The various personalities that come together in the market have remarkably different philosophies when it comes to bidding. Broadly speaking I have found three prevalent schools of thought and some work considerably better than others.
Some firms are constantly pushing out bids for short notice, limited scope, high competition, and low profit work. They never seem to win anything so they attempt to make it up by bidding more often. I call such firms “bid mills” because it’s endless grinding out bids without any concern for winning or losing.
These bidders aren’t sophisticated, they do the same thing over and over again because survival is their only goal. This mindset carries beyond just mindlessly chasing whatever is in front of them.
Eddie chases things too, but he doesn’t win much work.
If you always do what you did, you’ll always get what you got.
Often they become hostile with subcontractors that are reluctant to bid to them. They adopt a mindset wherein opportunity is a top down proposition and can be lorded over those who work for you. It’s unfortunate because the opportunity only exists if they win. It never dawns on these folks to reply with “you may want to reconsider – we’ve won X amount of work last quarter and we’re gearing up for the summer rush”. They bid for survival so they view every invite as a lifeline. Essentially they have nothing to offer beyond shared survival.
Lots of firms start out with a similar mindset. They believe that it’s a simple matter to just “win whatever” then build it profitably with folks they hire once there is work for them. The “plan” relies entirely on luck and growth to return a profit.
They will likely discover that they need to include more overhead to deliver quality work AFTER they win a job. Then they will want to add more overhead to the next bid, so they’ll lose. They won’t be winning enough work so they will want to bid more jobs and so the bid mill is open for business!
These folks live in a state of constant disappointment going from week to week or job to job hoping for a big break. It’s depressing to think how long some companies have been doing this.
It ain’t gonna happen buddy…just let it go
Sow before you reap
There’s another group I call Farmers. These folks have a very short client list, sometimes only one or two. They tailor their operation to please their client(s) and they rely upon the work they’re given for their survival. Farmers are as good as their client. In most cases Farmers with good clients are relying on relationships built over long periods of time. Establishing those relationships is incredibly difficult. In most of the cases I’ve seen, it’s some combination of being in the right place at the right time and doing a good job. It’s pretty easy to know when you’ve found a farmer with a good client because they don’t try particularly hard to announce their existence. They get known for doing whatever they’re good at and subcontractors flock to them. Farmers like this are generally very risk averse so they’re not as focused on low bid as they are on perfect performance. They’re also some of the happiest people you’ll meet, it’s a good life if you can get it.
That’s not fertilizer I smell…
Farmers with bad clients are as pitiful and dangerous as an abused dog. They flinch every time their client rattles the chain, and they pass every abuse down the line. There’s a national grocery chain that used to conduct “reverse auctions” that’s a prime example of this. A reverse auction has all the bidding contractors submit their bid to a website by a deadline. A moment after the deadline, the website posts the current low bid amount along with a countdown timer for the amount of time you have to revise your number. It depends on the conditions set by the client but I’ve encountered such bids where you must cut a minimum percentage of the low number in order to revise your bid amount. Some display all the bidders, some just show the low number. If they only share the low number, you don’t necessarily know that you’ll stay the low bidder. Even worse, some of these systems keep updating the timer to prolong the bid for as long as people are cutting their bids (hurting themselves). Some go for hours.
There’s no pot of gold at the end of that particular rainbow…
It should go without saying that the countdowns don’t allow sufficient time to contact subcontractors to ask for better pricing, or to consult with anyone. GC’s have certainly cut beyond the lowest number they could achieve on bid day. Where’s that money going to come from? It will come out of the subcontractors pockets one way or the other because the farmer with a bad client can’t/won’t get work elsewhere.
The last group I’d identify are targeted bidders. These companies are very selective about what they will bid because they know that bidding less means winning more. They don’t chase low profit work, bad clients, or pick fights with farmers. Targeted bidders generally have more success and less relevant competition because they started by defining where the profitable work is in the marketplace. Next they establish a plan to become qualified bidders for that work. Essentially targeted bidders are “working backwards” in that they start by picking the best work they can find, then they lay a plan to address all the requirements to get there. They may very well have to start at the bottom like everyone else, but they don’t stay there for as long.
