This phase consists of establishing who the builder of the project will be and also establishing the actual cost of the work. This can be done in various ways, two of the most common being bidding and negotiation.
The bidding process invites a number of contractors (I usually invite four) to competitively bid the job. The owners are then presented with a number of proposals from which they may choose.
The advantage of this process is its built-in competitive checks and balances, that is, the owners will get a good sense of the reasonable range of prices for which the project could be built. Excessively low or high bids can also be identified. The disadvantage of this process is that it does not adapt well to times in which the building economy is super-heated. In these times there is so much work available that many contractors are disinclined to compete, favoring instead a negotiated construction agreement.
Under the negotiated agreement the owner ideally settles on a contractor early in the process (as early as schematic design, if possible) and so gains a valuable resource to inform the design process. In this way the owners may also be able to reserve a reliable spot in the contractor’s construction schedule. It is often thought that the downside of the negotiated contract is that competitive cost information is not available; in actuality, the general contractor will still be soliciting multiple bids from all subcontractors and suppliers. The remaining part of the equation concerns the general contractor’s labor, profit, and overhead numbers. Profit and overhead are easily compared to industry standards, but labor is difficult to verify.
For this reason I recommend that this type of construction contract relationship be entered into only with contractors who are known either to the owners though previous work, or to me through previous projects. The negotiated agreement usually takes the form of a fixed price contract, but other forms are also used, ‘time and materials’, and ‘cost of the work plus a fee’ are other common forms.
This phase concludes when a satisfactory contract for construction is signed.