Price Negotiations

A few years ago I had a small excavation job to be done in San Francisco – a couple workers with shovels and a truck could do it in a few hours. I estimated the work and decided that I would pay $800 for someone else to do the work. I called a demolition contractor – let’s call him Alan – who had done some work for me before:

Me: Hi, Alan, I have a small excavation job. (I described it; Alan knew the site.)
Alan: Sure, Bob. I’ll charge you for time and expenses.
Me: I’d like a fixed price.
Alan: OK, Bob, I’ll give you a break and do it for $2000.
Me: (Laughter)
Alan: Bob, listen, I have some crew available who aren’t working. I don’t need the profit on this job. For you, I’ll do it for $1500.
Me: You know, Alan, let me think about it.
Alan: Bob, you’ve been a great customer. $800.
Me: I’ll call you back.

I wasn’t concerned about our conversation, because I was confident of my own estimate; I called another company, locally known as “the 3 Russian guys”, and they did the work for $600. I later learned that Alan had some personal money problems, and he was alienating all of his customers by making outrageous bids on jobs large and small.

The primary lesson from my experience is that it helps when you’re getting bids, to have a good idea, either from experience or from the myriad of sources available on-line and in print, of the appropriate cost of the job.  If you have a good idea of what a project should cost, you have a head start in the process of receiving and evaluating bids for your project.

Currently (Fall 2011), homeowners and commercial clients are in the driver’s seat when it comes to negotiating prices with contractors. But be careful about your negotiating tactics. Most good contractors have adjusted their bidding practices to the current environment, and their first bid to you will be based on a carefully thought out estimate of the cost of the work, plus a reasonable profit. Unlike my friend Alan, they won’t be trying to make a killing, just a living. If the contractor has come back to you for additional information about finishes and other details, that indicates that the work is well planned. To understand why your multiple bidders ask for different prices, ask them each for a “schedule of values” – a document that details the portions of the total contract price and their relation to the payment schedule.  When I bid a job for my construction business in the San Francisco Bay area, I always include a schedule of values, detailed appropriately for the job. If a contractor doesn’t know what a schedule of values is, consider that to be a red flag, because the contractor should have used a schedule to put together the bid in the first place.

Once you have your bids, compare them, not just on price, but also on any differences revealed in the individual contract documents. Does one contractor specify exact finishes, while another repeatedly specifies “or equivalents”? Does one contract go into detail, while the other says, “to be determined?”

If you feel that you need a lower price, be careful about your negotiating tactics. Do not go to the individual contractors and say, “Hey, you bid $20K, and another guy bid $18K. Can you beat that price?” If the contractor simply returns with a bid for $17.5K, then something may be wrong. The most likely situation is that the contractor has removed something from the contract, without telling you. The site will be left dirty, or the contractor will relax some quality controls, with the excuse that “the client didn’t want to pay for quality.” Or they’ll nickel-and-dime you on every single item that isn’t spelled out in the contract, and when you complain, they’ll look you straight in the eye and say, “Look, you took every penny of profit out of the original contract, and you eliminated my ability to have any flexibility about scheduling. I have to make it back somehow.” The back and forth style of bidding will also erase any goodwill that the contractor feels toward you, because he or she knows that you’re going right back to the other bidder to try to get a bid for $17K.

A better route is to go to the contractor and say, “I’m not prepared to pay $20K for this work. I budgeted $18K and I can’t go above that. I like your bid otherwise, so I’d like to know what will change about your work if we make the price $18K. “ A good contractor may have almost exactly the same conversation as in the first case, but without any ill feelings: “I can do it for $18K, but that price eliminates all flexibility from the project. If you don’t specify every single detail, including how the tiles are cut in the corner of the backsplash, then I’m going to nickel-and-dime you for changes and extras.” That contractor is giving you a chance to get the lower price, but at the cost to you of more thorough and better design and planning. And you’re both prepared for it to be that kind of project. Or the contractor may just say, “You already have my best bid,” in which case you either take the lower bid or you back-pedal on your willingness to go above $18K.

So be careful about how you negotiate with contractors. Most of the time, you get what you pay for, and you never get more than what you pay for.

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