I was recently on LinkedIn and noticed a question in one of the group forums asking readers to identify the biggest problem facing construction businesses today. The answers ranged from finding quality employees to wanting more control over project documents. One theme, however, seemed to dominate the thread. Intense bidding competition is driving prices so low that contractors cannot both make a profit and perform quality work.
While this isn’t a new problem, economic conditions have made the playing field more competitive. Contractors have to adapt to these conditions, but that doesn’t necessarily mean that they have to win every low-bid battle. Every contractor should, however, re-evaluate their overall bidding strategy and should realize the degree to which this strategy reflects and reinforces their business strategy and long term goals.
The Short Run: Profitability and Market Share
Construction companies who routinely submit the lowest cost bids may simply be more efficient, counting on lower labor and overhead costs to help them walk away with a profit. But in today’s hyper-competitive market, contractors with any significant amount of inefficiency in their operations are likely not in business. Efficiency is now more of an expectation, not a competitive advantage.
Many times the contractor who is the regular low bidder is the one looking to roll the dice on short term profit. That isn’t to say they are looking to cut corners or do shabby work. They are hoping that all will go to plan with schedules, equipment, the weather, etc. They put the squeeze on their subs and vendors for the best prices possible, delay payments to keep cash in the bank. In short, they “walk a margin high wire” on most every job. If they have “great balance” (i.e., outstanding job performance and luck), then walking this high wire can pay off. If not, well, the fall can be painful.
Another take on this is that contractors who regularly bid low may be looking to quickly gain market share. These construction companies usually have deep pockets that can sustain losses on jobs with the idea that they’ll get a big enough share of the market to make a bigger profit later on. The downside to this is that clients get used to the low bids, so they may run into trouble as the market turns around and they want to increase prices.
The Long Run: Fewer Projects, Sustained Growth
When I took economics in college, my professor often said, “It’s all about the long run.” Contractors who are looking for steady, sustainable growth and the benefits of repeat clients are usually focused on the long-run. Their bids typically come in higher than others’ because they build in higher quality and larger profits into their estimates. Because they won’t win as much work, they have to make sure the work they win makes money.
Nevertheless, even in a price sensitive market, these contractors do win work. We all have examples from our own experiences as consumers where we will pay a premium for a product or service. Sometimes it’s because of a particular quality or feature, but often it’s because of simple loyalty to the brand. We come to trust the vendor, and trust is one thing that will never become commoditized – it always carries great value. Contractors who nurture their brand with loyal repeat customers over the long term can offer that intangible that can’t be included as a line item on a bid.
So, What is a “Good” Bid?
What you consider to be a good bid depends on the goals of your construction business and how you choose to manage it. In general, a good bid is like a good negotiation –both parties leave the table (or construction project) as a winner. That usually means taking other factors beyond price into consideration, such as quality, materials, customer service, cost saving measures, and relationships. How you bid also affects your sub-contractor and vendor relationships. If you squeeze them for every project, will you have their cooperation and loyalty in the future? There isn’t necessarily one right way to bid, but the processes and practices you implement at the beginning of a job are not only carried out throughout the duration of the job, but also through your construction company and its reputation.
What’s your bidding philosophy? Is this in line with your business philosophy?