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April 23, 2018

Fallacy of Competitive Budgeting

Even when clients are building a high end estate home destined to be featured in Architectural Digest, they care about costs. It’s simple – no one wants to be taken advantage of.

But asking for competitive bids at the preliminary design phase is not the best way to ensure a cost effective selection process.

Using a competitive process at the preliminary design phase can be an ineffective and even dangerous method of selecting a contractor. The budgeting process will always result in a wide range of estimated hard construction costs by the contractors, because each firm uses interpretation and guesswork at this early stage.

Budgets at early design can vary widely – commonly, plus or minus 40%!

But those varying interpretations and guesswork can create a problem. The client wants to believe the lowest preliminary guesstimate (who wants to pay more than you have to, no matter what your means?) The client often selects a contractor based on what they perceive to be the same house at a lower cost.

[Want to download a PDF of the Fallacy of Competitive Budgeting? Click here.]

In reality, the lower estimate represents lower quality, craftsmanship or detail. Here’s the thing: once the information and drawings for the project are complete, the hard costs for all contractors will be within the same 3% to 5% range.

The bottom line is that you should select your contractor based on fee, general conditions and qualifications for the project, as the hard construction costs will be nearly the same once the design is complete.