ICO Report:

NYC Home Renovation Bids

Executive Summary Welcome to the ICO Report: NYC Home Renovation Bids. This is our examination of bidding on interior renovations in New York City over the past year. Executive

highlights include:

1. Bids for any particular project vary greatly. 44% of projects receive a highest bid that is more than 75% higher than the lowest bid.

2. 8% of projects receive a highest bid that is more than two times larger than

the lowest bid.

3. Perfect storms of high bids often lead homeowners to accept a bid that is well above the market average.

4. As repeat referral sources, architects are the major force in cleaning up an inefficient industry. Without them, the shortage of repeat business for contractors reduces their incentives to do quality work.

5. Good value contractors are hard to find because they drop off the radar after becoming busy with repeat referrals.

If you could like a full copy of the report, email rebecca.hughes@ico-usa.com We are ready to assist you if you have any questions about the report, how to find NYC contractors and architects or on interior renovations in general.

Best wishes,

Sebastian Donovan

President ICO www.ico-usa.com sebastian.donovan@ico-usa.com

Significant contributions to this report were made by Suzanne Matulay, Vlad Ciobotaru and Rebecca Hughes, members of the ICO team.

Cover Image: Warren Residence, Upper East Side, New York City Architects: Felhandler/Steeneken Architects | www.fs-architects.com | 212.874.6479

Photographer: Eniko Szucs | www.enikoszucs.com | 908.310.0774

ICO Report:

NYC Home Renovation Bids

Contents

1. Report Intro

2. Project Bid Distribution

3. Perfect Storms of High Bids

4. Why Good Value Bids Can Be Difficult to Find

5. Architects’ Recommendations Clean Up an Inefficient Industry

6. Causes of Renovation Price Variation

7. Notes on Project Data

8. Example Project Bids

1. Report Intro

ICO is an agency which represents architects and construction firms in New York City. According to ABC Channel 7 News, it provides “one-stop contractor shopping” for architects, other trade professionals and homeowners.

ICO has a proprietary window on construction project deal flow, price negotiations and homeowner spending. This window is from two main sources:

1) Affiliated architecture firms that use ICO to source bids for their projects 2) Construction firms that ICO represents to bid on projects

A specific subset of project data was used for this report: residential interior renovation projects in New York City. 2. Project Bid Distribution

These charts will come as a surprise to anyone expecting that (a) renovation projects are priced according to standard and widely conformed to metrics or (b) different

bids for a renovation project are typically broadly in line with each other.

Indeed, this variation is not limited to residential interior renovation. Other construction projects show similar spreads:

“[Based on various factors] … the estimator is advised to adjust his prices

by a figure to be selected – somewhere between 25 percent and 100

percent!”i

Samuel C. Florman, Chairman, Kreisler Borg Florman Construction Company

Contractor for New York by Gehry

(the tallest residential tower in the Americas)

To produce these charts, the winning and non-winning bids for renovation projects

were aggregated. The data was then analyzed from two perspectives. 1) Each bid for a project was compared to the average (mean) bid for that project. Each bid was then expressed as percentage above or below the mean. These bids

were grouped into bins to plot a frequency distribution - see “(1) Distribution of Bids” chart above. This perspective illustrates the clustering of bids.

2) The highest bid for each project was expressed as a percentage above the lowest bid for the same project. This produced a “high-low spread” percentage. These spreads were then grouped into bins to plot a frequency distribution - see “(2) Distribution of High-Low Spreads” chart above. This perspective illustrates the width

of the total bid spread. Method (1) is best for indicating the typical market clustering of bids. Method (2) is best for indicating the spread between outlier bids.

By both measures, the bid scattering is relatively wide. Looking at the distribution of bids, the vast majority of bids (71%) are more than +/-10% different to the mean

bid. Indeed, 14% are more than +/-30% different to the mean bid. Looking at the distribution of high-low spreads, we see that 8% of projects receive some bids which are over two times larger than their lowest bid. For example, one multi-story apartment renovation received bids between $1.21m and $2.56m.

Given that renovation contractors only do business by winning projects, why would they submit bids which are significantly higher than the mean bid? We do not believe

they are intentionally missing out on projects by submitting these high bids. Working on generating a bid costs a renovation contractor time (often expensive senior management time) and sometimes money. Therefore these bids must sometimes be successful winning bids.

That leaves a hanging question. Why would a homeowner be willing to pay for a bid that is well above the average market rate?

3. Perfect Storms of High Bids

A homeowner typically won’t knowingly pay well above the average market rate for

their project. They only end up accepting a high bid when it is amongst a “perfect storm” of other coincidentally high bids. This means that many times buyers are unable to source a competitive set of bids.

When such a large sum of money is concerned, why is it that homeowners find it difficult to get competitive bids for their projects? We believe it is because finding good value contractors for a specific project is a challenge. They are out there. They

are just hard to find.

