What’s The Difference Between Bids and Estimates?

If you’re a homeowner planning to have some contract work done, whether you’re breaking ground for new construction or undertaking a remodel you’ll be well served by doing your homework. Before you can begin the work, you’ll need to find a contractor with whom you can work. Inevitably this will mean comparing prices, which means asking each potential contractor how much your project will cost. There are two ways to ask about cost: requesting a bid, and requesting an estimate. What’s the difference between a bid and an estimate, and which should you ask for? Keep reading to find out.

Bids: a Complex Equation and a Commitment
The average homeowner may have no idea how much time and effort goes into making a bid. The contractor has to take into account every possible expense for the duration of the project, from start to finish, including any fees, taxes and incidental costs that may arise in order to reach the cost of the bid. The three main factors contributing to the cost are materials, labor and subcontractors’ wages, but the contractor also has to try to predict “accidentals,” incidental costs to cover anything that might come up, including potential delays and the cost to replace any materials that are damaged, broken or lost in transit.

Ideally, the cost of the project will not exceed the price quoted in the bid. Because the effort required to deliver an accurate bid is so great and the undertaking so involved, asking for a solid bid represents a kind of commitment to work with the contractor. That doesn’t mean that you are obligated to work with a contractor once you’ve requested a bid, but requesting more than three bids will be a waste of your time and the contractors’. Narrow down the list of contractors with whom you’re interested in working by asking for ballpark estimates and spend some time looking at the quality and style of the past projects in their portfolio. Hold off on requesting a formal bid until you’re sure that you’re interested in doing business.

A Word About Taxes
Another factor to be aware of when requesting a bid is Hawaii’s General Excise Tax (GET). Before he can offer a final bid price, the contractor must also factor in Hawaii’s GET of 4.166% on the total cost of the project. Mainland homeowners may be unfamiliar with the General Excise Tax; a contractor on the mainland typically pay sales taxes on all the materials and incidentals individually, but not on subcontractors or the final contract price. Hawaii has no sales tax, but the GET is assessed on all business activities, which contributes to the final cost of the project.

Estimates: Ballpark Figures to Get You Started
An estimate is a contractor’s rough approximation of how much a project like yours might cost, all things considered. The estimate a contractor offers you may not be 100% accurate to the final cost of the construction, but it should give you an idea of whether the services he can offer you are within your budget, close to it, or way beyond your means. A full bid for a larger project, like a remodel or a new home, is incredibly involved. Asking for an estimate is a good way to rule out contracting companies that are too expensive or who offer suspiciously low prices, and it will help keep you from wasting your time or theirs.

Because estimates are, unlike bids, estimated rather than painstakingly confirmed through communication with materials suppliers and subcontractors, contractors often include fairly sizeable prices for Allowances. Allowances are areas where the contractor simply doesn’t have enough information to form an accurate estimate, so it’s sort of a catch-all miscellaneous category to cover unforeseeable incidental costs. If an estimate comes back that’s much higher than you anticipated or much higher than competing estimates, a generous Allowances budget might be the cause. On the other hand, if an estimate is much lower than the others you’ve seen, it could be down to a conservative budget for Allowances, which could land you in hot water should materials or labor prove more expensive than originally estimated.

In general, ballpark estimates are sufficient for vetting contractors and narrowing down whom you’d like to work with. After you’ve selected two or three competitors, request formal bids from all three and make your final decision. Now that you know the difference between fixed-price bids and ballpark estimates you’ll be able to talk the talk and walk the walk, helping you to choose a contractor with ease.