AMA - How Do I Process This Quote? - The Real Estate Espresso Podcast

Episode Transcript
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(00:01):
Welcome to the Real Estate Special Podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. Today's show is another AMA
episode. That is ASK Me Anything.
I'd love to answer your questions.
And if you have a question you think is going to be a broad
interest, send it in. I'll answer it live on the air.
Send your questions to victor@victorjm.com.
What's victor@victorjm.com? Today's question comes from Mark

(00:24):
who writes. We received a quote from a
general contractor that's way above the expected averages for
the actual square footages of the building.
I've attached a copy of the quote in the drawings of the
building. I'd love to get your thoughts on
whether I need to readjust my expectations for what this
project will actually cost to build.
Well, Mark, this is a great question.
I did review the drawings and the bids from the

(00:45):
subcontractors. I'm seeing a number of things in
the quote that simply don't makesense to me when I look at the
individual line items. Getting a proper bid is an
exercise and paying a lot of attention to details.
Whether you get a number from your contractor that you like or
not, you still need to dig into the details and make sure the
scope of what's being quoted is really what the building needs.

(01:07):
Sometimes the subcontractor willgive you a number you like, but
then list a whole bunch of exclusions that they'll charge
extra for. If these items are required
within the scope, then a low number simply doesn't help.
Unless the subcontractors respond with the correct scope
of work, it's very difficult to comparison shop.
Now, some of the numbers that I'm seeing in the quotes simply

(01:28):
don't make sense, and this is where we rely on comparable
metrics for similar buildings that we have experience with and
for similar scopes of work. For example, I'm seeing a single
plumbing quote when I would expect to see three bids for
each scope of work. The plumbing quote is nearly
double what I would expect for abuilding of this size.
The quotes for framing are anywhere from 50 to 80% above

(01:50):
what they should be on a per square foot basis.
You've got a very high cost for exterior cladding that frankly
is insanely high for a building of this size.
There's numerous steps in the way construction is specified
that requires trades to start and stop in an alternating
fashion, and that makes for an extremely inefficient
construction process. I would assert that there is a
significant opportunity for savings by eliminating some of

(02:14):
the structural steel on the upper levels in the building.
There are numerous items that are being called for that,
frankly, are redundant. For example, the flooring system
is calling for a separate acoustic membrane, when in fact
the newest generation of flooring comes with the acoustic
membrane integrated into the flooring.
The result is that there's considerable redundancy in the
quote and I'm seeing it in several places.
At the same time, I'm also seeing several gaps in the

(02:37):
quote. The quality of this bid is so
low that quite frankly, I don't know what conclusion I would
draw from the entire tendering package.
Some of the line items consistedof budgetary estimates that
don't match what I would consider to be industry numbers.
When we work with commercial construction lenders, we also
work with a cost consultant who will certify the budget for the
lender prior to finalizing the construction loan.

(03:00):
They'll also be involved in the sign up process for each
construction draw request from the general contractor.
These cost consultants have a massive database of cost from
recent projects which they use to benchmark quotes from
contractors, and it's amazing tome that somehow subcontractors
think they're going to win business with these types of
quotes. Now at this point, I also need
to alert you to a practice that does exist in the marketplace.

(03:22):
Now, I'm not accusing anyone here of anything, mostly because
I'm not seeing evidence that points to forcing the bid
process towards specific trade partners.
But I'm also going to report that some subcontractors will
intentionally bid a high price and expect to pay a kick back to
the general contractor in order to win the business.
This is a way for some general contractors to earn extra profit

(03:43):
margin behind closed doors and by working with their preferred
trade partners, they control thechoices of contractors.
A kickback is also a way for some subcontractors who are not
bidding a competitive price for a particular scope of work to
secure the business at a higher price.
Now, these practices are shockingly common in the
industry. They're difficult to uncover
unless you have real insider knowledge of some pretty close

(04:05):
knit communities. One way you can figure this out
is when another contractor tenders a similar scope and gets
a substantially lower price. This could be an indication of
price fixing practices. Now, just because these
practices are common in the industry doesn't mean you need
to fall prey to them. Sometimes the general contractor
just does not do a good job of tendering the project, and they
don't always get high quality bids.

(04:27):
It's incumbent on the general contractor to maintain a
dialogue with the subcontractorsand ensure that their
submissions are complete. That's a lot of conversations.
If you've got three bids for each division of work, there
could be up to 60 conversations to maintain across the breadth
of a project. That's a lot of conversations.
And that can seem overwhelmingly, and frankly, I

(04:48):
understand it's difficult to manage well.
It's a lot of attention to detail and it's a lot of
conversations to manage. And you need a really strong
system to manage it well and keep track of all of the moving
elements. I want to thank you, Mark, for a
great question. And unfortunately, you're going
to need to get a higher quality bid in order to figure out what
it's going to truly cost to build this project.
As you think about that, have anawesome rest of your day.

(05:11):
I'll make some great things happen.
I'll talk to you again tomorrow.

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AMA - How Do I Process This Quote?

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