ensure that the contractor provides the most comprehensive, lowest pricing for timely, quality work?

A group of contractor principals was asked that question recently and their answers offer several money-saving opportunities for their utility and pipeline clients. Providing money-saving suggestions were: Dennis Klumb, Jr., president and CEO of KS Energy Services; Joe Kramer, vice president of Business Development and Jeff Sedillos, vice president of Operations for SiteWise, formerly Kelly Services; and Jay Osborn, president/CEO of Q3 Contracting.

Reduce The Unknowns And Your Costs Will Go Down. “Contractors must build costs based on unknowns,” said Joe Kramer of SiteWise, a Denver-based gas and telecommunications contractor. He continued, “Utilities and other infrastructure owners can reduce their costs by helping contractors reduce unknowns.”

“Some clients minimize negative information they give contractors in an effort to keep bids lower. But that approach tends to work against them,” explained Jeff Sedillos, of SiteWise. “When clients don’t let a contractor know what the challenges are on their job site, good contractors will try to cover themselves by building in additional costs for unknown risk factors. For example, if the client knows that a portion of the construction will require tough digging – but that the rest of the project will be easier terrain – telling the contractor in advance will allow them to bid a lower overall cost. Building trust with contractors helps to lower costs over time.”

“Unexpected problems like rock in the construction path, the need for swamp mats, or unusual weather delays can be negotiated into the original contract as clauses,” suggested Dennis Klumb, Jr., KS Energy Services, New Berlin, WI. He added, “With some protection from nasty surprises, the contractor’s bid cost is lower, because the surprise costs are shared. The fewer the unknowns, the lower the bid price can be.”

“Road and traffic issues are another set of unknowns that can be avoided,” continued Klumb. “If the client can preplan and coordinate with municipalities and DOT, then surprises like 24-hour construction, road closures, concrete barrier requirements and crash barriers can be planned for instead of resulting in expensive delays.”

The More Time And Information Contractors Have Before Bidding The Lower Your Costs. “During the bidding process,” offered Jay Osborn, Q3 Contracting, St. Paul, MN, “the more open the utility is about the work and the more detailed its responses to questions submitted by contractors, the better our bids can be.” Here are some additional suggestions from the group:

1. Really tight bids take time to create. Allow enough time for contractors to inspect project sites and review relevant documents. It also takes time to get prices from subcontractors and vendors.
2. Issue the bid as early as possible in the construction season. Even if the bid is for next spring, why not go out for bid in Q3? Contractors are more efficient with a consistent backlog of work.
3. The more information the contractor/bidder has, the lower the risk and, therefore, the lower the bid price. For example, by providing site and digging conditions, weather, anticipated delays that the client might be aware of, and getting permitting done before the start of the project can help contractors make tighter bids.
4. The more accurate the design and engineering is, the more aggressive contractors can be on pricing. A little more work up front by the client can also mean fewer change orders.
5. Provide maps and prints of the construction area. A good contractor will want to see the entire system in the construction area as well as the specifics relating to the bid. Surprisingly, some companies will not even provide a sampling. Not sharing those raises costs, again, because of the unknowns.
6. Strong client project routing and project profiles are increasingly important in congested areas where cities and counties are more aggressive about the specifics of where the new line or replacement work will be installed. This may require engineering expense on the part of the contractor that was not anticipated.
7. Choosing the right tasks to contract for can make a difference for clients. By analyzing operating tasks and assigning higher-level tasks to internal teams a savvy client uses their higher skilled and higher paid personnel efficiently and they retain the high levels of technical knowledge. Contracting less skilled work keeps costs down. For example, contracting meter testing for residential meters and having in-house experts test rotary and other high-volume meters can be a smart division of the work.

The More Consistent The Workload, The Lower Your Costs. “Understanding the contractor’s business needs,” suggested Kramer, “can help a client leverage their bid process to reduce costs. Obviously, a contractor has to pay staff, have the right equipment, cover overheads and turn a profit. The steadier the work, the lower the unit cost, so finding ways to keep contractors engaged will help both businesses succeed. Margins can be lowered when there is enough work in the pipeline to allow the contractor to most effectively utilize their resources.”

