Lowest Cost Isn’t Always Best: An Engineer’s Perspective

For any construction project, there are two costs that can be considered:

1. The up-front ‘Bid’ cost

2. The final ‘True’ cost

Bid Cost vs True Cost

The Bid Cost is simply the value that the project contract was based on from the tendering or quoting process.

This is the cost that the owner may expect to incur for this portion of the project based on the bid…in a perfect world.

The True Cost is the value that ends up being paid at the end of the project, or possibly even extended over the service life of the project.

The Bid Cost is very easy to see; however, the owner should be more concerned with True Cost. The immediate difference between the True Cost and Bid Cost will show up as budget overrun. This difference can be relatively small or considerably large.

While a low bid can seem appetizing as a cost-saving measure, if it is a significant anomaly or outlier one should understand where the difference comes from.

Budget Overrun

Far more publicity and visibility is generated from budget overrun, particularly in publicly funded or high-profile projects. The general public does not like the idea that their tax dollars are being wasted.

Bad press is often directly related in magnitude to the disparity of the budget overrun. Here are some high-profile examples of budget overruns:

• Sydney Opera House was budgeted at AU$7 million when the project began in 1959. By the time it was completed in 1973, the total cost was AU$102 million. Their actual expenditure was over 1400% higher than the bid price!
• Montreal Olympic construction was another over-budget project. The estimated cost for the 1976 games was CA$300 million but actually cost CA$1.5 billion.

Lest you think that this is a problem of the past, based on these examples, some more recent examples include:

• Completed in 2021, the William Beaumont Army Medical Center in El Paso, Texas was budgeted for US$740.4 million and ended up costing approximately US$1.4 billion, approximately 189% of the budged cost.
• In Canada, the Trans Mountain pipeline expansion ran into project delays and overruns resulting in a CA$34 billion price tag, nearly five times a 2017 estimate.

It’s estimated that the vast majority, roughly 9 out of 10, of construction projects go over budget. Some of these budget overruns can be attributed to external factors such as labour shortages and dramatic material price increases. However, there are some measures that can be taken to improve your chances of completing your project within the expected budget.

Low Cost Isn’t Always Best

• Tender or multiple quote pricing may vary considerably
• Easy to look at the up-front costs at face value
• Instinct makes it tempting to take the lowest cost
• Remember, True Cost will be realized following completion of the project and beyond.

It is quite often the case that a lower bid cost will end up costing far more in True Costs

• All pricing should receive due consideration
• Identify factors that may differentiate different prices

Other aspects of the costs beyond the face value should be considered and weighed against the base price, to arrive at a True Cost weighting.

Four key items should be considered when selecting a construction bid:

1.    Scope of Work 

“From soup to nuts” – American idiom

Is the scope of work quoted comprehensive and covers the complete scope required? 
Are there exclusions or omissions from the cost that will end up being claimed as extras

These can be explicit (written exclusions) or implicit (obvious omissions), but if they are required for proper completion of the work, they will eventually be realized as an added cost.

2.    Materials, Equipment and Method

“Price is what you pay; value is what you get.” - Warren Buffett

Are the materials, equipment and methodologies proposed within the scope of work appropriate for proper completion and performance of the project relative to the known and controllable project and site conditions?

Alternatives to materials or items can be considered, but are they truly equivalent or acceptable? Do they meet specification and design standards for performance of the structure over its life cycle?  The implications of substandard products can be realized quickly in which case proper remediation or correction are imposed but potentially at cost to budget and schedule, or over long term in scenarios of reduced longevity and durability long after the project is deemed complete.

3.    Experience

“Experience is the teacher of all things.” – Julius Caesar

Is the proponent adequately experienced in the work?

While the adage is true that “You can’t get experience without experience”, proponents can get in over their heads and capabilities in attempts to secure work and try to break into the market. Experience goes a log way in ensuring the proponent is capable to complete a project that is delivered on time and within budget.

