Having had the benefit of nearly forty years’ experience of working with contractors, let me share some thoughts on how you, as a developer, can have a fighting chance of coming out on top. We’ll be wearing a few different hats as we go through, since this nearly always helps make things a little clearer.
The first thing to say is that you should be running a tender. This is where you create a specification for your job, and you put it out to several contractors so that they can provide you with a quote. It’s your best chance of getting an apples vs. apples comparison between quotes. How many contractors should you court? Time to put on the contractor’s hat and look at the situation from their perspective. Responding to a tender involves a fair amount of work on their part, with no guarantee of any payback. If they know they’re competing against a dozen or more other contractors, then they may think the odds are stacked against them, so why bother responding, particularly if they’re not short of work. I’d say you want to be aiming to approach between five and ten contractors, from which you’ll have a fair chance of more than half of them responding.
The next thing you want to consider is whether to run a strip-out tender first, ahead of the main tender. Let’s assume you’re converting a commercial building into residential flats. The contractor’s first job will be to strip out the structure; however, this could expose some additional work requirements that weren’t obvious before the strip out took place. If you’ve already appointed your contractor for the complete works, then they’ve got you over a barrel since they can charge you for this additional work without fear of competition from other developers. But, if you run a strip-out tender first, then you have an option to switch if your strip-out contractor’s quote for the main works is too expensive. And since they know you have the option to jump ship, it should keep their pricing keen.
Let’s now consider how tenders work, and once more, we need to put the contractor’s (hard) hat on. New developers can be surprised by the huge range of prices they often receive from contractors when they run a tender. How can the same job elicit such diverse quotes? Well, some contractors may be stuffed to the gunnels with work, and so they don’t really need your project. If they respond at all, they’ll build in some chunky profits, as they don’t mind taking on the extra work if it’s going to pay handsomely. At the other end of the scale, we have the contractor who’s short of work. He desperately wants your business, so he puts in a highly competitive quote. But there’s a potential sting in the tail that you, as the developer, need to look out for. It’s known as the extras and overs.