Osborn agreed. “It may take a little longer on the client’s end in terms of workforce planning, but planning for consistent workloads and schedules means lower costs. Peaks and valleys of work are expensive.”

“Be flexible with start and completion dates,” recommended Klumb. “Flexibility will allow a contractor to perform their work when it fits their schedule best. The result is lower prices for the client.”

Avoiding Delays And Change Orders Lowers Costs. Once the job is awarded, costs can still go up. Here are some suggestions about avoiding added costs:

1. Ensure that all permits and rights-of-away are secured at the time the work is scheduled to start. If not, a contractor may have to jump around from one segment of the job to another. This could result in a change order.
2. Accurate locates are vital. Clients that can also provide “as-builts,” access to mapping, original design plans, and other information can keep costs down.
3. Ensure the pipe and other key materials will be available at the start of construction so the project can begin on time. Any material delay could result in a change order or a missed completion date.
4. Can related contractors stay up with your primary contractor? For example, a steel piping project may require x-rays of welds. The utility can save itself money if it can make sure the x-ray company can keep up with the installation contractor to avoid a slow down.
5. Help make sure the client’s customers don’t slow the work. Communicate with any customers (especially business owners) who will be affected by the construction process. Advise them of the project and set realistic restoration expectations. Provide them with a contact number for questions. Included in this customer communication should be a request for the homeowner to mark out any private facilities (dog fences, irrigation systems, fuel runs and sewer laterals). Also, any “special needs” that the contractor should be aware of such as someone in the home who is on oxygen, in a wheelchair or who is visually disabled, so that in the event of an emergency extra safety precautions can be taken.
6. Are the bids from all the contractors truly comparable? Do they all have an accurate understanding of the requirements and your expectations? If not, those contractors who did not understand will be requesting change orders.

The Better The Communications, The Lower Your Costs. “I believe that having high-level meetings with client officers and senior-level directors along with our contractor principals can be very helpful and save money,” said Osborn. “At that level, our leadership and the client’s leaders can discuss issues, new ideas, major project workflow and be able to make the changes necessary quickly and efficiently to save money. Most field managers and supervisors may not have the authority or be willing to make those kinds of changes.”

“Inspectors are vital to contracting work. Assigning an inspector who is familiar with your requirements and has a good working relationship with your contractor makes a major difference,” said Klumb. “When the project is more likely to be accomplished as a team, the result is a safer job and one that is on time, on budget.”

“Clients can capitalize on and improve their relationships with city, county, and state regulators by letting the contractor know of their involvement. Good contractors will know what is important and can uphold positive relationships in the field,” said Sedillos.

Alternative Bids Can Also Lower Costs. All three contractors suggested that sometimes contractors can help clients by suggesting alternative ways to get the work done. The better the contractor knows their clients the more likely they will be able to present cost-saving measures. One effective way to do this is with alternative bids, though not all clients will accept them.

Leverage Time And Materials Work To Lower Your Costs. “There are times when Time and Material (T&M) contracts make sense for both parties,” said Osborn. “One example is when a major multi-year project is on the table and there are a lot of unanswered questions in the bid process. Awarding the contracts to several qualified bidders at T&M rates for the first part of the project will help contractors establish a true cost. They can use that experience to make a more competitive bid for the next phase. They know the risks and unknowns of the project. There will also be fewer change orders. Another way to reduce cost and keep projects competitive would be to begin the work on a T&M basis while the utility tracks the cost per foot by each contractor. Then the utility can award additional work to the low-cost provider keeping in mind the safety and quality of the product.”

“Don’t be afraid of T&M work,” agreed Sedillos. “On a T&M bid basis, lower volume work or ess routine work usually means higher prices from contractors. But this does not mean that T&M contracts are a blank check with no guarantee of efficient work. The contractor incentive is to do well on T&M work so the contractor can earn more work. If the work gets done at a lower cost than expected, many clients will share the savings.”

Sedillos noted one job that was expected to cost $320,000 but the final cost on a T&M contract was $280,000. The client and the contractor split the savings. Both gained from the agreement.

Ric Hinkie
is retired president of the Midwest Energy Association and is a contributing writer to P&GJ.