It’s not enough to win and build the work. To be a strategic move, those first projects must be the foundations of a reputation for excellence. To clients, this means doing the right thing without generating lots of “static” in the process. Smoothly run work is noteworthy work. To the subs, this means prompt and fair payment. Insulating the subs from unfair clients/design teams is a strategic investment in the GC’s reputation. Rewarding good work and constantly keeping an eye out for new talent is how a GC can keep their subcontractor bids low.
Once the GC has a reputation for winning – they can call in loyal subs and offer strategic partnerships in exchange for better pricing. Giving a sub no or limited competition (1 or 2 other bidders) greatly increases their odds of winning with that GC. Asking for better sub pricing in exchange for reducing their risk is a fair deal. Using this advantage to further their plan is how this GC works towards their goals. Until the GC has hit their target market, they use this pricing advantage to snag better work in line with their intended outcome rather than consume it as available profit. The very best work will have elite competition backed with extensive experience. Gaining a foothold in their market will not be easy. Long term commitments to staying “lean and mean” are necessary for success. However, once established, these firms are able to capitalize on their pricing advantages to an incredible extent.
How do you like me now?
A survey of the field…
I can tell you that there are very few target bidders on the market. Some of them do really small work but they’re always profitable. That’s an important point, it’s not about having huge capital behind you, it’s about knowing what you’re good at, scanning the field, picking a worthy target, and applying your resources to make it successful. Companies that do that are consistently at the top of their game.
Farmers are a little more common. A bad economy is especially tough on good farmers because they struggle with how to scale back their operation to compete profitably on the hard bid market. They’re also relatively unknown to the hardscrabble subs who are offering market pricing. They also fall into traps with bad clients because they’re entire mindset is on cherishing a single client rather than appraising them more critically. Farmers with bad clients in a recession are in a perfect storm of misery, subcontractors should beware. It’s not unheard of for such farmers to put one subcontractor out of business for each project they complete!
Know what your good at and go where it pays.
There’s never an end to the bid mills, they’re just the lowest common denominator wherever they reside. It’s really hard to tell someone at the bottom that they should be a picky bidder. These guy’s all believe the “big job” is going to come along and it’ll be a gold rush for them. Lots of gold prospectors died broke while grizzly’s got fat swatting salmon out of the same river.
“Prospector’s are tasty”
There is a pervasive and loathsome notion going around that I should address. The idea is to bid the first projects of the year with enough overhead to cover all work for the remainder of the year, after which bidding becomes “gravy” since any wins thereafter are presumably “all profit”. This is the sort of stupidity that can only come from collegiate isolation. In practice this can create an “unforced error” where 1st quarter projects can fail to materialize as expected leaving everything awarded through 2nd quarter bidding underfunded. Lots of companies have found themselves in dire straits because they failed to make every job pay for itself. Overpricing work is a great way to lose bids and very few Project Managers will run a padded job with the restraint they’d have on a tight budget.
It seems like common sense but I’ll state it anyway. Overpricing work is not building relationships, honoring the client, or furthering the profession. Good value, honesty, integrity, and knowledge are all reasons a business will succeed. Getting away with harebrained schemes when clients are fat, dumb, and happy won’t count for much when times are tight. Whatever works during a recession will work in times of prosperity.
The connections between the bidding and the corporate philosophies are important. There are firms with estimators who are bid milling and project managers who are farming. This “crop dusting” technique results in a lot of low-budget clients getting high level service at the cost of the GC and their subs. If the client is obligated to hard bid all their work (i.e. municipal work) then there is no chance of negotiated work in the future. Basically the farmer is planting weeds.
Firms with misaligned priorities will find themselves in unpredictable situations. Estimators must be careful to observe what’s going on and advise to correct course accordingly. Strategic investments are only realistic when everyone understands the strategy. Many firms fail to properly develop and communicate their strategy in finite terms to everyone involved. General platitudes dissolve into messages like: “do this, for money” . Even small firms can fall into patterns of cloistered communication. If the person doing the takeoffs doesn’t know why this project is worth bidding it’s not realistic to expect their best effort when the work is thankless.
Why we’re all here
There’s an old parable about a Bishop inspecting a Cathedral under construction. The Bishop asked a Mason what he was doing – “Laying out this archway” replied the Mason. The Bishop asked an Architect what he was doing – “Designing this buttress” replied the Architect. Finally the Bishop asked a laborer pushing a wheelbarrow loaded with trash what he was doing – “Building a cathedral” he replied.
Bid with purpose and professionalism so that others will follow.
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© Anton Takken 2014 all rights reserved