The Bidding Game

Edward T. Braverman is a partner in the law firm of Braverman & Associates.

At a recent cocktail party, I had occasion to see and speak to a former board member of one of my co-ops. He had been a principal of the sponsor that had converted a turn-of-the-century, large, red-brick building to co-op ownership. The property is beautiful, but its 100-year-old infrastructure has deteriorated significantly. His family had managed the building for many years, but they had recently sold all of their unsold units to an investor and had relinquished the management and control of the building to the co-op and its new board. We chatted about significant upcoming capital improvements that were needed to restore the structure, and when I related the pricing for the upcoming renovation, he offered advice on how to reduce the cost of the repairs.

“Ed, you don’t understand how to achieve the best pricing. What we did was approach a contractor and tell him what our budget was; ultimately we would find a contractor who would take on the job at our price. That’s how it’s done!”

I was not particularly shocked at the suggestion, as I had learned from the co-op’s current engineer that much of the structural damage to the building came about as a result of deferred and substandard property maintenance. This sponsor’s method of bidding out work was a surefire way to obtain:

a) Substandard work
b) Time overruns
c) Claims for extras
d) Contractor disputes
e) Job abandonment

This former sponsor did accomplish his goals, however:

a) Expended only a fraction of what was really necessary to complete the repairs
b) Made cosmetic, substandard repairs only
c) Reduced the possibility of a sponsor’s negative carry for their unsold units by keeping maintenance and assessments low
d) Passed along major building problems to the remaining tenant-shareholders and to the investor who later bought the unsold units

The sponsor, as a member of the board and as managing agent for the co-op, owed both the cooperative and all of its shareholders a fiduciary duty to bid the capital improvements properly so as to keep the building structurally sound and to protect the investments of all of the tenant-shareholders. He didn’t – but you should.

Bidding Basics

The bidding process starts with securing the service of a competent architect or engineer, one skilled in the type of work to be performed. It should be obvious that a mechanical engineer will not be qualified to do façade work or roofing replacement. Nor will a structural engineer be competent to prepare the documents for your boiler replacement.

Don’t skimp! The key to a quality job, which is completed for the bid price and within the allotted time, is dependent on the services of a knowledgeable professional who makes the appropriate investigation to create a unique set of drawings and specifications. All of the contractors bidding for the job should be able to prepare complete and accurate estimates – leaving nothing to conjecture. That should eliminate the need for extras and cost overruns.

The specifications should include all of the conditions under which the job will be performed and contain all of the terms under which the contractor will be required to perform work, including: work-schedules retainage
(withholding 10 percent of each payment due to the contractor to assure completion), insurance requirements, union affiliations, supervisory personnel, and security issues.

The architect/engineer should also include an “Invitation to Bid,” which amounts to the rules and requirements under which prospective contractors will submit their proposals. This should include a required line-item breakdown of the elements of the work, and should require the contractor to indicate the prices for line item – the total of which will be the lump sum price for the work. Such a document is known as the “Schedule of Values” and will aid a property and its professionals in awarding the contract. It will also substantially aid the later administration of the payment process.

The bid package should also require a “Unit Price Schedule” (cost per unit, i.e., “pointing: $1.50 per lineal foot”) so that additional work, or deleted items, have an agreed-upon price. The “Invitation to Bid” should also require that the contractor inspect the property in advance, set forth the insurance requirements demanded by the building and, among other things, indicate whether a payment and performance bond will be required.

Unlike a municipal project, which requires public bidding and award to the lowest responsible bidder, a co-op or condo’s invitation to bid should indicate that the owner shall have the right to reject any bid and to award the contract to any bidder (regardless of price) and to even renegotiate the bids after they have been received.

(Not all work should, or need be, competitively bid. Emergency repairs, or repairs – latent in nature – which cannot be determined in advance, can be negotiated with a reputable contractor on a time and material basis. But the person negotiating such a contract must be very knowledgeable about pricing labor and materials.)

This process will give the co-op/condo the greatest flexibility in selecting the contractor and then even renegotiating with each of the selected bidders, or with a new bidder, without incurring liability for not having awarded the contract to the lowest bidder. It should be remembered that the board seeks the lowest “responsible” and “capable” bidder so as to achieve the maximum quality of work for the lowest reasonable price.

In this regard, it is never a good idea to negotiate to the point where a contractor cannot make an adequate profit. Such a situation will ultimately result in the contractor seeking to cut corners to achieve a reasonable profit. This will result in less than a quality job.

