“Getting The Work”
Quality Based Pricing
Best-in-Class Contractor Series March 17, 2021
In our 2021 Best-in-Class Contractor series we began at the beginning – signing and executing contracts. This is the stage in the construction process that most of the risk in the transaction is assumed by contractors. Mesmerized by the “low-bid” procurement method, a belief that they have no options and a bid-controlled competitive marketplace; contractors rarely consider a quality-based pricing approach. Our best-in-class CEO, however, takes a refreshingly novel approach to pricing jobs. Without hesitation during our interview, he casually laid out the five rules of quality-based pricing his firm always follows.
5 Rules of Quality Based Pricing
- “We spend a lot of time pricing our work …”
Estimating and bidding job after job is a time consuming, expensive process. As each contract proposal comes and goes, most contractors develop “boilerplate” responses that fit similar circumstances in a variety of jobs – Avoid this trap.
Each job is unique in scope, timing, and detail. Do not gloss over details to save time or money at the estimating and pricing stage. Take the time and go to the expense of pricing every job as if it is the first job your company has ever bid on. Drill down to the unique details of the owner’s wants and needs. One size does not fit all. Remember, when it comes to putting together a bid – speed kills.
- “We price what the customer wants and expects and then deliver it.”
The job description in the RFP is never enough. Some contractors gloss over details and price jobs based on their experience in the past. Our best-in-class contractor suggests that “zero based budgeting” concepts apply when pricing a job. What you did in the past is not the controlling factor when it comes to pricing the next job. Experience is certainly a good guide, but don’t let past pricing tempt you or your estimators into just “plugging in” numbers that worked in the past.
- “We NEVER let any outside influence impact pricing. ”
Our quality-based pricing approach and methodology causes us to price a job based on our estimate of the true cost of providing the owner exactly what they want, quality included, and price the job accordingly.
- “We would rather do less work than take cheap work.”
Most contractors we have talked to don’t agree. They believe they have to take some “cheap work” in order to stay competitive in the market, to sustain their sales goals, and keep their overhead covered during slow times. There is an appealing logic to this attitude until you take a look at the data. The more that contractors are tempted to take “cheap work”, the more they get. However, research shows that the inherent risk factors in construction wipe out marginal profitability most of the time. In other words, if a large percentage of the jobs you estimate are marginally profitable (2-3-4%) they will actually result in losses when all is said and done. Most contractor failure is sudden and unexpected because they have not accounted for the gradual erosion of capital that results from jobs they believed would be marginally profitable. In other words, there is no such thing in contracting as marginal profitability.
- “Keeping every customer and marketing to capture new ones provides automatic growth…which has been exponential for our company. ”
Because contracting is not a continuous process that flows seamlessly from year to year, in the minds of most contractors, customers come and go as jobs come and go. Contractors have a tendency to focus on the present job while searching for the next job and finding new customers to replace the present ones. Few contractors see their business as the provider of continuing construction services for clients in a definable marketplace of potential customers where every satisfied present customer is also the next customer. Since the industry has been plagued by a low-bid competitive atmosphere for a century, the concept of having only “satisfied customer” by satisfying every customer has never really caught on. Some think “satisfied customers” are simply those that have paid all the invoices and gone on to other matters without filing a lawsuit.
Best-in-Class Contractor – 2021
Our 2021 “Best-in-Class” contractors will no longer hungrily acquire work by bidding low for jobs that lose money just to stay busy and flow cash over bloated fixed overhead.
Our 2021 “Best-in-Class” contractors will carefully price quality work that proudly delivers the owner’s wants and needs. They will see every present customer as their next customer.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you, Tom
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