4. Why Good Value Bids Can Be Difficult to Find

We believe there are four main reasons why homeowners often find it hard to find renovation contractors that will provide good value bids for their projects. 1) It is hard to know where to go looking for the gems. Many good contractors don’t

advertise. Economical contractors are also often reluctant to publicize “low

prices” in case they are perceived as being low quality. Discovering their prices is

only possible by seeing their bids on real projects. This option is not available to the first time customer. Architects (as frequent repeat quasi-customers), however, are good sources of this market intelligence. They see multiple bids for each project they work on, adding to their brain-trust of market insight with

every project they complete. 2) Amongst the gems, it is hard to pick out the diamonds. With so many contractors

out there (nearly 8,000 residential remodeling firms in the NY metro area aloneii) it is easy to loose the diamonds amongst the glitter of all their competitors. This is especially true when, because of the importance of contractor/project “fit”, you are looking for a diamond of a specific size and shape.

“The home improvement industry remains fragmented …”

Abbe Will and Kermit Baker

Joint Center for Housing Studies, Harvard University

3) A big portion of “value” is not about price. It is about quality. This is very hard to judge before the customer has actually hired the contractor and experienced

working with them. For this reason, customers often defer to their architect when trying to judge a contractor’s quality. If the architect has worked with them before, they will have a unique insight into this aspect. From the other side of the table, it is also a challenge for a high-quality contractor to convince a potential

customer of his high standards before he is hired.

4) If especially good value contractors for particular types of project are out there,

why don’t they win all the work, leaving little for all the other players? They typically get very busy with the work coming in from referrals. Then they drop of the radar.

5. Architects’ Recommendations Clean Up an Inefficient Industry

Much of the market inefficiency in the industry comes from a simple reason. There is relatively little repeat business available to renovation contractors. Most homeowners

wait a long time after their first renovation before doing another. Given that they are unlikely to be repeat customers for the contractor, he has a limited incentive to provide quality service and quality work. With little visibility about quality before

starting work, the primary factor for homeowner choice becomes bid price. This produces many of the horror stories involving homeowners who have selected a contractor based on his low bid. They discover all sorts of problems once the initial deposit has been paid and the work started.

Due to the alternative scenario above, by acting as repeat referral sources, architects are the major force in cleaning up the industry. A contractor who has provided good

service and good quality work for an architect’s project is often rewarded with more referrals from that architect. 6. Causes of Renovation Price Variation

What are the causes of renovation price variation in the first place? We believe it is primarily due to the wide variation in cost that each different project represents to each different contractor.

Construction is primarily a labor service. The labor cost depends mostly on a) the

hourly rates of the laborers b) the skill with which they work and c) the performance of their management in deploying them. There can be a wide variance in any of these factors. A specialist or highly skilled

sub-contractor may work 2-3 times faster than a less experienced one. A construction manager who has his team well grooved, has each of the different players working well as a team and each playing to their strengths may double the

speed with which they work. The contractor/project fit is also a major factor. It directly and independently affects all factors (a), (b) and (c). For example, a contractor may not be competitive for

single bathroom renovations but may come into his own for full townhouse rebuilds. Other less significant factors include the perception/expectation about the amount of work required, desire to win project, synergies from the contractor’s other projects

nearby, strength of relationship with the client or architect and order pipeline.

7. Notes on Project Data

A total of 132 renovation projects were used for the data in this report. The projects were all within the five boroughs of New York City during May 2011 – May 2012.

8. Example Project Bids

The table below illustrates some typical projects and their bids.

Bidsiii Average Bid

% more / (less) than Averageiv

High-Low Spreadv

Summary Project Description (truncated)

$2,824,182 $3,252,600 $4,120,400 $4,490,380

$3,671,891

(23)% (11)% 12% 22%

59%

Gut interior rebuild of 25ft wide, 8000 sq ft Upper East Side townhouse. Rebuild of entire structure, except for the front façade. New floor structure on all levels. Glass framed penthouse addition. Upscale, high-end finishing throughout. New elevator to all levels. Minor repairs to cosmetics of …

$177,500 $199,200 $245,120 $274,702

$224,131

(21)% (11)% 9% 23%

55%

Complete renovation of 2.5 bedroom approx 1,500 sq foot apt on Upper West Side. Custom cabinetry throughout. Kitchen: total gut renovation, marble counter tops, new high-end appliances. Master bathroom: replacing toilet, sink, tiling + re-glazing tub … Second Bathroom: gut renovation …

$22,590 $31,450 $35,706

$29,915 (24)% 5% 19%

58%

Complete gut bathroom reno (6 X 8 X 9 ft incl. tub) to cement slab. Wonderboard and laticrete membrane. Minor electrical work. New fixtures, same positions as old fixtures …

$94,990 $107,920 $179,630

$127,513 (26)% (15)% 41%

89%

Renovation of 1.5 bathroom Midtown apartment:

Renovate kitchen with new cabinets, granite counter-tops and fixtures … New shower wet area. Gut reno of bathroom. Sand and refinish wood floors (about 800 sq. ft.) New open dinning area …

i Good Guys, Wiseguys, and Putting Up Buildings: A Life in Construction – Samuel C. Florman ii United States Census Bureau: County Business Patterns iii For projects with more than 4 bids, 4 representative bids have been selected for display in the table. iv Used for chart “(1) Distribution of Bids” v Used for chart “(2) Distribution of High-Low Spreads”