4.3 Commercial Contracts, Bidding Procedures & Cost Estimating

Commercial Contracts, Bidding Procedures & Cost Estimating

Commercial vs. Residential Contracts

The consumer-protection framework covered in Sections 4.1 and 4.2 — the Home Improvement Contract (HIC) rules of B&P Code §7159 — applies specifically to residential property of one to four units. Once a C-20 contractor is working on a commercial building, an office park's rooftop package units, or a larger multifamily property of five or more units, §7159 no longer governs the deal.

That distinction matters in practice:

Commercial owners and contractors can agree to deposit percentages, milestone billing structures, and retention terms that would be illegal on a residential HIC. That flexibility comes with more complexity: commercial jobs typically route through a general contractor, use formal plans and specifications, and require the C-20 contractor to carry higher liability insurance limits and provide performance and payment bonds on larger projects.

Competitive Bidding Procedures

Private commercial owners typically solicit bids from three or more qualified contractors working from the same set of plans and specifications, so the bids are comparable to one another. The typical sequence:

1. Plans and specifications are issued — mechanical drawings, equipment schedules, and a written scope of work.
2. A pre-bid walkthrough and Requests for Information (RFIs) follow — bidders inspect the site and submit written questions, and the answers are issued to every bidder as addenda so no single bidder has an unfair information advantage.
3. Bid submission — sealed or electronic bids are due by a stated deadline, sometimes accompanied by a bid bond, commonly 5-10% of the bid amount, that guarantees the low bidder will sign the contract and furnish performance and payment bonds if awarded.
4. Bid evaluation and award — the owner or general contractor selects a bidder, and it is not always the lowest number if qualifications, schedule, or bonding capacity are a concern.

Bid shopping — a general contractor disclosing a subcontractor's bid to competitors to squeeze out a lower price after bids are already in — and bid peddling — a subcontractor offering to underbid a number the general contractor already has in hand — are considered unethical practices in the industry and can expose the parties involved to legal claims, even where they are not independently criminalized.

Building an HVAC Cost Estimate

A defensible HVAC bid starts with a quantity takeoff from the plans: linear feet of ductwork, tonnage and type of equipment, number of registers and diffusers, refrigerant line length, and any specialty work such as variable refrigerant flow (VRF) branch controllers or energy recovery ventilators. From there, the estimate builds up through three layers:

1. Direct costs — materials such as equipment, ductwork, refrigerant, fittings, and controls, plus labor at the crew's burdened hourly rate, which includes wages, payroll taxes, and workers' compensation.
2. Indirect costs, or overhead — the cost of running the business that is not tied to any single job: office rent, vehicles and fuel, licensing and insurance, tools, and administrative staff. HVAC contractors commonly track overhead as a percentage of revenue; trade benchmarks frequently cited in the industry run in the 15-22% of revenue range, though every contractor's actual rate depends on their own books (see Chapter 3 for building that rate from real financial statements).
3. Profit margin — the amount added on top of direct plus indirect cost to compensate the business for risk and generate a return.

Markup vs. Margin: A Frequently Tested Distinction

These two terms are often confused, and the exam expects a contractor to know the difference:

• Markup % equals (Selling Price − Cost) divided by Cost, times 100.
• Margin % equals (Selling Price − Cost) divided by Selling Price, times 100.

A 25% margin is not the same as a 25% markup — a 25% margin actually corresponds to a 33.3% markup, since Markup = Margin ÷ (1 − Margin).

Worked Estimate Example: A 4-Ton Split-System Replacement

Industry sources commonly cite HVAC equipment markups in the 25-50% range, with markups of 100% or more on smaller parts, and typical job-level gross margins of 25-40%. These figures are business benchmarks rather than fixed statutory numbers — a contractor's real pricing should always come from their own cost accounting, not a rule of thumb.