The Lowest Bid Isn’t Always the Lowest Cost

The Lowest Bid Isn’t Always the Lowest Cost

Why healthcare construction requires looking beyond the number at the bottom of the proposal

By Tony Michuda, Vice President of Development, Michuda Construction

There is nothing inherently wrong with awarding a construction project to the lowest qualified bidder.

Sometimes it is exactly the right decision.

If the scope is clearly defined, the drawings are complete, existing conditions are well understood, and operational risks are limited, competitive bidding can be an effective way to establish market pricing and protect a healthcare organization’s capital.

The problem is not hard bid.

The problem is assuming that the lowest construction number always represents the lowest cost to the hospital.

In healthcare construction, those two numbers can be very different.

Hard Bid Is a Procurement Method. Cheap Construction Is a Behavior.

That distinction matters.

A good contractor can win a competitively bid project and perform exceptionally well. A poor contractor can be hired through a negotiated process and perform poorly. The delivery method does not determine the outcome by itself.

What changes is the amount of information, collaboration, and problem-solving available before the construction price is established.

On a hard-bid project, contractors are generally pricing a defined set of construction documents at a defined point in time. Their responsibility is to submit a competitive number based on what those documents require. That system can work extremely well.

But it has limitations.

A bidder has no incentive to voluntarily add an allowance for temporary infrastructure that is not explicitly required. It may identify a phasing concern but have limited opportunity to re-analyze the approach. It may recognize uncertainty in an existing condition but still need to price the documents as written because hard bids are a race to the bottom to win. 

The competitive environment naturally rewards the contractor that can satisfy the requirements at the lowest price.

Again, there is nothing inherently wrong with that.

The question is whether the construction documents have captured everything that matters.

Inside an operating hospital, they often cannot.

What Negotiated Work Can Change

A negotiated relationship with an experienced healthcare contractor creates a different conversation.

Instead of asking contractors to price a nearly completed solution, the owner can bring the constructor into the process while there are still opportunities to influence it.

Can the department actually function through the proposed phasing? What happens clinically when this shutdown occurs? Should the team open the ceiling now and verify where a system goes? Would temporary infrastructure allow a revenue-generating department to remain operational? Could a different sequence eliminate an entire phase?

Those conversations do not necessarily make the project more expensive.

Very often, they do the opposite.

A strong negotiated contractor should be looking for ways to remove unnecessary cost, challenge assumptions, create competition among trade partners, and give the owner visibility into exactly where the money is going.

The value is not that the contractor is allowed to charge more.

The value is that the owner gets more information before committing the money.

Transparency Changes the Conversation

There is an important difference between receiving a price and understanding a price.

In a transparent negotiated process, the owner should be able to see how the project is being built financially: trade coverage, general conditions, allowances, contingencies, escalation, temporary work, unresolved scope, potential risks, and opportunities for savings.

Nothing should need to hide behind a lump-sum number.

That transparency creates a different kind of relationship.

A good healthcare contractor should be willing to tell the owner when something is overpriced. It should also be willing to say when cutting something is a bad idea.

That second conversation can be harder.

There are times when the responsible recommendation is:

“We can remove this $75,000 from the construction budget. But here is the operational risk the hospital will assume if we do.”

Then the owner makes the decision with the benefit of the full picture.

That is very different from simply saying no. It is also very different from allowing the risk to remain hidden until it becomes a change order.

The Hospital Has Costs the Construction Budget Cannot See

Consider a procedural room that has to remain offline longer than anticipated.

The contractor sees additional labor, supervision, temporary work, and schedule extension.

The hospital sees procedures that cannot occur, patients who need to be rescheduled, staff whose workflows are disrupted, equipment that is not generating value, and temporary space that may need to remain operational longer.

Construction may represent only one part of the financial impact.

That is why a decision that saves money within the construction budget can still cost the healthcare organization more overall.

The appropriate question is not simply:

What does this cost to build?

