Alternates

Alternates: The great scourge of a straightforward bid.  How to keep it organized, get your subs on-line, and make money doing it.

These days it’s the rare project that doesn’t include at least one Alternate request.  An Alternate may be as simple as a product substitution or as complex as an entire building.  Regardless of how complex or how many, the estimator needs to ensure that Alternates are priced correctly.

Make a list

Only the very best design teams will generate a highly visible list of alternates which are painstakingly detailed on ALL sheets showing the affected areas.  This is a rarity to be cherished, the majority of alternates will require some amount of digging to fully define.  Be on the lookout for alternates that affect any of the engineering disciplines.  Sometimes an architect or interior designer will request alternate pricing via key-note on an Architectural sheet without communicating to engineering consultants.

Create a list of ALL the alternates listed in the plans, specifications, Narratives, and Request For Proposal (RFP) documents.  Often alternate numbers are not coordinated between consultants.   Give the alternates a unique number to ensure that on bid day the subcontractor quotes align with your expectations.

Define the intent

Alternates do not occur in a vacuum.  Some projects contain so many extensive alternate requests that it’s possible to assemble a scope of work that works against a subcontractor bidding the work.  For example let’s say a project involves three alternates.  The base bid is for a building that will feature a paved courtyard.  The first alternate is to erect an out-building in the courtyard area.  The second alternate is to pave a drive-through lane on the base building.  The third alternate is to pave a sidewalk around the base building.

For a site concrete firm bidding this project, the first alternate is a credit for area NOT paved because the out-building is going up.  The second alternate is an add however the third alternate may be affected by whether or not the first and second alternates are accepted.  This bidder is forced to decide whether to risk coming up short should the alternates not be selected sequentially.  It’s common for the apparent low subcontractor to change depending on which alternates are selected as a result.

Defining the client’s intention of the alternates reduces this speculation.  When in doubt – issue a Request For Information (RFI) to get resolution.

Combine the list, intent, and subcontractor obligations

Depending on the state of the plans, the subcontractors may need additional guidance to ensure that bid day proposals are complete.  Every alternate should be a mini-estimate with breakdowns for subcontractor quotes.  This can be especially important on Mechanical, Electrical and Plumbing (MEP) plans sets that do not adequately define the alternate scope.  Remodel work can involve complex plans that use several pages to resolve the areas of work.  Consider highlighting the plans to indicate Alternate Boundaries.  A word of caution – if an alternate request is conceptual in nature, it behooves the estimator to deliver conceptual pricing.  If the client was sincere about accurate alternate pricing, they would have paid their design team to fully develop plans and specs accordingly.

Alternates need to be defined early

Generating a bid is a great deal of work.  Knowing that an alternate must be priced at the start can reduce the difficulty involved considerably.  Asking for an alternate or a breakout price on bid day can be a tall order.

Shooting a bystander

Some projects require breakout pricing for owner financing reasons.  A common example is the “Landlord scope” of a tenant leasing agreement.  The Landlord will pay for certain items that were included in their leasing agreement.  This breakout is not likely to positively or negatively affect the bidders.  Other projects will be so large as to allow entirely different construction teams for “breakout” work.  One such project involved two buildings of very different size and difficulty.  On bid day one subcontractor submitted a bid for the project as one lump sum.  This bid was second low to another bidder who had broken out the buildings individually.  The GC asked the second low bidder for breakout pricing.  Caught flat-footed and without sufficient time to accurately separate the two buildings, the subcontractor guessed at the  value of each portion.  They guessed wrong by a significant percentage – making them over priced for the small building and under-priced for the larger one.

The GC won the bid by carrying the incorrect price on the larger building and the legitimate low bidder on the smaller one.

Lessons to be learned

There are several lessons here – first of which is NEVER GUESS at the value of a substantial alternate.

The second lesson is to be aware that EVERY NUMBER YOU PROVIDE CAN BE USED AGAINST YOU.

The third lesson is that helping someone does not make them your friend, nor does it obligate them to help you in return.  The GC called asking for a breakout knowing that the subcontractor’s pricing was competitive but not low.  It’s possible that the 2nd low bidder could have priced one building cheaper than the low bidder.

The GC knew the proportional value of each building from the low bidder’s pricing.  They had enough information to suspect that the 2nd low bidder’s breakouts were wrong before they bid.

