A Look At Negotiated Fee vs. Low Bid

Posted on December 1, 2010


If you ask your design and construction team whether they would prefer to negotiate their fee or participate in a bid, no doubt they would choose a negotiation. But it is not about them, a project is about an owner. To understand this preference, it is important for both parties to see things from the other’s perspective.

A bid is really a negotiation where the owner stipulates all conditions and there is no give-and-take. A negotiated fee condition is a neutral situation where both sides start with equality. Not following? Let me explain.

To prepare a bid, a design-builder must invest significant research and time early merely to compete. Right off the bat, the team is financially in the hole and they bring that ‘paper loss’ to the table to recoup when they win. A bid is a statement to all competitors that the final choice is bottom line driven; therefore goodwill, trust and teaming are all severely discounted. To paraphrase Stephen Covey from 7 Habits, the prospective owner has already made an emotional withdrawal in a relationship where the competitors have all made emotional deposits.

While a negotiation environment begins a relationship of trust, a bid environment creates a future work environment of staking out territory and protection. Early on it is clear to the design-builder that it is every man for himself.  Feet are held to the fire on decisions, every change is tracked and change order generated. In a negotiated scenario, both parties get a little bit of what they want from the beginning and had to give up a little, too; they do not start as adversaries playing hard ball. In fact, they are more likely to give up some of the little things and not watch every penny. An owner would be naive to think there are not dozens of times during a project when something comes up and the builder has the option of being strict and tracking it, or throwing it in gratis.

Owners may not be aware, but project procurement has a trickle-down effect on the entire team, including relationships with subcontractors. In a negotiated fee, the preferred subs are chosen by the design-builder and a reasonable price is set because everyone has done good work together in the past. In a bid low-cost subs are chosen, and in the process, beat up by the builder for their ‘best and final’ price at least twice. It is not in an owner’s best interest to embark on a long, complicated, multi-million dollar project with everyone looking to protect a razor-thin margin, and make up for the normal profit they conceded just to get the work.

Fee-based selection is like choosing beauty over brains in your mate. The physical (fee) gets the attention, but the mental (team synergy) is what delivers happiness—and it is the mental aspect which is hidden. By not “dating”, an owner never finds out what he gets with his beautiful choice; it could be a real dud behind that glam.

What’s more is that a low bid fee is not much of a savings above a negotiated fee. A negotiated fee can still occur through a competitive environment, and an owner can always walk away if she felt she was gouged when comparing a fee against a third-party estimate. In the end, a negotiated fee would fall in the medium cost bracket while a low bid is in the low cost bracket, but the difference is often less than 10%, and usually 2-5%. People lose more than that each week by not shopping diligently for groceries. Is 2-5% worth giving up all that a negotiated arrangement offers in value?

Many unenlightened owners I talk to think projects are fatalistic endeavors:  results are the same regardless of your team, the only difference is how much you pay for it. This could not be more inaccurate. Team members are not interchangeable with the outcome guaranteed. Nothing is guaranteed. Each project follows its own path guided by a team, and team members are variables in the equation. How each team component performs is crucial to the project success. I know many firms that simply do not answer RFPs, so an owner’s original selection set for choosing a team may be less than ideal from the start.

An owner should want the best team at the best price, cost and performance, otherwise known as value. However cost is not an independent variable. It matters how the cost was derived. To throw a psychology reference out, procurement method (negotiation or bid) is a moderator in the relationship between team and outcome; in other words, procurement method helps define the efficacy the team will have on the project outcome. No, cost does not predict outcome (higher cost = better project), but it defines how the outcome occurs.

Given the previous examples, it is short-sighted to think how a team is chosen and the way its fee is set up does not affect a project outcome. A bid message is clear to a design-build team:  your services are not unique to me; I don’t value them, and our relationship is strictly a business transaction. Trade me a building for a price and spare me the teaming, learning and exploration. I can look out for myself, thanks.

Whether an owner’s intentions are transparent or not, it makes sense for the owner’s wallet and expectations to send the message: “I am interested to hear how your team is different. And if you impress me, let’s work together.” From a team’s perspective, competition does not scare teams off; design-builders will live to see another day. But how a person chooses to do business is important to everyone involved in a project, and in most cases low bidding is a dubious choice.