Our #1 New Year’s Resolution for 2021
“We will let “low-bid” contracts become an historical curiosity…”
A Reader’s Question
I think your 10 New Year’s resolutions are great. If the construction industry could widely and successfully implement the changes you discussed it would have an incredible effect on the industry. But I have a question about the first goal you listed: “We will let “low-bid” contracts become an historical curiosity. No reasonable business manager would bind their firm to a contract designed to squeeze every last nickel out of their profit margin.” How would you advise contractors to practically do this? Bid lists have been steadily growing and creating a buyers’ market (at least in our region, Pacific Northwest) the last 3-4 months and it only seems to be getting worse. Accordingly, I foresee 2021 being a buyers’ market and leading to more low-bid procurement, not less. Companies are getting desperate to fill backlogs to create some security for their companies so I wonder how there could be widespread abandonment of the low bid method.
To See My Answer, refer to the 35thCrisis-era Message to Contractors on this site.
This reader makes a valid point and reveals another widely held belief: “I foresee 2021 being a buyers’ market with a trend towards more low-bid procurement, not less. Many construction organizations are getting desperate to fill backlogs to create some security for their companies…”
Self-destructive “low-bid” procurement will persist in construction until both owners and contractors adopt new “beliefs”. The re-education it takes to alter long-held beliefs can only be accomplished over time and in this case will likely follow something similar to these four progressive steps.
Step One – Stop the Acceptance – Take steps to change the paradigm
- The efficiency of “low-bid” contracting is a core belief held by both contractors and owners.
- Core beliefs (however erroneous) are not easily changed.
- Self-destructive low-bid contracting beliefs will persist even in an industry that is stricken by a high contractor failure rate and populated with owners plagued by over-budget, behind-schedule, and failed projects.
- Most contractors participate willingly, if not enthusiastically, in a low-bid competitive marketplace.
Step Two – Educate Owners – An educated owner is a better client to work for
Owners believe that low-bid contracts keep contractors honest, increase competition, control costs and save taxpayers money. Exhaustive Simplar research reveals that nothing could be further from the truth.
Our research findings contradict low-bid beliefs:
- In the traditional low-bid method, the odds are that owners will NOT get the best qualified contractor in 3 out of 4 cases. Not exactly good gambling odds!
- Contrary to popular belief, best-value selected contractors were more than 2% cheaper than the average low-bid market contractor. This means the owner still gets the best price while also hiring a better qualified contractor.
- Best-value selected contractors had substantially better qualifications than the low-bidder alternatives. This can be seen in owner evaluation scoring. For example, when compared against the lowest bidder, the Best-Value contractor submitted:
- Technical Proposals that were 21% higher quality.
- Schedules that were nearly 7% faster.
- Project teams that were 15% more qualified.
- Awarding contracts to the “lowest-bidder” seldom resulted in lowest over-all project cost.
Step Three – Educate Contractors– Improve the industry together
Permit me to share from my response to the reader quoted above:
“In every construction market downturn, margins suffer, and the failure rate accelerates because we do it to ourselves. Bid lists grow out of control and every project looks like the last job available, so the profit comes out of the work as contractors attempt to maintain their size (annual sales) from a shrinking market which is mathematically impossible unless half the others agree to shrink their size twice as much as necessary…In short, I cannot in good conscious support low bid construction, particularly in a declining market, even though I know the sentiment falls on deaf ears.”
Step Four – Enlist Experts
Simplar’s comprehensive approach has been utilized by organizations of all sizes and industries. Through workshops and hands-on training, Simplar’s team assists owners with implementing and mastering the most advanced procurement and project delivery practices. Expertise-driven Project Delivery (XPD) has proven to:
- Reduce schedule delays by 40-60%
- Reduce cost changes by 20 -50 %
- Increase owner satisfaction by 20 – 30 %
Patience + Persistence
Changing long-held, unexamined beliefs is a daunting task. It will take a major dose of self-awareness and a willingness to learn and grow on the part of both owners and contractors. Only if they each perceive their own self-interest will they even embark on the journey. If they do, however, they will change a self-defeating practice of the construction industry.
For more information on Simplar’s Expertise-driven Project Delivery proces go to www.simplar.com.