Should unit prices be required in the bid process?

I could not sleep last night and it had nothing do with the moon eclipse. But I did run across a discussion on unit prices in bids and it is a topic that I find interesting. I got into a bit of rant on it. Rather than do one throw away into the I-way ozone cloud I figured I might dress up my thoughts on unit prices and share them here and elsewhere as well.

I enjoy estimating and bidding as a sport.

I consider estimating for historic preservation work to be the most challenging, complicated and rewarding form of estimating in the entire world of construction.

I have been doing it for a long time. Over the last few years I have been working on writing a book about misadventures in estimating in historic preservation with a mind to reveal enough secrets, foibles and weaknesses that I will never be able to return to doing it again.

I am not quite there yet.

I am interested in sharing, ranting on all sides our thoughts and impressions on the estimation and bid process as it applies to historic preservation work.

The initiating question is: Should unit prices be required in the bid process?

Unit prices do complicate the bid process but what I find most difficult with them is that it is not always clear what their intended use is.

I agree that if they exist that they should be for the purpose of pricing additional work or reasonably unanticipated conditions but in my experience that use is rarely the primary reason that they exist, or that they seem to increasingly proliferate in number. My first leaning toward a recommended practice would be toward a clarification in the bid documents as to what the intent and fair use of the unit prices would be applied to in the management of the project.

Compared to other areas of the construction industry in historic preservation (and I do not mean our bread n’ butter maintenance projects) there is not a great deal of standardization of work activities but there is a great deal of need for and reliance on specific labor skills of unique individuals. When I encounter unit prices they range from work activities that may on the surface look to be relatively simple but in fact be quite complicated to activities that are so unique that nobody, including me, has a clue what they should cost.

A price in economic parlance is information and what I find is that the first use of unit prices is as information used in evaluation of the honesty of a bid.

People – friends of mine -- who evaluate and compare bids quite often have no idea what a work activity should cost and so they line up all of the bids, and all of the unit prices in a matrix, and if the unit prices appear to be deviant from the comparative trend then they place a focus on the areas of greatest deviancy.

An honest evaluation would look at where unit prices run low as well as high, but a less than honest evaluation will only focus on higher unit costs in an effort to negotiate them lower. That lower cost being an objective where the goal of the evaluator is low cost and not necessarily the eventual economic and qualitative success of the project.

I run across clauses such as, “Unit prices that are deemed excessive in cost will be cause for rejection of the bid.” A problem with this approach is that though the unit prices provide information what they reveal can be false and misleading, and generally the people making the interpretation have no clue as to an objective truth or falsity of the information as they are usually the ones who wrote the specification that may very ambiguously describe the scope of the presumed unit price. And in a majority of cases they will never have been in a situation of themselves having to actually provide the specific item of work out of their own resources.

On a bid sheet a unit price may be described in two to three words and a problem in bidding is figuring out what those few words will mean later in the management of the project.

For example “Repointing of brickwork”. I am quite often asked by contractor associates what this unit price should be. Without knowledge of the potential complications one tends to assume that there is a standard market price. There is a perceived standard market price, a price that those who evaluate expect to see listed as the unit price, and in general it is too low of a price for the reality of the resources needed to do the work. Beyond the issues of quantity in a small or a large amount, which is generally a question of logistic and mobilization overhead wrapped into the unit price item, there is also a question, at least in historic work, of skill technique that can vary quite widely as well as a range in cost of specialty materials.

Are the joints to be cut out with a diamond grinder or by hand with a hammer and chisel? Do we actually expect that the joints will be cut by hand with a hammer and chisel as is often specified but as is nearly impossible to actually do in practice? Does the sand for this repointing cost $2.98 per bag or is it a specialty sand to replicate historic mortar at $25.37 per bag? Are the additional units to be done in the same general area or on another portion of the planet? Will our competition on the bid know the difference?

This gets very complicated when the unit prices are reflected back into the number of units in the base bid and the use of the unit prices is an expectation that the lump sum in the base bid reflect the unit price times the number of units but not accommodate other needed resources to complete the work.

This becomes a real problem when one is dealing with public works bids where, depending upon the practice of the public agency, everything is based on unit prices applied to quantities of units, and worse where the logic of the separation out of the units is inadequate and poorly thought out. Made all the worse when there is no room for discussion as in bid sheets that clearly indicate that prices are not to be annotated. [In my old age I refuse not to annotate bid sheets in the determination that it is better to shoot me now. I have been known to scribble all over bid sheets in my irritation that they were so poorly constructed that I want to scream and do other unseemly unsocial acts of vengeance.]

I have always been of the contention that when the quantity of additional units exceeds the base bid by 10% that there should be a change order negotiation. This is not always well received or accepted in argument as a 10% deviancy tends to reflect that the bid documents were not very well put together to begin with.

I recognize that one driving motivation behind the honest making factor of the use of unit prices is that we all operate in a world where we often either cannot tell who is cheating or honest, or that we have no choice but to contend with cheating as a standard way of contractors managing projects and therefore need protections. We also need protections from the protections. Whatever I may think of unit prices it can all be folded into strategic game theory and like sinking into a cosmic worm hole we may find ourselves coming out of the argument before it even started.

I have also been of the contention that deduct of units should not include deduct of profit and overhead. This is the general argument in favor of having unit prices listed as Adds and as Deducts. This can work well in practice as long as it is clearly understood what resources are applied to the unit cost to begin with.

The spread between the Add and Deduct is also information and the estimator needs to accommodate how that information will be interpreted and used. If it is used to interpret that overhead and profit is 500% and that the entire bid is overpriced because of that then it provides one more problem to deal with.

Most specifications that I encounter stipulate that the unit costs will include all overhead costs including taxes, fees, mobilization, logistics and profit. I am in favor of unit prices being bare bones and clearly defined and that overhead and profit is included in the base bid as separate line items, excepting for the problem when unit prices exceed a reasonable threshold, referring back to the 10% margin I mention above.