We are discussing how unexamined beliefs about the nature and structure of the construction business transaction have had a corrosive effect on contractor profit margins for the past 50 years. The resulting standard business practices followed by all construction companies must be re-examined and adjusted if we will have any success in improving profit margins in the near future.
We Are Not Bankers
Last week we examined the automatic assumption made by all project owners that the contractor will supply all the necessary working capital to see the job through to completion. The unexamined belief that “banking” a construction project is the rightful role of the contractor has gone unchallenged for almost 100 years, yet our research into the causes of contractor failure revealed that simply “running out of money” was the primary cause of contractor failure.
The Lowest Bidder Trap
This week we’re looking at “lowest-bid acquisition”. We have already discussed at some length the origin and current legal status of awarding government work to the “lowest qualified bidder”. We have agreed that the process not only makes sense to government agencies but also seems perfectly logical in the private arena as well. Low bid acquisition, it seems, is here to stay. Start-up and growing contractors cannot avoid low-bid acquisition, so is there anything we can do to minimize its corrosive effect on profit margins?
Strategy
New and growing contractors must submit aggressive low bids to capture enough work. Therefore, the issue is not whether they should participate in low-bid acquisition, but rather how they should participate in low bid acquisition. Only a long-term strategic approach to acquisition will eventually free a contractor from the lowest bidder trap. From the very beginning, set a goal for your company to be considered the highest quality builder of a specific type of project in your region. A reputation for excellence is the key to becoming that singular “sought after” expert builder. Once the construction marketplace wants you, desperately chasing low bids is no longer necessary. You will be “selected” to submit responsible bids that assure you of a reasonable profit going forward.
Tactics
Only effective tactical maneuvers executed in the present will achieve the future strategic goal. While a young construction company is working its way through the early years of chasing work by submitting low bids, the how is more important than the what. It’s ‘how’ the company executes low-bid acquisition, not ‘that’ it does so in the first place.
The following tactical maneuvers can protect your company from “running out of money” while it builds a reputation for excellence.
- Assure that estimators are highly trained, thorough, and amply rewarded for the key role they play in company profitability.
- Never take a losing job! Never!
- Bid only on work you have successfully built in the past.
- Avoid bidding on work that is too large for your company’s financial capacity.
- Bid only local work. Resist the temptation to travel far and wide just to be sure you get the next job.
- Avoid unusual designs and complex “high-tech” projects until your company has developed the in-house expertise.
- Do not be tempted to take on a new job that is two or three times larger than anything you have completed in the past. Whether a company can make a profit on the first job that is twice the size of its previously largest job is at best unknown and at worst unlikely. Making a profit on a job three times greater than the largest previous project is close to impossible. Losing money never adds to a reputation for excellence.
- Constantly reevaluate your company’s capability after completing each project. Changes in personnel, ongoing advances in construction technology, aging of key equipment, erosion of capital on the balance sheet, and increased intensity of local competition all have a dramatic effect on your company’s current capacity for excellence.
- Never outbid incompetent competition. Let them have the work and accelerate their own demise.
- Amply reward excellent performance. Your company’s long-term reputation depends on your ability to sustain excellence. Ongoing recognition and reward are key success elements.
Not Just the Little Guy
Although I address these thoughts to “young and growing” contractors who, for the most part, are temporarily trapped in the low-bid acquisition cycle, the long-term strategy of reputation building is applicable to all construction companies, large and small. A continued dedication to excellence is a fail-safe method for success.
For more information on bid acquisitions, read more at: ACQUISITIONS
For a broader view of reputation read more at: REPUTATIONS
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
