The Price Tag Paradox: Why Cheap Estimates Can Cost You Big

If you’ve been in the construction industry for longer than a week, you know about the price tag paradox. It is the idea that cheaper estimates can lead to bigger costs in the long run. toa-heftiba--bImQ31kEz8-unsplash

Think of it this way: you want to go to your favorite pro sports team's home opening game. You can pay $200 for a nosebleed seat, or you can pay $800 for a suite seat. Being the savvy money saver that you are, you opt for the nosebleed seat. However, what you didn’t realize is that you have to pay for parking (which is far away from the sports venue), food, drinks, and walk 3 miles to get to your seat. The suite seat came with a parking tag (right by the venue), food, drinks, a dedicated bathroom in the suite, and you got a golf cart ride from the venue entrance to your suite.

Did you save $600 on the cheap seat? Not really. You actually paid a discount for more hassle and not an ideal experience. 

The Temptation of Low Estimates 

The same goes for construction estimates. The low-price tag of an estimate can be enticing to project owners who may only be focused on the costs. However, are they are thinking about the ideal project building experience from the start? The lowest subcontractor bid for your project may also look like a steal but are you going to get more of a hassle from them later on in the project?  

The reason the cheapest options are usually selected are: 
  • Budget constraints 
  • Lack of awareness 
  • Short-term focus 
  • Perceived similarity 

Budget constraint is the easiest reason to point to why the lowest estimate was chosen. Construction is not cheap. But it is also very complex. Any given construction project has a lot of moving parts, equipment, and people. Risk is high, safety is paramount, and cutting corners on budget could negatively impact those items.  

Selecting the lowest estimate may also be because of a lack of awareness. If the project owner has not taken on a specific type of construction project before they may not be aware of what to ask for in an estimate. The same thing goes for a subcontractor. If they are highly skilled but don’t have the understanding of that specific project, then they could be sending in a low bid that doesn’t reflect the actual work requirements for the job. 

Learn more about meeting the owner where they are in in their understanding of construction in this episode of Precon Geeks preconstruction podcast. 

Short-term focus hinders long-term gains. An estimate may have looked great because it was so much lower than the other estimates that were submitted at the time, but these decisions are usually knee-jerk responses in the moment. Taking time to consider long-term goals is required for every construction project. 

Getting a couple of estimates that look really similar but have different price tags and then choosing the lower estimate because it was lower is known as “perceived similarity.” Without digging into the difference in cost limits your ability to understand why one estimate was lower compared to others. The perception is that they are similar when in reality they could be vastly different in their understanding of the project. 

Unveiling Hidden Costs 

office space estimateEvery good contractor should explore the hidden costs associated with estimates. From subcontractors and from your own team members. As mentioned before, construction projects are complex. Communicating all of the complexities to every project team member is a neverending task. Items get lost in translation, skewed due to deadlines, or forgotten because it wasn’t a pressing issue at the time. 

One of the areas to keep in mind that could be hiding costs is quality. Quality of materials and labor skills, specifically. Using cheap materials may cut down on costs today but they may be a running maintenance cost for the project owner down the road. If your project owner is constantly having to battle cheap materials after the project is done, then they likely won’t be a repeat customer.  

Inexperienced labor is also usually less expensive upfront because they may not have realized how much skills or effort was needed for the project. You will likely need to bring in more experienced people later on to get the project finished on time but not within budget. 

Additional fees and charges are another area for costs to hide. If these are not initially disclosed upfront your project can feel the budget pinch later. Your team should account for and understand labor rate fluctuations, material costs ebbs and flows, permitting timelines, and schedule infractions like weather delays. Being able to brainstorm ways that additional fees may pop up during your project and having a game plan in place before they do will save your project costs today and in the future. 

Mitigating the Price Tag Paradox 

This may seem simple but the first step in mitigating the price tag paradox is to fully vet every estimate and their scope of work. Have conversations with your subs about expectations, sharing the complexities of the project, and asking them for their input on any “gotchas” in the project. Treat your subs as valued project team members … because they are! 

Another no-brainer is to get multiple quotes and compare them thoroughly. You are going to learn which sub accounted for complex project situations or included a piece of scope you hadn’t thought of by comparing the estimates. This will save your proverbial bacon. 

Be the trusted advisor your project owner needs you to be. They will very likely be focused on the budget numbers today and pushback on portions of your estimate they may seem like a sticker shock. Walk them through your experience and knowledge of that piece of the project and lay out the options of cheapest, fastest, and best in front of them. You can beat the drum for the best option and lead your client to the best choice for their project.  

By understanding how the Price Tag Paradox is impacting you, your client, and the project you can be better equipped to fend off short-term decisions today in favor of long-term growth. 

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