The Hidden Cost of Choosing the Lowest-Bid General Contractor

Project Assumptions

• Retail Strip Center: 20,000 SF

• Hard Construction Cost: $4,000,000

• Soft Costs (Design, Engineering, Permits, etc.): $500,000

• Land Cost: $1,500,000

Total Project Cost: $6,000,000

Assume the developer finances 60% of the project:

• Loan Amount: $3,600,000

• Interest Rate: 8%

• Annual Interest Expense: Approximately $288,000

Additional annual carrying costs:

• Property Taxes (based on $2.5M valuation at 2.5%): $65,000

• Insurance, HOA, Liability, Maintenance, and Miscellaneous Expenses: Approximately $100,000

Total Annual Carrying Cost

• Interest Expense: $300,000

• Property Taxes: $65,000

• Insurance, HOA & Other Expenses: $100,000

• Total Annual Carrying Cost: Approximately $465,000 to $500,000 per year

For example: A 20,000 SF project: $25 per square foot per year or approximately $2.08 per square foot per month.

What Happens When the Project Is Delayed?

If the project completion is delayed by just one year, the owner incurs an additional $500,000 in carrying costs or $25 per square foot of additional cost.

This cost is often much higher than the savings achieved by selecting the lowest construction bid.

For example, many developers spend months negotiating a lower contract price with a less-qualified contractor to save a few dollars per square foot. 

However, if that contractor delays the project by 12 months, the carrying costs alone can exceed the original savings several times over.

The Hidden Opportunity Cost

The financial impact doesn't stop there.

When a project is delayed:

• Tenant move-ins are delayed.

• Rental income is postponed.

• Loan payoff is delayed.

• Investor returns are delayed.

• Business owners cannot open their doors.

• Leasing momentum slows.

• Market opportunities may be missed entirely.

In many cases, the opportunity cost is greater than the carrying cost itself.

Don't Forget Change Orders and Legal Expenses

Project delays frequently lead to additional costs such as:

• Change Orders

• Extended General Conditions

• Consultant Fees

• Legal Expenses

• Lender Extension Fees

• Mechanic's Liens

• Disputes and Claims

These costs can significantly increase the overall cost per square foot and further reduce project profitability.

Key Takeaway

As developers and property owners, we should not evaluate contractors based solely on the lowest bid.

Instead, we should prioritize:

• Proven track record

• Ability to finish on time

• Financial stability

• Quality control processes

• Project management capabilities

• Transparency and communication

The best contractor is not always the cheapest contractor.

A contractor who consistently delivers projects on time can save a developer far more money than any discount negotiated upfront.

Remember: In commercial real estate development, time is money. Every month of delay has a direct cost, and every year of delay can dramatically impact project profitability. Choose your general contractor in Texas based on their ability to successfully deliver the project, not simply on their price.