Most of the U.S. construction industry may be on flat-line status, but the building pulse is still strong in Salt Lake City, Utah. More than $4 billion of large mixed-use, commercial, education and health-care projects are under construction in the metropolitian area, with others ready to start construction or go out for bid.

Bidders fight for over $4 billion of nonresidential work.
Photo: Michael Moore / SME Steel Contractors
Bidders fight for over $4 billion of nonresidential work.

The good news is this activity does not translate into local increases for construction materials and labor due to the drastic reduction in housing-sector activity. The bad news is that low bids based on current low materials and labor prices from bidders desperately trying to survive pose long-term, difficult-to-manage increases in risk for owners and general contractors.

“The largest impact on our costs is the large number of subs who are low-balling bids to get work to survive,” says Dennis Cigana, chief estimator for Jacobsen Construction Co., ranked No. 179 among ENR’s Top 400 contractors. “Many times, they bid at or below cost and hope to make up the loss with change orders,” he adds.

Cigana says there is almost a perfect storm in bidding activity. “Local subs who were chasing out-of-state projects last year are coming back home, subs from other areas are flocking here looking for work, and smaller subs are bidding on projects larger than their normal range” he explains. “There is a lot of risk hidden in these low bids.”

Not all experience is transportable to new markets. “We see drywall contractors whose experience is one- or two-story malls bidding on mid-rise and medical projects, which have totally different requirements. Their bids are low because they do not understand the real costs of the different project types,” Cigana says. “Those bids don’t look so good when the sub goes bankrupt after the project is under way, uses materials that cost less but do not meet the specifications or hand in a bunch of change orders at the end of the project.”

Cigana’s cost-risk analysis is echoed by Kevin Charves, a top-level construction manager with oversight responsibility for multiple large projects in the health-care division of Layton Construction, Sandy, Utah. “The bidders are crazy. Both subs and general contractors are bidding below cost just to keep working,” he says. “We saw one hard bid at the beginning of this year that came in at 10% under the owner’s budget,” states Charves. “Most of our health-care projects are CMGC. We normally work with preferred, prequalified subs, but we are seeing clients in our other divisions going the hard-bid route.”

Charves believes selecting subs solely on low bids is a recipe for disaster. “The low bids look great to owners, but they will pay the price in the long run. When those subs and generals start to drop out mid-project or need more money to complete, there will be a domino effect—and the owners will not think those low bids were such bargains,” he says.

“It is hard to convince owners not to push too much risk on general contractors by going hard bid,” Charves says. “Fortunately for my division, open hard bids are more prevalent in commercial projects than health care, particularly with owners who understand that construction of health facilities requires experienced general contractors and subs who understand the unique problems of building hospitals.”

Both Charves and Cigana work hard to reduce risks from low-bidding subs and potential materials increases over the course of long- term contracts. “No escalation contracts, early procurement and storage of materials such as copper and steel, getting the owner to allow for contingencies—those are just some of the methods we use to mitigate what are huge risks,” says Charves. “We are also requiring bonding of a lot of subs [whom] we never required bonds from in the past,” he adds.

“The real key to minimizing risk is to have a team-partnering approach to bring the project in on time and budget,” Charves says.