Competition is an integral part of every market. Even companies who enjoy contracts without competitive bidding must be able to prove that they represent market value. In simplest terms market value is the “going rate” for a given project as defined by the winning bid total for similar work. The more a project has in common with past work in that area, the more tightly defined that going rate will be.
It’s very tempting to assume a project will have a consistent and predictable budget regardless of where or when it’s built. Local competition can substantially raise or lower the project cost considerably. Timing is critical as well because firms desperate for work bid differently than firms that are really busy. All costs in business are tied to supply and demand. Competition is the over-arching action that defines how everything comes together on one specific job.
Let’s get one thing out-of-the-way right from the start. Companies are not only motivated by profit. For example a company might be bidding a job they don’t really want because they want to maintain a relationship with a client or design team. In other cases a company might be more concerned with keeping a competitor from winning work with a good client.
Some competitors have more… primal motivations.
Some companies bid work they don’t want to appear relevant on the market. Other companies bid unfamiliar work they don’t want as “practice” in order to learn more about the market, the work, and the client. These motivations change for each company whenever they’re; busy, slow, expanding, or contracting.
If you’re ever over-run with bids for a given scope of work you’ll likely notice that the bids will conform to a normal statistical distribution which looks like a bell when graphed. The “bell curve” essentially puts the bulk of any data set into the middle with lesser and lesser outliers the further you get from that midpoint value. Simply put, you’ll see that the majority of the bidders agree on the project value. Bidders that are significantly higher or lower are often outliers for a reason. Estimators often forget that small data sets like 3-4 bidders per trade are insufficient to draw broad conclusions from. I’ve encountered projects with thirty bidders per trade where it’s much more apparent what’s really going on.
Bidders with similar economic drivers and motivations will stratify relative to the project value. In practical terms this means that an estimator might receive six bids which form two clusters around different bid values. What this may be telling the estimator is that the lower price group (assuming they include the full scope) is better suited to (or more interested in) the work. General Contractors (GC’s) who don’t tailor their bid list to the work being bid can often be surprised by what appears to be an outlier which is in fact, merely a market-leading subcontractor for that particular type of project.
Relationships are great but the one-size-fits-all view of bid lists only works when you’re looking at similar work all the time. It’s not enough to broadly categorize the work according to building function, the estimator needs to notice how the bidders scope changes on each project. For example, a GC might have built a chain of restaurants with an established team. Chasing a different restaurant chain might seem like a simple transition. However your “old-reliable” masonry subcontractor might look at the new project and notice that the new chain has got 1/10th the amount of work as the old chain’s design. They may not be able to pay their bills charging the same square foot cost for that work because it’s too small. Inviting a smaller company that’s more aligned with the new scope of work will mean lower subcontractor bids.
Some really great companies are very reluctant to admit this basic necessity is critical to winning competitive bidding because they’re afraid to risk working with a small firm.
“Yup, he’s terrifying”
Of course small projects are worth less meaning the risk is naturally reduced, but if these folks thought it through, they’d come to that conclusion themselves!
Conversely, bigger work demands more resources to meet expectations. Even the most stalwart and reliable firms struggle to succeed when overloaded. The smarter of those smaller firms will price big work accordingly. Lacking the resources to handle big work, these firms must plan on renting equipment and hiring temporary workers at high wage premiums. The “little guy with low overhead” is a high bidder compared to market-leading firms of the appropriate size.
Life isn’t fair
Competitive bidding can be discouraging because much of what goes into a win or a loss is concealed from your desk. As a GC bidding, you’ll often know where the competitors numbers came in but how they got there is a function of interpolation, guessing, and investigation. GC’s that chase “public” bids which have no barrier-to-entry for competing firms often assume the solution to all their problems is “more subcontractor coverage”. In reality the subcontractor bids they really need, are the market leaders. Market-leaders can pick and choose who they’d rather bid to. Brute force “get everyone to bid” tactics are common among companies that are out of good ideas. Conversely, companies that are forthright, communicative, and honest tend to attract more than their share of attention. I once doubled the amount of subcontractor quotes I was receiving through a policy of posting bid results within 24 hours of hearing that I’d lost a bid. It actually took less time than answering the innumerable phone calls asking for results AND it proved to the bidders that I wasn’t hiding anything.
