The Contracting Process

piecestogetherWhen the owner determines that the project is feasible and construction financing is available, he will solicit bids from general contractors and/or specialty contractors. Owners will use trade publications and newspapers to invite contractors to bid for the construction contract.

The notice will provide the contractors with the procedures to be followed in submitting a bid. The bidding contractor obtains a copy of the plans and specifications from the owner to prepare the formal bid. The bidding contractor solicits bids from subcontractors, estimates direct material and labor costs, and evaluates the ultimate profit potential of the contract. The amount of the bid covers the estimated costs and profit for the construction project.

The owner evaluates the submitted bids and will award the contract to the successful bidder. The contract document contains the contract amount, project start and completion dates, progress billing procedures, insurance requirements, and other pertinent information. There are standard cost manuals that a general contractor can use as a guideline in computing the bid. These guides contain a compilation of cost data for each phase of construction.

It is important to realize that the cost of bidding a job can be considerable. The costs include reviewing and reproducing the job specifications and blueprints, calling in subcontractors to get bids on the work involved, developing the total cost figure for the project, and preparing a formal bid. The preparation of the bid is the first step in the cost control system. The bid becomes the budget by which the actual expenditures are measured.

The object of the cost control system is to provide the general contractor with information regarding actual project costs versus anticipated or budgeted costs. These cost comparisons are essential for internal control as well as for auditing purposes.

You may see situations where a contractor might pursue a "break-even" bid to generate enough cash flow to meet payroll, particularly in recession periods. The general contractor solicits bids from subcontractors in the various trades, the subcontractors bid for the jobs in much the same way owners do.

Scheduling Subcontractors

The general contractor is expected to schedule the subcontractors so that the construction runs smoothly and is completed on time. The various specialty areas include, but are not limited to, the following:

1. Site Work
2. Foundation
3. Framing
4. Exterior
5. Roofing
6. Interiors
7. Specialties
8. Mechanical
9. Electrical

This list conveys some of the complexity inherent in the construction process. It reflects the necessity of scheduling the work of subcontractors and using a budget, bid costs, and actual cost variances for cost control purposes. Budgeting and scheduling are critical factors in determining the success of the contractor.

IRS Construction Industry Audit Technique Guide (ATG) - Chapter 1, Publication Date - May 2009
The information on this page is taken from the IRS Website and it claims that this is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. It is current through the publication date noted above. In general, it is a good reference guide through the subjects discussed.