Ethics

Let’s approach this from two different directions.  Alternate requests may “set the stage” for change orders made necessary to fill in gaps the design team missed.  For example there’s a project with an alternate request to upgrade a Roof Top Unit (RTU) to a larger size.  The base bid might have the original RTU being replaced with a new one of the same size.  Often in such cases the MEP plans will include some details on the alternate.  The savvy readers are already seeing where this is headed.  What about the structure?  A larger RTU may weigh substantially more than the structural opening was designed for.  If the design team had no structural concerns in the base bid scope, they might not have hired a structural consultant.  As a competing bidder, this alternate presents an ethical dilemma.

Coming from the opposing view, an Alternate request may be worded in such a fashion as to generate unacceptable risk.  For example let’s say there’s a remodel of a very large office building and the client has not allowed a job walk.  The Architect included a key-note on the reflected ceiling plan requesting an alternate price to repair/replace all damaged acoustic ceiling tiles in the space.  Without knowing the existing conditions – this alternate becomes a risk center for all bidders.

In both cases, the ethical course of action is to pursue RFI’s to document the estimator’s efforts to resolve the ambiguity.  Another option is to bid alternates with conditions defining what is included and what is not.  Be wary of providing too much help.  Volunteering a price without a design can leave your firm vulnerable to whatever the design team comes up with after the fact.

Moving parts    

It’s a tale as old as time, the Architect produces a set of drawings with carefully selected materials that perfectly reflects their vision of the project.  The project goes out to bid and comes in over budget.  The client demands changes to meet their budget – the architect goes back to the drawing board and the process repeats until the budget is achieved.

I’m not sure that painting the bricks you picked is what’s driving the cost…

To the GC estimator, the cost of re-bidding a job can be significant, especially when cost cutting measures are evident at the original bid.  Anticipating a budget over run and offering suggested cost cutting measures at the original bid puts the GC in a position to help secure the contract without long design delays or costly re-bids.

Making that happen requires a deeper understanding of the forces at work in the modern bid environment.  Starting with the client, design development is often a long and costly process.  Clients often rely on conceptual pricing exercises during design development to assure them the budget is in line.

Client commitment and hidden costs

Conceptual estimates are approached in three ways by the market.  The first is to simply square foot cost the project to quickly be rid of a costly obligation.  The second is to strictly price only what is shown on the incomplete plans.  The third is a painstaking blend of design-build, and plan interpretation to render the most precise estimate of the project.  A responsible design team with experience on similar projects and well-defined project scope should be able to accurately gauge the estimated budget.  For such established teams, a square foot costing should be accurate enough.  Requesting such assistance from a single GC as a courtesy is common in the industry.

Some clients/design teams put conceptual estimates out for competitive bid hoping for accurate pricing via market competition.  This generates a considerable amount of work for the bidders who mistakenly believe that construction teams will be selected based on this bid.  The second method is generally employed here on the part of GC estimators looking to lock up a job.  This method exposes the client to potentially huge cost over-runs as the design team finalizes the plans to include predictable items that were excluded from the conceptual bids.

Rarely a client may choose to contract with a GC early in the design development process to assist the design team in maintaining the budget.  These clients benefit from a GC estimating approach that strives to not only fill in design gaps, but offers constructive options to the design team as the project moves along.

Pressure on the Design team

A design team may face significant obstacles to meet their client’s expectations.  It’s common for a project to have oversight and funding restrictions from a myriad of individuals.  Some of these people may not have a vested interest in the total project cost.   A developer may demand aesthetic consistency which obligates the design team to specific finishes or vendors.  A utility provider may demand easements that force the building to a specific location.  The local Fire Department may require amplifiers for their radio equipment if they deem the project likely to interfere with their signal.  Many of these agencies communicate only when asked the right question.  The due diligence work required of the design team can be immense as the affected agencies are rarely coordinated.

A client with a poorly defined project makes the process more difficult.  Often design teams rely upon local vendors to offer solutions.  In some cases these vendors provide extensive support in exchange for a commitment to use their products on the project.  The design team must carefully weigh the cost of this obligation against the time saved in exchange.

Compounding the Architects difficulty is the market forces that affect pricing.  It’s very common for a client to schedule design development such that ground breaking on the project coincides with advantageous weather.  Conceptual pricing takes place during  the slow times of the year when contractors are hurting for work.  Final bid pricing ends up taking place during peak profitability season where labor shortages and fuel costs are highest.

