Homeowners who get multiple bids on the same work are often amazed at the range of bid prices. It is not uncommon for high bids to be 2x the low bid. This leads to considerable uncertainty and decision anxiety for the homeowner.
The homeowner is left with important, but complex questions. Why do bid prices vary so much? Can I trust the low bid for basic quality? Can I trust the high bid for value?
By understanding the factors behind price variation, the homeowner is better able to identify risky or predatory pricing in the bid process. The common factors that drive price variation in home services include:
Bidding approach – There is no standard way to estimate job prices for custom work, but many service providers use a cost plus approach. Variations in the costing and markup will create significant job cost variations. Some service providers use material and labor costs from recent, similar jobs they have performed. Others estimate from a standard cost/productivity reference book (e.g. R.S. Means). Others may have portions of the work bid by a subcontractor(s). Once a cost total is estimated, the “markup” or “profit” (usually in the range of 10% – 20% of the costs) is added to create a bid price.
Work Scope – Not all bids assume the same materials or work tasks. For example, surface preparation for an exterior paint job may mean a quick “powerwash” to one painter and extensive scraping, filling and sanding to another painter. Unless all work tasks are called out explicitly, the ambiguity in work tasks – and materials used – will often lead to wide price differences.
Contractor Costs – In some cases, some service providers may have access to lower costs for material or labor. In some cases (but not all), this is a result of lower grade materials or unlicensed/uninsured labor.
Installation Quality – It is often the case that a craftsman will require more time to create a quality result than is required to do acceptable or marginal work. If no quality requirements are specified, there will likely be price variances due to varying grades of installation quality.
Motivation – Popular, reputable service providers don’t need additional work and may price significantly higher than the market to maximize profits. New or unknown service providers who need the work may price at or below costs, hoping to profit from fast work.
By breaking down cost estimates and understanding the details behind the bids, you can often understand the reason for significant price differences.
As we discuss in other posts, it is even better to structure your bidding process to understand and eliminate these sources of price variation.