Bids, Estimates, Proposals and Contracts

      Which is which? There's communicating, there's defining, and then there's promising. March 25, 2008

Question
What's the difference between bids, estimates, proposals, and contracts? Are they just interchangeable terms?

Forum Responses
(Business and Management Forum)
From contributor J:
I'm not a lawyer, and I'll be interested to hear whether I'm on track, but I'd guess...

Bids - you indicate the price you'd charge to build something or do some work that has been clearly defined by a potential customer.

Estimates - you approximate the price you'd charge to do less-clearly defined work, based on whatever limited information is available.

Proposals - you interpret a potential customer's loosely expressed wishes, specify in detail how you'd meet their needs and how much you'd charge to do it the way you're proposing.

Contracts - a binding agreement between you and a customer, complete with caveats and contingency plans explaining who must do what to hold up their end of the bargain.



From contributor D:
Might as well add in "Quote" and "Number" and "Ballpark" since those terms are also loosely thrown around. I have asked your question repeatedly for 20 years - including right here - and have never gotten anything like a clear answer. I do think there are regional differences, as well as differences within trades. My solution is to be very specific.

Estimate means, with some assumptions and unspecified things, this is approximately the price.

Quote means this is exactly what the price will be for the specified work (as attached).

I don't use the terms proposal or bid. I also don't use contracts per se. I resist giving ballparks and numbers since once a number is uttered, it is all anyone remembers, even if the specifications, quantity, etc. change.



From contributor T:
I provide a proposal for all prospective projects. I recently updated my 1-page form with a specifications checklist, so it's easier to crank out in just a few minutes. I agree that estimates are a sure invitation to conflict, and never use the term or the practice. A useful alternative to an estimate is to point to a photo of a past project and say how much it would likely cost if all things were equal (not to be confused with how much it cost when I did it). This is the only way I'll ballpark something, by tying it to a specific project I've already done. Ballparking based on someone else's work, while occasionally useful, may be cheating a little and should be done very cautiously if at all. When a customer insists on a ballpark number, it's almost always a sure bet we're not going to be playing on the same field.

I get as much information as possible, fill it in on the proposal form with a price, and off it goes. If the specifications listed change once I get the job, then the price can be appropriately adjusted up or down.

A bid is simply a proposal offered when you know a number of people may be bidding for the same work.

A quote, short for price quote, likely has its roots in a specifically verbal statement of a price. You know, back when someone's word was all we needed to make the world go round. "Hey Jack, the price you gave me three weeks ago was..."

A contract is simply a formal agreement to do something in exchange for something else. My customers indicate agreement to my proposal by sending me the deposit stipulated. The proposal has a signature line, but even without the signed proposal, once I cash the check, a contract has been formed. Clear communication in business is as necessary and valuable as any piece of equipment.



From contributor M:
Estimate is based on less than complete information and itís just that - an estimate.

Proposal is based on accurate, detailed information and you are proposing to do something based on known variables. If a proposal is to become a contract when signed, then it also has to include things like delivery date, payment terms, etc.

Once a proposal is accepted and signed, it becomes a contract.

When you refer to your price to do something as a "bid," you might be understood by some as saying that you may be willing to change your price based on other submitted prices. Bid also could be used as a verb, which means itís the act of generating an estimate.

The definition that is taught in school for the word "quote" has to do with attributing something spoken or written to a person.



From contributor E:
I use estimates all the time to clarify the project. I work with a lot of designers that like to sketch drawings on napkins. I then put together an estimate of the project and a loose idea of costs. The only item (and it is a line item) that is exact is the price for drawings. My estimates are clearly defined as "non-binding," but give the designer an idea if the project is doable or not within their client's budget. To get a quote, the designer must have us draw the project. Then, once we have established the exact parameters and materials (these folks love to use exotic materials that cost lots of money), we give a quote.

This solves two or three problems at the same time:

We don't have to do all the detailed research involved with giving a quote every time we get a project proposal (note: proposals are given to us). This would eat up a lot of resources and cost money.

We actually get paid to do all of our drawings. The very nature of doing the drawings then clarifies and defines exactly what the project entails.

Once this is done, we provide a quote. This seems to have the wholly desired effect of keeping our costs down, our profits up, and the customers completely happy.

Please note: The drawings are a service contract only. We do not provide the customer permission to use those drawings to acquire another contractor (though we can't usually stop them - they know they are cheating). We do, however, remove most measurement and dimensional data from the copy they get. Let the next company do their own drawings! If the customer does want to do this, there is an additional charge that they agree to up front.

On the other side of the coin, we have commercial customers that build unit after unit of the same or similar things. We have been standardizing all of the millwork and GC work into a template system that we publish privately on the web. The client then goes there and picks from a menu to "build" what they want. It all has standardized pricing (usually per linear foot or something similar) and material type. This saves us huge amounts of money on constantly needing to estimate new projects for these customers - many of which they do not do. Once they decide to go forward with a particular project, we default to the standard quote process. Sometimes it's as simple as copy and paste.



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