The Real Cost Of Commercial Construction In Nashville: What Owners Need To Know Before The Bid
Commercial construction costs are set well before the first piece of equipment is loaded onto the truck.
Drawings, specifications, existing conditions, permitting requirements, scheduling constraints, and owner expectations all impact the overall cost of a project.
For property managers, developers, and business owners, the first thing you need to understand is the difference between the contract cost and the project cost.
On a well-defined design-bid-build project, those two figures could be the same.
However, when the design is incomplete, existing conditions are unknown, owner needs change, or regulatory issues arise after bidding, the project cost can be adjusted legitimately through the contract.
Knowing where this risk exists before construction starts is one of the best ways to manage the budget for the project.
What a Commercial Construction Bid Includes
A commercial construction bid is priced based on the scope of work defined in the drawings, specifications, addenda, bid instructions, and other documents made available to the contractor for the bidding process.
On a traditional design-bid-build project, the contractor's bid becomes the contract price.
The contractor agrees to perform the work depicted in the contract documents for the agreed-upon price, subject to the specific terms and conditions of the contract.
This bid should not be considered as the starting point that the contractor expects to increase later.
The contractor can be expected to have an understanding of the bidding documents, coordinate the work reasonably shown or required by the bidding documents, and price the cost of that work into the bid.
The project cost can be adjusted legitimately when the project itself changes, or when the circumstances surrounding the project were not reasonably identifiable from the contract documents.
Some examples would be:
• Owner-requested changes.
• Design revisions after bidding.
• Concealed or unforeseen existing conditions.
• Differing site conditions.
• Incomplete, conflicting, or amended design information.
• Regulatory requirements not identified in the original documents.
• Changes to phasing, access, or operating requirements.
• Other conditions addressed by the change clauses in the construction contract.
This is important to understand.
The contractor should stand by the price they bid for the work depicted in the bidding documents.
However, the owner needs to understand that the contractor cannot reasonably price the conditions or scope that were not identifiable during the bidding process.
Five Ways That Final Construction Cost Is Affected
Change Orders
Change orders are one of the most frequent ways that the final construction cost differs from the original contract cost.
However, not all change orders are created equal.
Some change orders are the result of owner-requested changes to improve the project or change direction.
Other change orders are the result of design revisions, unforeseen conditions, regulatory requirements, or scope not clearly defined in the original contract documents.
The question is not whether or not the project had change orders.
The real question is:
Why did the change order occur? Could it have been reasonably identified prior to the start of construction?
The diligent contractor documents the change, determines the cost and schedule impact, and obtains change order approval whenever possible or circumstances permit.
On projects where the General Contractor is involved in the preconstruction phase, many of these changes can be identified prior to construction through constructability review, scope coordination, budgeting, and investigation of existing conditions.
Permitting & Regulatory Requirements
The permitting and regulatory requirements in Nashville and the surrounding Middle Tennessee jurisdictions differ.
Each jurisdiction has a different permitting process, inspection requirements, review times, and code interpretation.
These requirements can impact the schedule and cost of the project.
The permitting process for a tenant improvement in Davidson County will be very different than a warehouse in Wilson County or a commercial renovation in Rutherford County.
Some examples of regulatory requirements that could impact your project, depending on the type of work, would be:
• Building permits.
• Grading permits.
• Stormwater.
• Utility.
• Fire Marshal.
• Accessibility.
• Health Department.
• Planning/Zoning.
• Required inspections and testing.
The construction plan should account for the jurisdiction the project will be constructed in, not some generic permitting schedule.
Existing Site & Building Conditions
The renovation and civil projects present a specific type of risk that you cannot always fully verify prior to the start of construction.
For the renovation, it could be behind a wall, above a ceiling, or under an existing slab.
For the civil project, it could be underground utilities, poor soils, groundwater, rock, or previous unverified site improvements.
Preconstruction planning can reduce these risks.
Some examples of things that could be considered for the project would be:
• Site conditions.
• Existing condition surveys.
• Utility locating.
• Geotechnical testing.
• Selective demolition.
• Test pits.
• Existing drawing review.
• Coordination with facility personnel.
• Allowances or contingencies for known areas of uncertainty.
The goal is not to try and predict everything that could happen.
The goal is to know the areas where uncertainty exist and have a plan for how to deal with them reasonably.
Material & Equipment Lead Times
Construction pricing is not an island.
Many materials and pieces of equipment need to be purchased months in advance of installation.
Electrical gear, HVAC equipment, structural steel, specialty doors, elevators, generators, and some finish materials all have lengthy procurement lead times.
The contractor must not only know the cost of an item, but when it needs to be selected, approved, released, fabricated, and delivered.
The delay of the selection decision can sometimes cost more than the actual change in price of the material.
The project plan must consider the procurement lead time early enough in the project for the owner and design team to make a decision before it impacts the critical path of the project.
