Subcontractor loyalty

Business is about relationships. Teamwork is critical. Building relationships. These phrases are repeated constantly in various publications, speeches, and meetings. However the mechanisms that connect these ideals to actions are left undefined. Effort thrown behind these unguided ideals can be likened to stoking a locomotive. There’s no end to the effort that engine will consume but where is the train headed?

It turns out that building on good intentions has a few notable flaws…

General Contractors (GCs) exist to be responsible for the entire contract scope. Contracts are written to make that singular entity responsible for any and all failures. We often lose sight of this fact because the vast majority of GCs reduce their risk by subcontracting portions of the project scope. This is never a 100% risk transfer for several reasons.

First, the subcontractor may fail to perform. This leaves the GC to remedy the situation at whatever cost, with whatever time remains. Replacing a subcontractor can be a devastating loss on a project.

Second, subcontractors are autonomous firms. As such, they are free to independently decide the risk versus reward relationship each opportunity presents. They can (and do) exclude scope to reduce risk.

Third, the subcontractors do not have any input on how the GC wants to divide the contract scope. More often than not, the GC makes subcontractors blindly compete on whatever portions of the scope the subcontractors decide to price. Personal choice, local tradition, and GC idiosyncrasies largely define who is “supposed to bid” what. This is hardly foolproof, even in ideal circumstances.

Fourth, Construction Documents (CDs) are a contractual instrument to be taken as a whole. If a scope requirement exists anywhere in the CDs, the GC’s contract will enforce it. Buried scope items in unlikely areas are common with shady design teams. Some specification manuals even stipulate that when facing internal conflicts in the CDs, the GC shall default to the most costly option.

“Designated nature areas must use compactable fill from the adjacent parking lot…”

That’s a tough requirement to fulfill when the only way to win the contract is by being low bidder!

Taking all of this into consideration, it’s time to reevaluate how relationships come together at the bid. Invitations to bid (ITB) are the contract instrument that GCs use to initiate a contractual exchange with the bidders they’re looking to invite. Distilled to its simplest parts, the ITB defines the who, what, when, and where’s of the project. The ITB is an open agreement for bidders to submit proposals in exchange for contractual award to the best value bidder. Best value is generally defined as the lowest bidder with the most complete scope inclusions.

Here’s where we hit upon something very significant. GCs are seeking to relieve their contractual risk by transferring scope to subcontractors. In order to do this, GC estimators must actually know what the project scope is. This can be very difficult to do especially when considering the vast specialty knowledge required in the skilled trades like the Mechanical, Electrical, and Plumbing (MEP). A common short-cut is to demand “per plans and specs” be included on all subcontractor proposals. This “puts them on the hook” for any nasty surprises buried where nobody would dig.

Driven to wits-end, Steve takes a more thorough approach to his digging…

The thought is that the GC can’t be expected to know what they’re bidding, so they must rely on subcontractors to know their scope. That’s not estimating, it’s collecting bids.

GCs control their risk via inclusions, clarifications, and exclusions. Barring subcontractors from these risk control measures is an obviously unethical action. Missing scope items are the GC’s responsibility to catch.

For example: MEP trades routinely clarify that they’re ONLY bidding per the MEP pages on the plans and specs. GC’s who’ve carefully reviewed the architectural pages looking for buried requirements can alert their bidders in advance leaving far less to chance on bid-day. GC’s who found buried requirements are in a much more reasonable position to demand scope inclusions of their bidders. They can, and absolutely should, expose these unprofessional tactics via RFI’s to the design team before the bid. Forcing the competition to include all the buried stuff via the Architects response to bidders allows responsible bidders to remain competitive. Plus making the design team spend time and money acknowledging their shoddy work discourages them from continuing the practice.

All of which leads to subcontractor loyalty. GCs are relying on subcontractors to deliver market leading pricing on bid day. Market value is most often determined by competitive bidding. Therefore GCs need both winners and losers to bid in order to prove they’re hitting the mark.

Savvy estimators will note the middle bid has half the lightning as the other two…

There’s always more losers than winners in competitive bidding. GCs don’t always win even when they’ve got the best bidder in the field. Statistically speaking, most of the ITB’s crossing a subcontractors desk are dead-ends. In contrast, the GC’s capacity to win is very much proportional to their ability to attract top subcontractors consistently.