In analyzing the bids, average out each line item in the various contractors’ “Schedules of Value.” By doing this, you can achieve a good understanding of what constitutes a reasonable price for any of the various items of work being bid. This should help tremendously in negotiating down the price after bid submission.

Choosing the Contractor

Managing agents, architect/engineers, and similarly situated boards are good sources of recommendations for contractors who have adequately performed similar work for others. On a major capital improvement at least four to six bidders should be obtained. Not only should the bidder be scrutinized for technical expertise in performing the required work, but you should look at financial capacity to complete the job, since the contractor must be able to have sufficient financial wherewithal to pay its material men, its subcontractors, and its own staff while it is waiting for payment from the owner.

If the contractor does not have sufficient finances, its staff and subcontractors may walk off the job and its material vendors may stop deliveries – all of which will lead to time delays and possibly the abandonment of the work by the contractor.

Bonding. To perform appropriate due diligence to determine a contractor’s financial condition or creditworthiness, you can secure a Dun & Bradstreet (or other financial) report. However, if the job is substantial enough (into six figures), demanding a payment and performance bond would be a significant help in hiring a financially secure contractor, and would also provide ancillary benefits.

A payment and performance bond is written by an insurance-type entity. For a fee (usually between two and three-and-one-half percent of the contract price), the bonding company binds itself to perform the construction contract together with the contractor (this is a performance bond) and agrees to pay the subcontractors and material men if the contractor does not (this is a payment bond).

Not all contractors are “bondable.” To be so requires the entity to meet stringent financial and asset requirements of the insurer and to have a track record of the type of construction to be performed. Accordingly, requiring a construction contact to be bonded will assure an owner that the contractor has the assets and financial ability to complete the work and to have the requisite skills to do an appropriate job.

This knowledge makes an owner’s due diligence simpler. The additional cost of the bond will be reflected in the price of the job. Additionally, the owner will secure the primary benefit of the bond: knowing that, should the contractor default or go out of business, an insurance company would be ready to complete the job. Moreover, appropriate bonding forms should be used to cover at least one or two years of the warranty period, thus protecting the owner should the contractor go out of business shortly after completion of the work and not be available to perform warranty work.

The Contract

The American Institute of Architects (AIA) is known for producing form construction agreements, which architects and contractors will tell you are “industry standard.” What they won’t tell you is that the AIA is an organization composed of architects and contractors, without any representation by owner groups. Additionally, they will not tell you that the “standard” AIA forms are heavily weighted in favor of the contractors and the architects, to the detriment of the owner. Your attorney should not agree to use the construction forms prepared by the AIA. While they may be easy to complete, their negative impact could be significant.

The agreement prepared by counsel should include all of the drawings and specifications, the general conditions under which the job is to be performed, the insurance requirements for the contractor and all of his subcontractors, as well as the way that changes in the work are to be implemented and their price and time extensions determined. Moreover, the contract should incorporate the bidding documents and any information supplied to the bidder before the contract was awarded. By doing this, we incorporate within the contract the foundation material for the bid and thereby eliminate, or substantially reduce, the likelihood that the contractor can subsequently request extras based on unforeseen conditions not listed.

Contract Administration

To know that your work is being accomplished in a good and workmanlike manner and in accordance with the specifications, someone must review the work as it proceeds. Additionally, someone must review the contractor’s monthly billings and certify that the work performed, for which payment is requested, was actually completed in a good, workmanlike manner. This review and certification should be performed by the owner’s architect/engineer at an hourly rate. Moreover, the certification by the architect/engineer provides an added source of responsibility upon which an owner can rely.

In performing his duties in connection with contract administration, an architect or engineer will generally not remain on site for a prolonged period of time each month. Rather, he may make one or two monthly visits to “monitor” the work. Additionally, the architect/engineer does not possess the skills of a contractor. Therefore, to more closely supervise the work in process, the owner may seek to hire a construction manager (usually a former contractor), who is knowledgeable enough to examine the method and means by which the contractor performs his work and can more closely review its daily progress and quality. Additionally, if engaged early on, the construction manager can help an owner in the bidding process with regard to the labor and materials market (labor and material costs) and more accurately evaluate the line-item bids supplied by the contractors.

Finally, but not the least in importance, by securing the services of a knowledgeable construction attorney, a property can protect all of its interests vis-à-vis the contractor and the architect/engineer. It is these services that can aid the owner in handling major capital improvements and help secure a quality job at a fair price.