Great expectations VS. institutional inertia

The design team approaches the final bid with greater commitment to their decisions owing to the work they’ve put into getting the plans this far.  The client has a more firm vision of their project replete with lots of “bells and whistles” that the design team introduced them to as the plans progressed.  It’s understandable that both groups would feel animosity towards budget solutions focused on amputating all the “frills” that gave the project its shape.  The traditional design, bid, build project development method separates the intent from the outcome until the bid which is why budget overruns are so common.  Institutional inertia is a destructive force in this industry.

Voluntary Alternates / Value Engineering

Reviewing the construction documents with an eye towards trimming costs, an estimator may find cost centers that are attributable to much of the above.  Voluntary Alternates can be used as a sales technique to guide the client and the design team depending on the situation.  The term “Value Engineering” is used for voluntary alternates that generally focus on cost-cutting measures.

Voluntary information should be balanced against client commitment.  Many GC’s have “helped” clients refine their designs only to see their ideas on drawings put out for their competitors to bid.  Generally speaking, the less complete the plans, the more voluntary alternates should be selling consulting services.  At the opposite extreme a final bid may come along with some opportunity to reduce the cost.  The GC estimator has little to lose in offering potential savings.

For example there might be costly sole-specified products pushing the project beyond its budget.  Volunteering an alternate here might expose how costly the design team’s vendor relationships are to the job.  If that’s the case, expect fierce push-back from the design team.  Subcontractors may be loath to antagonize a vendor they must rely upon for other jobs .  Proceed with caution – it’s not reasonable to demand subcontractors join in your struggle against perceived corruption.

It’s also possible the sole specification is due to a principal mandate – the design team may have no option but to require a product.  For example the door trim on a suite must often match building standards.

Be careful what you promise

Substitution alternates  benefit from cautious pricing because the Design team is given final say on whether a substitution meets design intent or not.  The client perceives the dollar savings as a fixed amount – it takes a lot of convincing to explain how partial acceptance of your alternate comes to only partial savings on their budget.  The design team may require alternate submittals be revised and resubmitted several times before they are accepted.

This all costs time and money that will not be recovered later.  If using product X in lieu of product Y saves some amount – retain a percentage of those savings to cover these expenses.

Diplomacy required

Be cautious about causing embarrassment by how the alternates are presented.  Design team animosity is often expressed through bureaucratic delay and compartmentalization to the exclusion of meaningful interaction.  Many jobs have been delayed by a design team, however the GC will bear the brunt of client frustration up to and including legal action. Nobody gets out clean.  Pay particular attention to the exposure of subcontractors, allowing a Design Team to exact vengeance on a member of your team can have far-reaching repercussions.  “Throwing them under the bus” earns a reputation for cowardice.

Think beyond the plans

Most Voluntary Alternates focus on either substitution, addition, or subtraction of project scope.  Creatively thinking offers other options; sequencing, timing and duration.  If the project were to start during the “off-season” many subcontractors would submit lower bids.  Changing the order of operations can have immense impact on costs.  Factors that the client could change should be approached as a means to potential savings.  For example a phased project may place a restroom remodel at the end of the project schedule.  Restrooms generally require the maximum number of trades per square foot of any room in a business environment.  This can create a “log jam” in production since there’s only so many people who can be in the restroom at one time – thus prolonging the duration of that phase.  Offering the client an alternate to sequence the restroom scope for greater subcontractor efficiency could not only reduce subcontractor pricing – it could shorten the project duration – thus reducing General Conditions.  It can be great fun to find a creative solution.

Slippery slope

Alternates create administrative loose ends that must be addressed.  Notice of award forms often neglect to accept or decline the alternates submitted.  Frequently these issues are left unresolved or deferred to the “kick off meeting”.  Voluntary / Value Engineering (VE) alternates that require Design team approval may be unresolved for extensive periods of time.  Some clients attempt to defer accepting an alternate until the project is substantially under way.  Depending on the alternate, the change in scope could require extensive re-work to accomplish.  If the alternates were priced assuming that accepted alternates would be in the base contract scope – the additional cost of re-work is a valid change order.  Protect yourself and your subcontractors from unintended consequences of client dithering.

