Hidden Dangers of Low Estimates

We all love deals and discounts. We feel proud when we secure better mortgage rates or higher salaries. Not only does it help with family finances, but we also feel good about ourselves and our negotiating skills. And why wouldn’t we try to lower construction costs a bit? After all, this is our hard-earned money, and every dollar saved on construction can be put toward something rewarding for the family, like a new TV or a relaxing vacation.

Like anywhere, there are strategies that work, but some can lead to disaster. Before discussing practical solutions to lower construction costs, let’s highlight the worst thing a homeowner could do when selecting a builder: engaging in bidding wars!

Imagine a homeowner who has narrowed down his choices of general contractors to two. He really liked the first contractor, but the second quote came in $60,000 lower. So, the homeowner accepts the lower estimate and asks the first contractor to match it.

It’s essential to understand that margins in the construction industry (when dealing with reputable companies) are very slim. The quote you received included quality materials and trustworthy trades.

By asking someone to reduce costs, you indirectly pressure the builder to take one of the following actions:

• Use cheaper finishes
• Hire low-cost sub-trades (who are low-cost for a reason)

Another pitfall contractors often encounter is agreeing to provide a homeowner a discount without a clear plan on how to achieve it. When your estimate is $1 million, it may seem feasible to drop $50,000 to $60,000. The contractor usually hopes for the best-case scenario and is confident he will make up for the expenses. But what could go wrong? Quite a bit, actually:

• Material prices can rise (we all remember the price hikes during COVID).
• Unexpected expenses might arise; for instance, if the gas connection is delayed, the contractor may need to heat the site with propane heaters at an unforeseen cost of $2,000 per month.

Do you really want to be faced with the fact that you have to pay extra to complete the job? Or do you want to risk the contractor walking away from the project because it has become a losing endeavour for him? While it would clearly be the contractor's fault for signing off on something he cannot deliver, that doesn’t help the homeowner at all!

Fortunately, there are better options to lower construction costs, which we will discuss in the next section.