4.    Reputation

“Once bitten, twice shy” – English proverb

A proponent’s reputation can precede them for good or bad.

Owners and General Contractors should beware of those with reputation for being repeat offenders of added costs and delays, and those hidden ‘extras’ that inevitably show up.

On the other hand, it’s well advised to put added weight on good reputations, those who have a proven track record of delivering with respect to budget and schedule.

Can a proponent be counted on to be accountable when problems arise, or will they turn and point fingers and claim it’s someone else’s problem?

Added Costs

Failure to perform in any of these categories can lead to unforeseen additional costs. These may be direct and immediate:

• Unaccounted for extras and changes in scope may not be properly documented or priced and can lead to significant cost increases.
  • The foot is in the door and the proponent is now in a position where they are not competing on price, so the opportunity may be taken to bump up the margins on claimed extras and the owner ends up paying higher dollar-value on items that should have been included in the competitive bidding process, in the interest of keeping the schedule moving.
• Time delays and associated damages – weather, work force availability, miscommunication between trades, and more can all add to a project cost.
  • Weather can be unpredictable, but if the schedule of work is known, at least some consideration for general conditions should have been made. For example, winter work should expect to have some requirement of hoarding and heating in exterior or unheated areas.
  • Adequate work force availability is a must to ensure a project progresses on schedule and appropriate production rates are met. Under-staffed or under-crewed trades lead to delays not just for their scope, but for every scope behind them on the project.
• Financial penalties
  • General Contractors have deliverables and timeline to meet to the owners and stakeholders. Financial penalties in terms of liquidated damages can incur quickly and add up when a project cannot be delivered on time or does not meet the standard of work expected.

Additional costs can also be indirect or long term:

• Remediation work
  • Poor quality of workmanship and materials can lead to requirements for remediation and there will be costs to bear in terms of bringing the work up to standard. While the owner may have recourse of recovery through litigation, this does not recover the time and impact on the schedule.
  • Substandard products and materials not immediately recognized may show up years after project completion in terms of early repair or upgrade work from deterioration or failure. These costs can be more difficult for the owner to recover as they may be well past any limited warranty period or the responsible party may no longer be in business.
• Legal costs from litigation
  • When serious problems and disputes arise on a project, this can lead to litigation by either party. Regardless of who is in the wrong, this will cost time and money for the litigation efforts. The lawyers will surely make their dollar, but everyone else’s can get whittled down, especially the longer it takes to come to a resolution.

The biggest cost can be the subsequent damage to personal or industry reputation.

“One bad apple ruins the bunch”. An owner or General Contractor’s bad experience with one specialty proponent on a project may lead to them to steer clear of the entire industry altogether and use alternative methods and materials next time.

• Unquantifiable
  • The loss of work and revenue to industry proponents would be difficult to quantify especially in the long term. Loss of revenue and work in the industry is also likely to lead to some proponents being forced to close up shop under financial constraints.
• Long-term Effects
  • Reputations of this type take a long time to build in the first place. Once they are knocked down, it can take an even longer time to regain and rebuild that reputation and trust.
• Difficult to recover and repair
  • Word of mouth can travel fast in construction circles and once a specific industry has fallen out of preference and excluded, it can be difficult for that industry to regain the attention of owners and General Contractors.

A little foresight in due consideration of all cost implications can go a long way in appreciating the true long-term cost or value of individual bids and avoid major added costs and delays before they happen.  

Mr. Quayle is a graduate of the University of Waterloo with both a Bachelor of Applied Science (Civil Engineering) and Master of Applied Science (Civil Engineering) and as the Senior Structural Engineer for EBS Geostructural Inc. helps lead their groundbreaking efforts in geostructural and foundation design. He has over 20 years of experience in geostructural engineering and has become and industry leading expert in design of helical pile and micropile specialty deep foundation systems and has been involved in giving technical presentations on the subjects for industry.  He lives in Waterloo with his wife, two boys, two cats and a dog and enjoys hockey.