Subcontractors struggle terrifically to get honest answers out of GC’s so they rely on the “grapevine” to know what’s really going on. Communication patterns between material reps and subcontractors are noticed, and distributors are alerted. The entire supply chain becomes a feedback channel that’s impressive for its speed and accuracy. A word of caution to all involved. Relationships drive what happens with that information. Life isn’t fair so you’ve got to learn how the relationships involved will affect your odds of keeping a job you might have won. In fact, those odds might be better viewed as a risk. If your number wins on bid day but your competitor gets the contract, you’re not competing on a viable opportunity. Bidding to a bid-shopping GC establishes the bounds of contract negotiation for the conspirators. The only way to stop bid shopping is for subcontractors to refuse to go along. Losing work to bid shopping is an added risk to bidding to those GC’s. Since estimating is about controlling risk, the obvious solution is to pursue GC’s who don’t cheat.
The lay of the land
Competition is influenced by the overall conditions of the local market. For example, public projects might be led by committee which can lead to mixed messages, contradictory priorities, and onerous funding requirements. Imagine how difficult the Architects task becomes in this situation. Making it worse, many municipalities require competitive bidding on the design services. This can lead to design professionals being obligated to endless committee-driven changes that have consumed far more hours than they’d originally bid.
By the time these projects are labeled “100% Bid documents”, the result is often far from the case. Public work projects are notorious for extensive Addenda during the bid as the design team scrambles to get everything in before the bidders deadline.
As bidders, the estimators must contend with a rapidly changing set of plans with a rigid deadline. Mistakes are much more likely, and municipal contracts are very one-sided.
“Read between the lines, it’s definitely one sided …”
Bidding these projects can be very difficult which influences how the market will respond. If there are plenty of other projects that GC’s can be bidding on, the public work may suffer from a shortage of interest. Conversely, when everything else “dries up” the GC’s in the area might mob every publicly funded bid-letting.
Higher competition coupled with a weak design increases the pressure on every GC to refine their price. It can be very difficult to be thorough and accurate while remaining competitive.
The lowlands of short-cuts and cutthroats
Some GC’s don’t consult with subcontractors about their scope at all during the bid. Some of them won’t answer their phones or email at all before the deadline. Most of the bid-shoppers I’ve encountered have no questions at all until AFTER their bid. Any mistake in their favor is the subcontractors problem to solve. Their contracts are very specific about items they didn’t ask about at bid time.
Unscrupulous GC’s may simply add up the low bidders along with their direct costs and submit that total “without fee”. These GC’s count on bid-shopping, and sharp dealing on change orders to claw their way back to profitability. Market’s rife with these competitors drive out legitimate firms. Over time, the market decays because their “going rate” of work is preventing subcontractors from paying their bills. It’s a tell-tale sign when a local GC’s are building in their city with out-of-town subcontractors. They burned the local subs until they were forced to chase work elsewhere. Is it any wonder there’s a shortage of skilled tradesman?
Eventually it becomes everyone’s problem.
The highlands of performance and professionalism
Some clients maintain exclusive bid lists of only the best GC’s. Wanting the best and being willing to pay for it, these clients also ensure that their design teams are at the top of their game. Competition at this level has different motivations because performance is more important than price.
GC’s at this level can’t afford to work with risky subcontractors. Therefore it can be an arduous journey for a subcontractor to become an approved bidder. There’s no substitute for knowing your business, and these GC’s will make you prove yourself in many ways. Expect lots of questions, interviews, meetings, and financial reviews as part of their standard procedure. In my experience, these firms are quick to answer your questions, and they are exceedingly careful to maintain a fair bid. The focus is on best value, not low price.
Tricky, complex, or weaseling bid proposals tend to discourage their trust in your firms abilities. Subcontractors should focus on providing proposals that offer a firm commitment to the work described, for the price listed. Working for these GC’s reduces complexity and risk making their work more profitable to the market-leading subcontractor. Subcontractors working for these GC’s often find its remarkably profitable.