Business & Tenant Disruption
When it comes to construction, business disruption is not just about the construction budget.
Some retail businesses need to stay open.
Some medical facilities need uninterrupted operations.
Some office renovations need to be phased.
Hotels, entertainment facilities, industrial facilities, and schools could have limited work hours or spaces that cannot be taken out of service.
These business and tenant disruption requirements can directly impact the contractor's cost through:
• Phasing.
• Temporary protection.
• Night or weekend work.
• Additional mobilization.
• Temporary utilities.
• Dust and noise control.
• Temporary partitions.
• Increased supervision.
• Restricted access.
• Accelerated schedule.
These operating requirements need to be known as early as possible so they can be incorporated into the construction plan accurately.
The Lowest Bid Is Not Necessarily The Lowest Final Cost
Competitive bidding is an essential part of commercial construction.
On many design-bid-build projects, especially public projects, qualified contractors are expected to compete on price based on the same set of drawings and specifications.
A well-priced low bid can absolutely result in a successful project.
The problem comes when the bidding documents are incomplete, conflicting, or the scope is open to interpretation.
Different contractors will make different assumptions when preparing their bid.
One contractor will include a certain item on the bid while another will interpret the documents in a different manner. Both are bidding fairly, but the bid prices could vary widely as a result.
It is important for owners to not just look at the bottom line.
Things to consider when reviewing bids would be:
• Scope completeness.
• Bid exclusions.
• Bid qualifications.
• Schedule assumptions.
• Subcontractor coverage.
• Allowances.
• Alternates.
• Proposed means and methods.
• Understanding of the project.
• Experience with similar work.
The goal is not to avoid the low bid.
The goal is to determine if the low bid is the complete scope of work required by the contract documents.
The Value of Preconstruction
Not every project will allow the General Contractor the opportunity to be involved prior to bidding.
On a traditional hard bid project, the contractor will receive complete bidding documents, have a certain amount of time to prepare a bid, submit a competitive bid, and have no involvement with the design process.
This is very different from a negotiated or preconstruction-based project.
When the General Contractor is involved with the project before bidding, the contractor and the owner/design team can work together to identify issues prior to the start of construction that could become construction issues.
Some examples of preconstruction services would be:
• Conceptual estimating.
• Design development estimating.
• Constructability reviews.
• Scope coordination.
• Existing condition review.
• Value engineering.
• Subcontractor budget pricing.
• Long lead procurement planning.
• Schedule development.
• Alternate evaluation.
• Allowance development.
• Contingency recommendations.
• Bid package review.
This does not mean there will not be any change orders on the project.
However, it does mean that the project team has a much better chance of identifying the uncertainty before construction starts and making an informed decision while they still have options.
Contingency is not Contractor Markup
Contingency is often confused with Contractor Markup.
That is, contingency is money that is added to the project to allow the contractor to raise the price.
That is not how contingency was developed in a properly executed project.
Contingency is money that is allocated to specific areas of known risk that cannot be fully defined at that time.
The amount of contingency will vary depending on the project design phase and the specific nature of the project.
An example might be a project with a low level of detail in the construction drawings that would require a higher level of contingency versus one with complete construction documents.
Another example might be a renovation project with a high level of concealed work that would warrant a higher level of contingency versus new construction with a well-defined site.
As design is completed and uncertainty is eliminated, the contingency can often be reduced.
A good construction budget will clearly articulate the assumptions that are built into the budget instead of hiding them within the contractor's mark-up.
How a General Contractor Helps Protect the Budget
A General Contractor is not just someone who will give you a bid price.
A truly capable Commercial General Contractor will work with the owner to understand what the price is based on and what the significant risks to the project are.
Some ways this might be accomplished are:
• Defining what is and is not included in the proposed scope of work.
• Identifying meaningful exclusions and assumptions.
• Reviewing drawings for coordination issues.
• Evaluating existing conditions.
• Developing meaningful allowances.
• Recommending appropriate contingency.
• Identifying long-lead items.
• Documenting budget changes.
• Communicating potential cost exposure to the owner early and often.
• Developing a documented change order process.
The end result is simple.
The owner will know the financial status of the project at all times, not find out at closeout that there has been significant budget movement.
What to Ask Before Hiring a Commercial General Contractor
When owners and property managers are evaluating a potential General Contractor for a commercial project in Nashville, they should ask the following questions:
What is specifically included in your price?
What have you specifically excluded or qualified?
Are there specific areas of the drawings or specifications that you believe require clarification?
What risks to the project do you identify based on the information that is currently available?
How will you handle unforeseen existing conditions?
How are change orders priced and approved?
How will you communicate potential budget changes throughout construction?
Are there any long-lead materials or equipment that will require decisions to be made early?
What assumptions have you made regarding phasing, access, working hours, or occupied spaces?
Do you have examples of similar commercial projects in the Nashville market that have been completed?
A contractor that can specifically answer these questions is not just telling you their estimating ability.
