Browse the Dodge Report and submit a competitive bid, to acquire any work that is available. Simple. For many years this was standard operating procedure in the construction industry. Selecting the lowest qualified bidder was mandated by regulation for most public work. Private project owners saw the wisdom in buy low and sell high, so they followed suit.
Until the 1980s, the low bid acquisition method was considered fair play since we had plenty of wiggle room when margins were much higher. But nothing in the construction industry is as permanent as change. Margins began to shrink dramatically as the latter portion of the 20th century turned into the 21st century. The Savings and Loan collapse, the mortgage meltdown, Covid-19, supply chain kinks, and the commodity pricing trend all conspired to shrink margins to the perilously low single digits.
Aggressive competitive low bid competition became almost an act of hara-kiri. It was like contractors were being slowly put out of business. One losing job seemed to follow another, driven by the need for cash flow to finance low profits jobs that were just wrapping up. Some contractors were forced to change the way they did business to survive. And some did not survive because once caught in the low-bid vortex, there was no way out. The failure rate in the construction industry soared to the highest it had ever been, second only to restaurants.
No Way In
Every time I point out the fallacy of aggressive low-bid acquisition, some start-up contractor would complain, “If I don’t bid low, I won’t get any work! It is the only way to get into the contracting business.”
Success Formula
Most contractors, of course, don’t fail. The question from the large number that do fail every year is, “How did those contractors succeed?” The answer that 30 years of research into the construction industry revealed is quite simple but not obvious to the casual observer:
– Build a Reputation by Always Doing Quality Work –
From a contractor’s first job to their last, their number one priority should be protecting their reputation for quality, dependability and honesty so that they never have to chase the next job. It will chase them. The success formula is simple:
Success = Reputation
- Owners and designers are increasingly engaging with reputable contractors through various alternative contraction arrangements rather than contracting with the lowest bidder.
- General contractors always invite their favorite subs to submit estimates.
- Reputation is the primary factor for getting on preferred bid lists.
Getting There
Startup contractors always ask me the following:
Question: How do we get the opportunity to show the industry what we can do?
Answer: Submit the lowest bid on small jobs you know you can complete on time and on budget. Proceeding with great caution.
Question: But I thought you said low-bid acquisition was the quickest way to the bankruptcy court.
Answer: It takes a source of capital to finance a start-up and to get through the early stages of growth. Every American industry like FedEx, Amazon, Turner Broadcasting, ESPN, and Tesla all lost money for years before they reached maturity and became enormously profitable. They were only able to get over the startup hump with constant infusions of equity capital from outside stockholder funding. Construction businesses follow the same pattern without the stockholder funding. Startup contractors must take any work they can get in the beginning and not expect to make much, if any, money on these early jobs. It takes sufficient capital to establish a brand in construction just like every other industry. Contractors are doomed without a reputation (brand). It’s only a matter of time. Thus, the huge failure rate of startups and of successful contractors during excessive growth. Banks and sureties ask:
Question: Is a lack of equity capital why so many contractors fail?
Answer: Yes. The construction industry is the largest and oldest industry in the world that is still made up of businesses reluctant to sell any ownership to the public. They prefer to finance growth out of their own pocket. The problem is that growth is costly, and most pockets aren’t deep enough. The alternative is extending supplier terms, increasing bank lines of credit, and borrowing cash flow for the next job.
In short, long-term success in the construction business depends on having sufficient capital and personnel capacity to establish and maintain a brand.
Next week we’ll discuss the folly of fixed price performance contracts.
For more information on looking beyond low bid, read more at: LOW
For a broader view of the management training, read more at: FINANCING
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.