Be advised that failure is punished swiftly and soundly. These GC’s can’t afford to let a subcontractor’s performance affect their standing in this rarefied market. It’s therefore important for aspirational subcontractors to meter their commitments according to their current abilities. It’s better to decline an invitation to bid than to be over-committed. In many way’s it’s impressive how the “going rate” for these projects is remarkably reasonable considering the level of service they receive. Competing on the basis of performance has that effect.
Some clients elect to enter a negotiated agreement with the GC which commits to contracting with the GC exclusively in exchange for “open book” estimating. This means that the client reviews the GC’s estimate and subcontractor proposals prior to approval of the bid amount. A typical requirement is “three or more” bidders per trade to provide some measure of proof that market value pricing has been achieved. GC’s in this position might have a short-list of 3-4 bidders per trade to offer market leading subcontractors reduced competition on their project. This incentive quickly loses its luster when GC’s subject their bidders to endless pricing revisions driven by the GC’s reluctance to select the winning team until the client approves the budget.
The GC’s are attempting to keep prices in line by maintaining competitive bidding. The assumption is that competing against their peers is a greater motivation for fair pricing than helping the GC to close the deal with their client. The invitation to bid is a commitment to contract with the lowest bid, or best value bid submitted by the deadline. Once best value bidder has been established according to the construction documents at bid time, GC’s should hold up their end of the bargain and work with that bidder until a subcontract can be written.
Alternately the GC could consider the bid a “loss” because the bid exceeded the clients budget. GC’s should provide prompt bid results, and inform all bidders that the project will be re-bid once the design has been sufficiently revised to achieve the clients budget. Estimates are not free, showing respect and transparency to the bidders makes their investment in the GC worthwhile.
Interview to bid anew
There are firms who make it a point to interview the “low bidders” in each trade before deciding on who to contract with. On the surface, this appears to be a final check on the estimators work before committing to a significant contract. The difference quickly comes to light when a Project Manager (PM) feigns confusion on the scope, and the bidders proposal in order to create a false opportunity to demand that the subcontractors revise their bid for a final and best proposal.
“I’m gonna need you to sharpen your pencil on this one”
This whole performance is repeated for everyone including the bidder who legitimately won the job. Particularly rude operators make sure to schedule the meetings so competitors will see one another in the lobby. Market leaders are rewarded with a blunt and brutal proposition; cut your bid or risk the job being taken away. These PM’s are trying to create their own “final round” where all savings go into the GC’s pocket. It’s unethical, short-sighted, and the firms turning a blind eye to it are just as guilty as the PM. GC’s quickly gain a reputation for this practice and subcontractors respond by padding bids to them. After all, if you’re going to be “invited” to cut your number if they win, why give them your best number on bid day?
GC’s who have their PM’s bidding their own projects might notice how the market rewards honest professionals with best-value bids. PM’s who start off with really profitable jobs before having a long losing streak on the bid-board may be living with the consequences of their actions.
“I admit nothing.”
What’s the going rate, and where is it headed?
Tight market conditions can lead to an impressive degree of consistency in project pricing. GC’s with consistent project types tend to be especially competitive at similar work. Established project teams with longstanding relationships can be especially efficient, allowing those GC’s to bid with less overhead. It’s easily overlooked, but GC’s with regular clients often spend less money on marketing or even bidding because they can maintain steady revenue. They have every incentive to make the work unprofitable for any interlopers making salvos into their sandbox. These GC’s get known for doing all the work with those clients. Subcontractors can’t afford to bid to GC’s that don’t win. Front-runner GC’s are better investments of their time even if they will face stronger subcontractor competition as a result.
When the build team is especially tight, a GC’s subcontractors might order their material immediately on project award because they know from repeated experience that the design team will approve their submittals. In many cases this can gain precious time on long-lead items that would otherwise be delayed by a month or more due to the formal approval process. GC’s who know they’ve gained a month or more on the long lead items can build the job faster, thereby reducing their overhead.
The GC’s competitors are stuck with longer schedule durations, higher costs, and greater overhead because they lack that build-team inertia. Building that momentum is a function of fair-dealing, good organization, and a strong grasp on the going rate. Competing against these firms is a bit like stepping into the ring with a black belt.
Pick your battles is what I’m saying
They put in the time, energy, and commitment to their craft to become experts at defending their turf. It won’t be pried away easily.