They are telling you how they will manage your project.
Bid Price versus Project Budget
One last distinction to make clear:
A contractor's bid is not necessarily your project budget.
The bid is the price that the contractor is bidding for the scope defined in their agreement.
Your project budget may need to include other elements such as:
• Architectural and engineering fees.
• Surveys.
• Geotechnical.
• Testing and inspections.
• City permits.
• Utility connections.
• Furniture, fixtures, and equipment.
• Technology systems.
• Owner vendors.
• Financing.
• Moving.
• Owner contingency.
Making this distinction prevents a common trap of believing that the amount of the construction contract is also the total exposure the owner has to the project.
Building a Construction Budget You Can Count On
There will always be uncertainty in commercial construction.
It does not mean that you should assume that the bid will increase significantly after award.
Nor should you assume that you know all of the conditions that will impact the final project cost.
What you should do is differentiate between:
• The work that should be included in the bid by the contractor.
• Owner changes.
• Design changes.
• Legitimate unforeseen conditions.
• The risks that have been identified that should be allowed for in allowances and contingency.
• The costs that should be included in your overall project budget and not the construction contract of the contractor.
When these things are understood from the beginning, you will make better decisions as an owner and have less conflict as the contractor managing the project.
Beech Construction Services has served Nashville and Middle Tennessee since 1993, providing commercial general contracting, renovations, tenant improvements, industrial construction, civil construction, and concrete services.
Whether the project is competitively bid or developed through a preconstruction process, our goal is the same.
Define the scope.
Provide accurate information.
Identify the risk early.
Manage the construction cost transparently from the very first estimate to project closeout.
If you are planning a commercial renovation, tenant build-out, industrial project, civil project, or ground-up commercial development in Middle Tennessee, contact Beech Construction Services to discuss your project.
Frequently Asked Questions
What is the difference between a construction bid and the final construction cost?
A construction bid is the price that the contractor is bidding to complete the scope of work defined by the bidding and contract documents.
For a lump-sum project, this bid amount becomes the contractual amount for the defined scope of work.
The final construction cost may be impacted by changes to the scope by the owner, revisions to the design, unforeseen conditions encountered on site, or other events that are compensable under the contract.
Are change orders normal on commercial construction projects?
Some are.
Change orders are often a part of complex renovations or projects with conditions that cannot be fully understood prior to construction beginning.
However, change orders should not be used as a mechanism to add a percentage to every project.
A well-executed design and preconstruction process can greatly reduce avoidable change.
Why do some commercial construction projects come in more expensive than the original bid?
Reasons projects may come in higher than the bid are often owner changes, design changes, concealed conditions, differing site conditions, permitting or code requirements, or changes to phasing or operations.
The contractor will be able to articulate the contractual basis for any requested adjustment to the contract amount.
Does the lowest bidder always come in more expensive in the end?
No.
A qualified contractor can provide the lowest responsive bid and complete the project for that amount, subject to legitimate contract changes.
However, owners should evaluate the scope, qualifications, exclusions, allowances, and assumptions to ensure that all competing bidders are including the same requirements.
How does preconstruction help control commercial construction costs?
Preconstruction enables the contractor, owner, and design team to identify scope deficiencies, constructability issues, risks associated with existing conditions, long-lead items, and budget concerns prior to construction beginning.
Resolving these issues during the design phase is typically more efficient than addressing them during construction.
Should every commercial construction project have contingency?
Yes, typically the overall project budget would account for some level of uncertainty.
However, the amount and allocation of contingency will depend on the project delivery method, design completion level, and project risk.
An example might be an early conceptual budget that would require a higher level of contingency than a project with complete construction documents that is competitively bid.
How do I know if a General Contractor's bid is complete?
Understand the scope, exclusions, qualifications, allowances, alternates, and schedule assumptions along with the bid price.
For larger projects, a bid-scope review or leveling process may be beneficial to ensure that competing contractors have similar scopes included in their bids.
Does Beech Construction Services do residential construction?
Not usually, unless it's a new development. Beech Construction Services is a Commercial General Contractor serving Nashville and Middle Tennessee with experience in commercial renovations, tenant improvements, industrial construction, ground-up commercial development, civil construction, and concrete work.
References
https://www.ossb.state.oh.us/OSSBBulletin/Pages/OSSB-Bulletin-Vol-43-Issue-14-April-2016.aspx
https://www.ossb.state.oh.us/OSSBBulletin/Pages/OSSBBulletinVol41Issue12November2014.aspx
https://www.ossb.state.oh.us/OSSBBulletin/Pages/OSSBBulletin-Vol41-Issue9-May2014.aspx
https://www.ossb.state.oh.us/OSSBBulletin/Pages/OSSBBulletin-Vol41-Issue8-April2014.aspx
https://www.ossb.state.oh.us/OSSBBulletin/Pages/OSSBBulletin-Vol41-Issue7-March2014.aspx
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