Everything in the GC’s world is a scope of work, a price, and a timeline for completion.  Clients should be able to understand that all prices come with an expiration date.  Once that deadline has passed, the scope of work in question is subject to re-pricing.  Estimators “holding” a new project before Project Manager hand-off should file individual RFI’s for each alternate provided requesting an answer.  Include the deadline and the default action that will be taken once the deadline has been reached.

For example “Please confirm that alternate #3 for wood in lieu of metal doors has been accepted.  The price quoted for Alternate #3 is good until this date whereupon this alternate is respectfully withdrawn and the base bid scope prevails.”

Architects answering RFI’s with some variation of  “wait for owner approval” should be tracked as “open” RFI’s since this is a non-answer.  Don’t be afraid to get this sorted since subcontracts need to be written and these details must be well-defined for them to be complete.  Rocky starts make for bad finishes.  Lots of clients have good intentions but fail to see how dithering hurts their GC.

Wallowing

There are some clients who come up short on financing just after the bid.  For whatever reason, they face a situation where the project cannot move forward without reducing the total price.  Value engineering is requested and the client begins bargaining about what is really necessary in the project.  Often brainstorming sessions are started and the GC’s are expected to work their magic to return with answers.  Some GC estimators begin menu pricing hoping to give the client an “a la carte” proposal that works towards hitting their budget.  The Design team may request pricing for portions of the job to justify the design or enable horse trading later on.

There is much to be cautious about here depending on how far off the budget is.  A huge miss is in indicator of problems with the Owner and their design team.

Don’t feed the stupid – it only makes them stronger. 

A weak design team and/or  a dithering client will consistently blow  budgets.  Some of them consider it “part of the process” as they re-bid the same job over and over hoping to snare a lower bid.  Winning a job with these people is a losing proposition.

Make it easy to make good decisions

If the budget is achievable via Value Engineering – present ONE option to hit their budget.  Breaking a Value Engineering solution into additive parts allows the Client to decline something critical to hitting their budget.  This approach is especially critical with projects that are severely over budget because poor decision-making is the root cause of the problem.

Clear, concise, and comprehensive

Competence brings confidence.  Solve problems by providing the direction and encourage action.  This is not the time to treat every hare-brained scheme like it’s a valid answer.   Some people struggle visualizing the moving parts of an alternate.  Giving them concrete “This or that” pricing to avoid misunderstandings.  If it’s too complicated for words, make a picture.  There are times that literally cutting and pasting plans to make a visual aide is the best approach.   Be advised that clients may not understand what drives cost in a given assembly – don’t feed misconceptions or erroneous assumptions even if they “work for you” at the moment.

For example, a client once asked how much the support structure for a mill-work counter cost on a linear foot basis.  The assembly in question involved individual cabinets which provided the support for the counter.  The cabinets are built and priced individually.  A counter installed without cabinets underneath would have to be supported in a completely different fashion.  This hypothetical situation has no decision-making value because the cost is not tied to the assembly as the client imagines it.  Helping the client to understand how things are actually priced respects their intelligence and promotes meaningful discourse.

Close the deal or close the door.

Until the client has contractually agreed to work directly with your firm – they are refining their plans at your expense.  In extreme cases a GC can end up spending so many hours estimating a job that there is no  profit from building the job.  Don’t let it happen to you.

Final observations

Alternates add or deduct scope of work which means that every alternate potentially affects the project duration, site logistics, critical path, and staffing requirements.  Take a moment to fully consider the project “in a vacuum”.  Now think about how the alternate affects the total job.  Alternates that drive duration should not be “free”.  Be cautious about deductive alternates – giving back overhead and profit on omitted work can leave the overall project under-funded.

Conversely, it doesn’t always make sense to “tack on” full overhead and profit to all additive change orders.  Simple product substitutions may end up substantially out of the client’s reach.  Additive Alternates are up-sells.  Sometimes it’s a better move to accept a lower fee on an  easy- to- earn alternate than it is to chance losing it altogether.

Be aware that clients and design teams rarely think like this.  Some feel product substitutions should only cost the difference in material costs.  Others feel that the awarded GC should meet the lowest alternate price of their competitors.  Their opinion is not necessarily your obligation – negotiate accordingly.

Finally, there are times that an alternate is so poorly defined that it creates unacceptable risk for the build team to price.  Assuming RFI’s seeking clarification went unanswered before the deadline – my advice is to decline to price the alternate it until they are.  If the alternate was truly integral to the client’s expectations the design team would have handled it accordingly.

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© Anton Takken 2014 all rights reserved