You may have heard of the bait-and-switch sales tactic before but have you ever really paused to truly reflect on the concept? Bait-and-switch is a morally suspect sales tactic that lures customers in with specific claims about the quality, low prices, and or delivery times on items that turn out to be unavailable or unrealistic in order to upsell the client on a similar, pricier item later and or in the construction industry lock the project owner into a contract only to find out later that their project is extremely over budget and months behind schedule. Bait-and-switch is technically considered a form of sales fraud, though it takes place in many contexts these days including both online dating and the food system. While many countries have laws against using bait-and-switch tactics, not all occurrences constitute criminal fraud. Bait-and-switch techniques have a long and widespread history as a part of our economic and social structure and the suspect behavior expresses itself in many formats throughout construction processes from allowances to unbeknownst materials substitutions.
Bait-and-switch is a form of fraud most commonly used in retail sales but is also deployed in many other contexts. In a simple retail context the customers are "baited" by salespeople or a sales tactic advertising products or services at a below capital market price, but when the customers visit the retail store or engage in the marketed services, they discover that the advertised goods are not available or at all what they seem. The customers are then pressured by salespeople to consider similar, but higher-priced items "switching" the product being sold resulting in a higher profit margin for the salespeople and the company in general. The intention of the bait-and-switch is to encourage purchases of substituted goods and services at or above market price, making consumers satisfied with the available product offered, as an alternative to the disappointment or inconvenience of acquiring no goods (or bait) at all, and reckoning on a seemingly partial recovery of sunk costs and time expended trying to obtain “the bait.”
The "bait" in a bait-and-switch tactic can be an advertised physical product or service that has a notably attractive price and or terms. It can also take the form of a teaser interest rate, in the case of a mortgage, loan, or investment product. Once a customer comes into the retail store or office to inquire about the advertised price or rate, the salespeople will attempt to sell the customer a more expensive product or modify the contractual terms, which constitutes the "switch."
Bait-and-switch tactics, as a form of false advertising, may be subject to lawsuits in many countries, including the United States. However, no matter how aggressive the salespeople are in attempting to upsell a potential customer to a more expensive product or service if they can sell the advertised teaser product, there is no course of legal action for the consumer of the bait. Therefore if your window package allowance that your builder provided to you is only one third the sum of the windows that you actually want you can either pay the difference or accept the windows included in the builders proposal.
The bait-and-switch tactic has always had notoriety in the mortgage market and construction industry as an unscrupulous marketing tactic. In a mortgage bait-and-switch, an agent or company will post exceedingly low mortgage rates, knowing full well that the vast majority of applicants will be unable to qualify for these teaser rates. Once customers begin to come into the office to inquire about the low rate, the agent will proceed to offer them the higher rates they are more likely to qualify for, thus earning a greater commission. A similar strategy is seen in auto purchase financing, in which buyers are lured by the possibility of a car loan with a rate as low as 0%. In reality, very few people (if any) will ever qualify for such a rate.
There's two primary factors to consider in how the bait-and-switch tactic may be used on you while undergoing a construction or development project. One factor is budget and the other is time. It is very important to analyze both data sets in this industry. Undefined time and schedule could lead to months of unaccounted for interest payments, rent, and general carrying costs as well as lost opportunities if you’re a developer who hires a builder that ends up months behind the delivery schedule used in the investment proforma. Even if it's a timeline that you don't want to hear it's better to know on the front end. The two most common bait-and-switch techniques that builders will use to get the deal inked are schedule and allowances. Ambiguity about materials, equipment, and features can really make a buyer think that they are getting the same value for less money in a competitive-bid-scenario when, in fact, they are actually getting a significantly lesser product for more. Some of these building materials and allowance variables effect not only the value, but the integrity, longevity, and resale value of the asset as well.
When it comes to custom home construction there are multitudes of builders that will lowball a projected cost of construction or construction estimate just to get the job into contract. Once the project is in contract every allowance reconciled above the impractical budget is considered a change order which is typically subjected to an amplified percentage or profit margin by the builder (Often +20%). That's bad enough in itself but to us the worst part is that the project owner cannot build the project that they thought they were going to get without going tens-of-thousands-of-dollars over budget which all too often means that these “dream home builders” are actually more like dream killers projecting financial distress onto project owners. Though there are multiple scenarios that can be a factor in an unfortunate build experience like this here are some considerations to make in your interview process and some contractual cues to look out for in your builder.
The list of scenarios goes on and on and on... These builders are what we like to call the “bait-and-switch builders.” They bait you with a great price then they provide you with sub-par products and services. You can surely “upgrade” to better products and services but then you’ll have to pay a hefty change order fee as well as costly charges for the upgrades that you had initially expected to be included. This is where many builders make their money while taking yours and sadly it is what most “big-box-builders” do as a standard industry practice while accumulating enough resources to develop “defense teams” to defend their suspect behaviors which often leave their client's with a bad overall life experience.
We believe that it’s not right to be surprised with too many extra costs outside of uncontrollable commodities markets volatility (inflation / deflation) later in the building process, yet so many builders do it and think nothing of it. Be smart, don’t become a statistic. Building a home should be a creative process that you can enjoy! In construction, a bait-and-switch is very easy to do. There are so many different materials and products that go into a project. If your contractor decides to substitute something with a lower priced alternative like CDX plywood for OSB plywood, how are you to know? And what about when the guy that sells himself as a reputable contractor, and then, once the contract is signed, you never see him again because he was just a salesman who doesn’t actually understand construction outside of the sales process and you find yourself dealing with someone else entirely whom you don't like? These bait-and-switches happen all the time and all these bait-and-switches have a common characteristic; They leave you as a project owner with some kind of expectation during the contract negotiations that the contractor knows won’t be met in the construction process but proceeds regardless rather than displaying a degree of transparency.
