How to find Black Swans
Back when the phrase was coined, Black Swans were thought to not even exist. While most people in the finance world would attribute “black swans” to Nassim Nicholas Taleb, it’s a term that actually dates back to the 17th century.
The Old World idea assumed that all swans must be white, since no one had ever seen a black swan. Such a theory is a great reminder that what once was presumed impossible, could actually happen.
So what does this idea have to do with reviewing proposals? When reviewing any company’s proposed scope of work, you need to understand the story behind the story.
Whether you are reviewing proposals, bids, budgets, estimates, etc, you are trying to “buy” services. For simplicity, we consider “proposals” to be all-encompassing.
Anytime you send out a request for proposal (RFP), you should be on the lookout for the unexpected.
You want to be completely open in your thought process to avoid the trap of thinking the likelihood of certain risks are impossible and that the possibility of certain rewards are within grasp.
A PROPOSAL REVIEW CHECKLIST
While each real estate project, scope, budget, and schedule are unique, we believe that there is an overall framework to evaluate proposals effectively and thoroughly. Think of it as a proposal review checklist.
When evaluating proposals from vendors, it makes sense to have options. While two proposals may be too few, seven or more proposals could be too many. Three to five usually feels about right.
Good, fast, and cheap – pick any two. If your timeline is tight, you may have to pay more for your proposed scope of work. If the “market” is busy, you may only have a few vendors interested in the work.
Let’s say you need an architect to design a high-end boutique resort in less than 9 months, but they are 3 weeks late submitting their proposal. Are you confident they can deliver on that design timeline?
What if a contractor had the wrong property address on their bid, should you trust the rest of their numbers?
You receive proposals from multiple contractors that are well below your budget, but what are their planned schedules to complete the work?
When confronted with these scenarios and others, we try to break our proposal evaluation into three sections:
- During the RFP process
- After the proposal submittal
- Review with the vendor
While you can get all nerdy and look at statistical variances, we prefer to use a list of predefined questions to ask ourselves and the vendors. Call us crazy, we like to keep it simple.
“How you do anything is how you do everything.”
Before we start evaluating any proposals, we want to know if one thing and one thing only:
Did the vendors submit their proposals on time?
If not, how are we to trust that they can deliver the project on time? There are plenty of factors in real estate and construction that are beyond our control – the weather, the market, the cost of materials, the lack of labor, etc. One of the few things that we can control is how we spend our time. If the vendor cannot manage their time, how can they manage your due dates and delivery schedule? The proposal should be the easy part: the project is usually tougher and much more complex.
A reasonable question to ask any contractor, architect, engineer, or consultant, is:
How are you going to complete this project on time when you were unable to submit a proposal on time?
PART I: DURING THE RFP PROCESS
Ideally someone on your team is tracking this process as it happens. If not, you can quickly sit down and reflect on the experience as proposals are submitted.
Some of our favorite questions to ask include:
- Did the vendors ask thoughtful questions?
- Were they engaged throughout the process? If not, how are they going to be engaging (and not absent) during the project?
- Did they follow the RFP instructions?
- Did they submit requests of information (RFIs) in accordance with the instructions?
- If they did not follow simple procedures and instructions during the proposal phase, how will they listen and perform during the actual project?
PART II: AFTER THE PROPOSAL SUBMITTAL
Having multiple proposals to review will allow you to notice patterns, trends, or outliers.
A good proposal response from a vendor will typically have the following sections:
- Information about the vendor/ company
- What makes them better than competitors
- Their specific thoughts on the project; how they are uniquely qualified to succeed
- Answers to any of your specific questions
- Their pricing
- Their “happy client” references
We always shoot for around three vendors, however that “rule of thumb” is not hard and fast.
Our thoughts and questions below assume that you, too, have multiple proposals to review:
- Are there any major differences in the line items of each proposal? If so, why?
- What information is missing?
- What information is incorrect, if any? If so, why?
- Did they follow the correct format for submitting a proposal? If not, why?
- When was the last time they completed a project of similar scope?
- Are their qualifications appropriate for this type of work?
Ideally this last question is answered before vendors are invited to bid, however it is a good idea to revisit it often. People, companies, and experience can change rapidly in today’s world, especially for those who are actively learning from their successes and failures.
“30+ years of experience” does not always equate to 30 years of continuous reflection and improvement.
PART III: REVIEW WITH THE VENDOR
At this point in the process, you have a number on a page.
Underpaying is just as risky as overpaying.
Imagine you have a budget of $250,000 and you select a vendor who proposed to complete the work for $175,000. Only after you are under contract do you realize that their proposal missed over $125,000 worth of work. Even worse, you did not catch the error during the review process.
Now is the time to get into the weeds and understand what you are getting for that number.
These questions should be reviewed with the vendors, ideally within a week or so of the proposal submittal. Why? Because we are human and forget things. It’s best to review the numbers, everyone’s understanding of the scope, and details of the proposals when the information is fresh in everyone’s minds.
A few great questions to review with the vendors include:
- What assumptions, if any, did you have to make?
- What about the scope is unclear?
- Are there any areas that you feel provide opportunities for substitutions or cost savings?
- Can you walk us through your exclusions?
- What is your proposed schedule to start and end dates the scope of work?
- Do you have any allowance for contingency within your schedule?
HOW TO EXPECT THE UNEXPECTED
We do not know what we do not know. If you treat each proposal as a new beginning, you will be able to hopefully uncover more unknown unknowns related to the scope of work, pricing, and potential vendor.
Remember as you review each proposal, ask yourself, “Why are these numbers so different? What are we missing? Better yet, what are they missing?”
To make your next proposal review easier, we went ahead and created a real estate proposal review checklist for you.
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