I have railed against low bid contracting for many years as the root cause of shrinking contractor profit margins and increasing contractor failure. In principle, it is an insane way to do business (selling a product for the lowest price rather than the highest price the market will bear) but this acquisition method is woven into the fabric of the Construction industry. As one contractor responded to last week’s blog, ” I agree with everything you said. The way we do business is crazy. But this is the way construction is done in this country and if a contractor wants to participate, he/she will continue to submit competitively low bids and try to make money through efficiencies. There simply is no other way.”
Let’s Face It
I don’t have to tell you that this contractor is correct. In the real world of contracting, (as opposed to the theoretical world of ideal business practice) low-bid acquisition is here to stay until contractors can ban together (perhaps through their various Associations) to advance alternative forms of contracting like CM, Design-Build, etc. which have already been tried but unfortunately most default to some form of “low bid” execution. Individual contractors can have little impact on structural changes for the entire industry and waste little time thinking about it. They’re too busy preparing the next bid.
Don’t Be Resigned…
So, for the time being we are stuck in an industry of low-bid acquisition. To make a reasonable profit on a project with so much competitive downward pressure on the selling price has never been easy. In this modern world of commodity pricing for construction services and defaulting to change orders or disputes as a business strategy, profits continue to evaporate. This situation, however, does not mean that we should be resigned to making marginal profits or accepting the occasional “loser” project in the interest of keeping some amount of cash flow to fuel overhead already in place. “Buy high – sell low – and make it up in volume” has never worked in any industry.
Before You Sign…
It is true that we have little control over the terms in the contracts attached to our bid packages, but we do have complete control over which projects we will bid on. The first step in enhancing profit margins is taken in the “Before” phase of the “Before-During-After” journey of client engagement we discussed last week. We have the right to bid or not to bid a project, therefore project selection is the first phase of profit enhancement. If we want to make more money in 2024, we need to be more selective in the projects we take on. (See Project Selection Program on the website listed at the last page.)
Project Selection
Here are some tips developed over the years or from contractors across the country who were generous enough to share them. Hopefully they will trigger a new way of looking at your project selection process and the beliefs you bring to the process.
Never bid against incompetent competitors. Their desperation drives down rational pricing and contaminates the bid pool.
Never bid projects outside your normal geography. Your impulse to expand and grow must be tempered by your realistic evaluation of your company’s capabilities and the added costs of travel and working with unfamiliar subs and suppliers.
Never bid work outside your direct experience. There is just too much risk in estimating the job accurately or executing on budget or on time.
Always bid your specialty. Regardless of how small or inconvenient a job may be in your area of expertise and in your operating region. Never let a competitor steal your thunder.
Always consider cost inflation. Be certain that your estimates envision cost inflation out to the expected duration of the project. We too often use current prices to estimate future material costs. With margins as thin as they are, this small oversight can make the difference between profit and loss.
Always bid within your proven capacity. Potentially profitable project size is relative to the size projects you have already completed successfully. Few jobs are too small. Every job is either appropriate or inappropriate. In our business, size matters. Too many contractors have attempted projects much larger than they have experience with trying to expand more rapidly, with disastrous results.
Trust Your Gut
So many contractors have told me that just about every time they ignored their “gut feel” about a project, the project was a loser. In the privacy of your own gut, think back to the projects that you talked yourself into that ended up with serious problems or were losers. We are experienced risk takers and should always follow our gut. Our gut is the whispering voice of reason and experience sitting on our shoulder battling the forces of ego and greed. In the end, it knows best.
We will continue this discussion next week.
For a deeper look into the Project Selection Program, read more here: SELECTION
For a broader view into managing risk, read more here: RISK MANAGEMENT
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.
