Low bid acquisition has been standard operating procedure in the construction industry, and just about all small start-up contractors are forced to participate or forgo getting any work at all. However, low bid acquisition destroys any reasonable chance of making a profit. Many contractors that I have talked with over the years say that they expect to take a few losing jobs just to keep busy, cover the overhead, and keep them in line for the profitable work when it comes along. In other words, the common thinking in our industry is it’s ok to lose money now and then.
A Little Low Bid History
Low bidding was introduced into the construction industry primarily in the mid-1800s in the United States to prevent corruption and waste in public projects, with specific federal laws later mandating it. New York passed legislation establishing competitive bidding in 1847, while the Federal Highway Act required it in 1938 and later revised Title 23 USC in 1968 to mandate awarding contracts to the lowest responsive bid.
Low bid acquisition was intended to keep crooked politicians honest and to force contractors to be more efficient. However, as time passed and competitive bid acquisition became standard operating procedure in public construction projects, the crooked politicians were forgotten and the contractors inadvertently replaced them as the adversaries that must be constantly monitored.
How Did This Happen?
Forced to artificially lower their selling price, contractors began to look for ways to become more efficient that eventually devolved into “cutting corners”, “cutting quality”, “fighting with the unions to limit wages”, and “over billing”. In other words, contractors inadvertently adopted the politician’s role as “adversary”. This tension between contractors and owners persists to this day and has given birth to “construction lawyers” as enforcers of the legal performance contracts in the construction financial transaction.
Low Bid Acquisition is Losing Its Grip
I am happy to report that low bid acquisition, although still a substantial part of construction acquisition, is beginning to lose its iron grip on the industry. New forms of project acquisition in construction have evolved from the standard Design-Bid-Build (DBB), to Design-Build (DB), Construction Manager at Risk (CMAR), Integrated Project Delivery (IPD), etc.
Beyond Low Bid
- Design-Bid-Build (DBB): This is the traditional low bid method, where the owner contracts separately with a designer and then separately with a contractor after the design is complete.
- Design-Build (DB): This method gives the contractor a chance to reduce their risk by allowing them to influence the design as well as the construction of the project. DB combines the design and construction phases into a single contract with one entity.
- Construction Manager at Risk (CMAR): This method shifts all the risk on to a construction manager who is hired early in the design phase and assumes the risk for the project’s construction cost and schedule, guaranteeing a maximum price. This sometimes increases the contractor’s risk.
- Integrated Project Delivery (IPD): A collaborative project delivery approach where the owner, designer, and contractor work together from the project’s inception, sharing in the risk and rewards. This is a reasonable method for contractors and puts them in the authentic role of a construction manager rather than owner or banker of the project.
Most Business Like Process
Integrated Project Delivery (IPD), in its many forms, is a sensible, fair, and business-like arrangement for the contractor to enter into. As I have pointed out many times in the past, contractors are neither owners nor bankers and are not being paid to assume any of the risks. Because of the low bid contract acquisition system, contractors’ margins are initially too slim for them to bare all of the risks of construction or finance. IPD, attempts to place contractors in their proper financial role, and they can then assume appropriate risks with a shot at some upside if the project succeeds.
How Does a Contractor Get from Low bid Acquisition Jail to (IPD)?
REPUTATION. The only way to migrate away from having to compete for every project by submitting the lowest bid is to build a positive reputation for quality, integrity, and on time completion. Then private owners, and now even some government entities, will invite them to participate in integrated project delivery arrangements, and they can start reducing financial risk by setting their own price and participating in project upside.
Contractors can’t expect to work their way out of low bid jail if they continue to “bid low” to get the job, then “cut” their way to limit losses. Remember, reputation is the opposite of “cutting corners” and “cutting quality” and reputation is the only way to long term success.
For more information on integrated project delivery, read more at: IPD
For a broader view of alternative project delivery , read more at: ALTERNATIVE
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Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