Delivering market value pricing while maintaining profitability is a balancing act. Knowing, really knowing what drives the project cost reduces uncertainty. Checking your results against the going rate tells you where you need to be. Sometimes that means shifting to a different market, a different level of competition, or simply aligning your allies with bid opportunities that maximize your strengths. Competitors are facing the same conditions as you. It’s very satisfying to just beat a real competitor on a profitable job.
Knowledge is power AND responsibility.
There are lots of clients out there working exclusively with a GC they’ve done business with for years. Every company hopes to land such a loyal client. Over the years the GC learns to fill in gaps and smooth over shortcomings in the design to ensure the client is always happy. That costs money. Over time that money get’s added to the proposals one way or another. The distance from a competitive hard-bid market price to what the client is seeing grows.
Hard-bidding GC’s will default to the construction documents only. Design teams that were sheltered from the change orders they caused may be caught flat-footed when they must make changes after the contract. The total build cost may end up higher than “old faithful” but it may take a client a few fiscal quarters to actually see that difference on their ledgers.
Estimators must strive to retain the client by offering outstanding value and an excellent build experience. Obviously this means the build team needs to be equipped to address the design shortcomings without resorting to predictable change orders. Cost-driving design decisions need to be handed during the bid. Offering approximate cost impacts of the most reasonable solutions to the design team can greatly expedite decision-making.
A word of caution. Any price that’s given will be remembered and pulled out whenever it’s helpful to them. These prices become a legacy you’ll be dealing with forever more.
“We’ve been trying to decide between this ceiling tile and that ceiling tile for this mop closet for several months. What’s the price difference?”
You think to yourself; this mop closet has maybe four tiles in it, I need them to make a decision so I’ll hazard a guess since it can’t cost more than a few bucks on this job.
“Oh I’d guess you’re looking at a fifty cent per tile difference for that.”
Three months later you’re bidding a different job with 53,000 square feet of the more expensive tile and they want to know why it blew their budget!
We wrote “doing the impossible” into your contract so….
The lesson here is that a GC striving to do the best for their steady client must keep a wary eye on the developing opportunity for a competitor. Who may knock the clients’ door down with their market-leading pricing. It’s a balancing act, but GC’s with regular clients can develop strong subcontractor teams that are unbeatable values inside and outside the negotiated agreement.
Estimators should keep some hard-bidding work in their repertoire to stay sharp and informed. If you can’t profitably win hard-bids, you need to dig in and figure out why. Markets can shift with incredible speed so knowing what’s going on is critical to steering the right course.
Media, realtor, and trade reports on market conditions can vary in accuracy and timeliness. Local markets with GC’s and subcontractors filing for bankruptcy can still be written up as hotbeds of commercial Real Estate activity. Large chain stores may bring in traveling construction teams. Lots of stuff may get built in your back yard without ever appearing on your bid list.
Developers don’t buy land then hire an architect. By the time the property sale is reported in a Real Estate Journal, the Developers GC is already breaking ground. Planning is in the works for months if not years. Knowing what’s going on at that level takes a lot of networking and communication.
You guy’s staying busy?
Every job walk includes that fateful phrase. The responses vary depending on who’s talking and what’s at stake. Direct competitors tend to be less forthright and more posturing in their responses. Subcontractors’ may be loath to sound “too busy” to a GC who’s shortlisted them on a bid. So again, accuracy is unlikely. Savvy GC’s may take the job walk banter as an opportunity to share which GC’s won previous jobs. They might in turn discover that they faced discrete competition who reached out to subcontractors at the walk. Often bid awards get hung up in negotiations. GC’s comparing notes with Subcontractors might arrive at the full story. Valuable market feedback is exchanged. GC’s who provide prompt and accurate bid results are often rewarded with subcontractors who are more forthcoming with their knowledge. Stiff, formal, and dictatorial job walks lead to cautious subcontractor huddles that exclude the GC. Sometimes job walks reveal more about the market than the project.
Put it all to work
Estimators should strive to pull together all the bits and pieces they can to stay informed. Wherever possible, try to do a bit of good. Competition can reveal character, seize the opportunity to shape your corner of the world with integrity and professionalism. It’s a wonderful experience to win a job that way.
Savor the moment.
For more articles like this click here
© Anton Takken 2015 all rights reserved