I don’t think that word means what you think it means…

Looking at the market as a whole, the vast majority of GCs and subcontractors are going home empty-handed on any given hard-bid. This business relies on relationships to improve the odds of success for all involved. Many GCs view this relationship through the prism of subcontractor loyalty. They provided project leads, they’ve hired subs in the past, their firm is the one everybody wants to work with. It’s a natural extension of this to assume that any lead is a potential gold-mine to every subcontractor on the market.

Like any business, economies of scale will play a role in determining which prospects are the most viable for any given company. GCs who carry the same ITB roster from a successful $300M job, shouldn’t expect much interest for a $100K opportunity. Yet it happens all the time.

Headed the wrong way on a one way track, stoking the boiler like there’s no coming back.

Subcontractors are expected to loyally bid work they don’t want, to GCs who won’t win, lest they be cut from the rare good opportunity. GCs who knowingly waste their subs time struggle to get enough coverage to know whether their maintaining market value. These GCs rarely respond well when subcontractors decline to bid because they can’t attract bidders to replace them. Subs who stick it out with these GCs, minimize their wasted man-hours by bidding high. All this wasted effort and misinformation serves to stoke the metaphorical locomotive further from the destination.

Time to make a decision

The entire problem starts with getting on the right track. GCs need market leader subcontractors to bid to them. You attract market leaders by being a market leader. As with all simple solutions, it’s a lot of hard work getting there.

It starts with pairing the right team to the opportunity. Many GCs have pre-qualification paperwork meant to screen out subcontractors who pose too great a risk. In the best examples, the pre-qualification process pairs an approved subcontractor with a subset of project values and types.

Looking at pre-qualification forms, it’s noteworthy how little focus is on what the contractor is actually good at. Subs see this and are pitching their answers towards what they think the GC wants to hear. GCs are rarely aware of the staggering resources required to be a “mid-sized” subcontractor. These firms typically built up to their level which means they’ve tailored their people, their tools, and their vendor relationships to be successful at the kind of work they’ve been doing along the way. Past performance is the best indicator of future success.

The concept of “mid-sized” as it applies to projects isn’t merely square footage, or building function. For example; a warehouse, a small restaurant, and a parking lot might all have the same electrical cost despite their differences.  These same projects could have wildly different concrete costs.  The invite lists should be tailored accordingly.

GCs who fail to align subcontractors with pertinent project scope are wasting resources. Bids lost this way are often described as “bad luck“.

When he wakes up, Ross will have learned a valuable lesson on how size applies to competition.

Well-defined market sectors with associated project values can define which opportunities are a better fit for that subcontractor. GCs who painstakingly pair their teams to opportunities have higher hit-rates because everyone is doing what they’re best at.

GC estimators who primarily focus on reducing risk for their subcontractors are rewarded with market leading prices. Answering questions, defining scope limitations, and carrying subcontractor exclusions into the GC proposal are all viable options. Not every request for proposal (RFP) is a sound opportunity. Avoiding bad-actors by not bidding is absolutely crucial. GCs who consistently “win” projects with clients who can’t pay aren’t doing the market any favors.

Performers in the spotlight…

Beyond the GC estimators desk, the legacy of the GCs past performance plays a role. Ethical GC’s who complete jobs on time, for clients who pay promptly are clear front-runners. Good communication, clear expectations, and reasonable timelines are all hallmarks of professionals that subcontractors will flock to.

Bug lights in the alley

Weak project managers, screaming superintendents, and pedantic project engineers are all risk-factors for subcontractors considering the ITB. Many PMs attempt to write subcontracts without the bidders exclusions and clarifications included. This is unethical because their bid-day price was for the work defined on their proposal, not the work the PM sees fit to stuff in the contract. The industry push for PMs to bid their own work has resulted in a dramatic decline in GC hit rates. PMs that aren’t winning competitive bids should consider what this feedback suggests about their reputation and their future.

This proves nothing!

GCs who accept incomplete subcontractor proposals discourage legitimate bidders. As do GCs who bid-shop, or re-bid work they’ve won looking for better options than their bid-day leaders. The local market is a small world and memories are long.

Looking at all of this from a different direction, a lack of subcontractor loyalty may be a symptom rather than a cause. Business may depend on relationships, but paying the bills requires profitability. Lots of firms are packed with great people who can’t get it together to bid, win, and build profitably. Nice folks or not, nature will take its course on mismanaged firms. The good news is that being more selective, protective, and proactive about their bidding is less work than losing.  Just as slow hits are better than fast misses, estimators must strive to bid less and win more. GCs that walk that talk have no trouble attracting attention.

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© Anton Takken 2015 all rights reserved