It is:

What does this decision cost the hospital?

The Cheapest Time to Find a Problem

Existing hospitals contain uncertainty.

Drawings may be incomplete. Systems have been modified over decades. Utilities may serve areas nobody anticipated. Clinical operations may have changed dramatically since a space was originally designed.

Nobody can eliminate all of that uncertainty.

But a collaborative pre-construction process can aggressively search for it through selective demolition, above-ceiling investigation, system tracing, scanning, trade-partner involvement, facilities interviews, clinical workflow meetings, equipment coordination, and shutdown planning.

Each provides information.

And information has value because the earlier a problem is discovered, the more options the owner has to solve it.

Discover a conflict six months before construction and it may require a design change.

Discover the same conflict with the department already shut down and crews standing in the field, and it becomes an emergency.

It is the same problem. It just has a very different price.

Negotiated Does Not Mean Uncompetitive

This may be the biggest misconception surrounding negotiated construction.

Negotiated should not mean writing a blank check.

A sophisticated negotiated process should still create competition throughout the project and Guaranteed Maximum Prices can still be established.

Multiple qualified trade partners can bid major packages. Scopes can be leveled

transparently. Budgets can be reconciled against the market. Alternates can be evaluated. Savings can be returned to the owner. Contingencies can be tracked and ultimately released as risks disappear. 

The difference is that the construction manager is sitting on the owner’s side of the table while those decisions are being made.

That relationship only works if there is trust.

And trust requires transparency.

If a contractor cannot explain where the money is going, why a contingency exists, or why an expensive recommendation is necessary, the owner should challenge it.

A negotiated relationship should create more financial visibility, not less.

Sometimes Hard Bid Is Exactly Right

Healthcare systems manage enormous portfolios. Not every project requires an intensive pre-construction process.

A straightforward renovation with limited clinical impact and complete documents may be perfectly suited to competitive bidding. There are projects where maximizing price competition is the appropriate priority.

There are also projects where the greatest risks have very little to do with the quantity of drywall, concrete, steel, or mechanical equipment being purchased.

Think about an ICU renovation, an operating-room modernization, a major infrastructure replacement, a project requiring critical shutdowns, or multi-phase construction surrounded by active patient care.

In those environments, the owner is buying more than construction.

It is buying planning, judgment, transparency, experience, and the willingness of a contractor to identify a problem before it becomes profitable to solve.

The Best Contractor May Occasionally Tell You Not to Spend the Money

That may be the clearest test of a negotiated relationship.

A good contractor should make money performing good work. There is nothing wrong with that.

But the relationship becomes valuable when the contractor is willing to recommend the decision that is best for the owner even when it creates less construction.

Maybe an existing system does not need to be replaced yet. Maybe a phase can be eliminated. Maybe an expensive solution does not create enough operational value. Maybe a project should be delayed until another infrastructure issue is addressed first.

The owner should expect those conversations.

Because once a contractor is involved early enough to influence the project, its responsibility should extend beyond executing the scope.

It should help determine whether the scope makes sense in the first place.

The Number at the Bottom of the Page

Lowest bid and best value can absolutely be the same number.

Sometimes they are.

But healthcare organizations should not assume they always will be.

Complex occupied construction creates consequences that no bid form can completely capture: the cost of downtime, disruption, uncertainty, a bad phase plan, or discovering too late what could have been understood earlier.

A strong procurement strategy recognizes all of them.

Sometimes that leads to a hard bid.

Sometimes it leads to negotiated construction with a trusted healthcare partner.

The important thing is understanding what the organization is actually trying to buy.

The lowest construction price is easy to identify.

The lowest total cost requires a much more honest conversation.

About the Author

Tony Michuda is Vice President of Development at Michuda Construction, a fifth-generation construction firm specializing in complex projects within occupied healthcare environments. Michuda has delivered more than 1,600 healthcare projects across over 70 hospital campuses.