We warn people all the time about the parallels of price shopping and the issues we see with the competitive-bid-process compared to the design-build process. The construction industry is like no other in the variation of products that can go into a build. We get people constantly who come in with a quote from another builder and we send them back to the builder that gave the quote to them with a list of all the items that “NEED” to be included in order to finish the project within a contracted timeline to their aesthetic expectations and the price would double. This industry has always been clever though. The oldest tool for bait-and-switch pricing is the allowances. Allowances are a great tool in design-build process as a budgeting framework but unfortunately many builders use them to bait the project owner for contractual purposes in multiple allocations and then they use the switch tactic to back the project owner into a financial corner and empty out their pockets constituting, “the hold up.” To us, this is simply a contractual form of robbery and these individuals lack integrity.
It is absolutely normal in a construction contract to have a handful of allowances for finishes. Simply put this is a number put into the contract (included in the price) for some items that have not been completely settled on yet. However, the allowance numbers used should reflect the project owners expectations and or set the project owner to the reality of what they can acquire for said allowance prior to contractual engagement. How would you really feel about a price provided to you to build your entire house where everything is set as an allowance? Site work, masonry, framing, appliances, flooring, drywall, paint, etc. Then you go to your bank, get a construction loan for the contracted amount, dial in your finances and your life accordingly, but then in order to actually get the house finished you get bombarded with change orders or reconciliations against the allowances set by the builder for an additional 30% of the loan value. Don’t Laugh! This is happening every single day now on a massive scale. The good news is that your dream house is being built, the bad news is that you don’t get the keys until you pay for all of the change orders in full. Suddenly the builder who gave you an estimate including everything you wanted that was 10% higher is not looking so much like he was trying to stick it to you after all. With this higher level of financial awareness beginning to develop within you in regards to the construction industry perhaps the next time that you see a construction project stop or stall you'll ask yourself; What’s the hold up? from a different level of perception.
There are two primary reasons for the bait-and-switch builders. The first is simply that most of the builders in the industry today are not actually builders by trade and or by experience, and they have no idea how to estimate a project properly and thoroughly simply because they’ve never actually physically constructed anything and they don’t know what actually goes into a project in regards to both labor and materials. They simply put the numbers provided to them by subcontractors on a spreadsheet, add their general conditions and profit margins, sign a contract and then issue orders to the subcontractors in the form of texts and emails.
The second is that a builder can get more clients in contract by saying that the price is lower than possible and that the project can be done sooner than possible. In this instance once the builder has the project owner in contract and has started the project it becomes cheaper for the project owner to then complete the project with the bait-and-switch builder than it is for the project owner to fire the builder, go through legal, stall or stop the project, pay for legal, pay interest to have the project sit through legal and then pay another builder a higher sum to then complete the project assuming liability for the previous builder while fixing the issues that the previous builder had left in their wake. Though some people may perceive this as an absurd concept and business practice there are many builders to whom this is just business as usual and this is the number one reason why cost plus contracts should always be outlined, negotiated, and contracted very thoroughly with an AIA Contract.
My advice to every project owner; big and small comes in a few suggestions.
1 - Do your own due diligence on the builders' work. Personally go and walk projects that the builder has completed and meet with multiple past clients of theirs. Check the local permitting division and make sure that the projects you’re walking and the client’s that you’re meeting are actual clients of the builder. Building is a long process and this process is very relationship based. If the builder has a good reputation their clients will speak for them.
2 - Do your own due diligence on your allowances and don’t leave anything as a “wildcard” to work out later. Request your materials take offs from your builder and go to their recommended materials showrooms and meet with their sales representatives to ensure that your allowances figures will cover the costs of the materials finishes that you are envisioning and then have your builder adjust the allowances accordingly within your contract to see the true costs of your project up front. Take the time to do this early on in the design process and you’ll save yourself a lot of financial disappointment and hardship later.
3 - Do your research on the subcontractors that your general contractor has lined up to perform the work on your project and understand that they are the ones that are actually building your project. Sure, a builder can get a painter off of Craigslist to submit a proposal to paint your house or a framer to frame your house but is that the subcontractor you want? Does this subcontractor have the team necessary to perform the task and is this subcontractor actually qualified to perform the work to the level of quality you are looking for in your finished product? A general contractors build team is like a sports team and if you pick a team with a lot of bad players you are going to leave the game having gotten your a** kicked!
4 - Take the time to go through the design-build process and establish your expectations contractually with an AIA construction contract rather than engaging in a competitive-bid-process where you yourself are just looking for the cheapest-bid-builder under the delusion that all builders are the same as if all athletes are the same. We're not. Building and all the trades are an art form. You’re not necessarily just paying the guy on the corner and getting Rembrant. You’ll typically get what you pay for in the construction industry if and only if you outline your expectations in contractual agreement. If you fail to outline your terms for time with clauses for schedule and expectations for finishes you leave them open to perceptual interpretation and there’s no telling what your perceptions are and what your agenda is compared to your builders.