Take a moment and consider all the features of a really great bid opportunity. There are bound to be individual differences but the majority of professionals would choose an opportunity with minimal risk, high profit potential, that is simple to build.
At the opposite end of the opportunity spectrum is the ugly job. These are the projects with lots of unknowns and difficulties, leaving minimal potential reward for the trouble they’ll cause you. During peak markets, ugly jobs are hard-pressed to get any bidders attention.
“Sorry, we’re only looking for jobs located absolutely anywhere else!”
Ground up construction is “cleaner”
New construction on a greenfield (never developed) site is a perfect example of a clean slate. With no existing obstacles, the project is theoretically free to get started. Further the design on a ground-up tends to be more complete as there’s nothing “unknown” in the project scope.
In contrast, remodels especially those involving structural changes can be very demanding. There may be no existing plans of the building. Historic buildings may have antiquated construction methods which bring all sorts of difficulties to a project merging the old with the new. Underestimate these jobs at your peril!
So is there an upside to the ugly job?
Marketing people are fond of reversing perspectives to advertise products. Offering a new diesel engine in an established car might be described as slower and louder than the gasoline model. It might alternately be described as improving the selection of diesel cars. So too, is there a way of reversing the perspective of ugly jobs. Starting with the fact that there’s less competition for difficult jobs. Competition is its own form of risk in that market pressures for the most desirable jobs will tend to lower the maximum profitability for everyone. An ugly job may attract minimal competition, leaving greater opportunity to capitalize on different approaches.
Ugly jobs take many forms. Night working hours can be the reason a job is unattractive. Objectively, having the building site unoccupied during working hours can actually increase productivity. Shift premiums, over-time, and extra costs for night mobilizations are all passed through to the client. For contractors with staff willing to accept the challenge, these jobs offer higher compensation, lower competition, and potentially better production. All of which can make them far more profitable than popular hard-bid opportunities.
Every population will have its share of low-performers. With the majority of firms crowding the market for “clean” jobs, it’s consequently very common for under-performing contractors to land this work. Many “clean” ground up jobs end up working overtime and weekend shifts towards the final weeks of the job. Very rarely will any of these folks see additional compensation for their long hours.
Pro tip: If the PM smiles when a sub demands overtime pay, they might be quicker than you think.
It’s one of those “costs of doing business in construction” that nobody talks about until after you’ve made an involuntary donation. This is less common with good firms.
Some remodel projects will have a lot of unknown existing conditions which increase risk. It’s important to understand that the risk is increased for everyone bidding. Further, the client expects that the unknown conditions will add to the project cost. Estimators tend to default to all-inclusive mindsets when it comes to project scope. On a ground-up project, estimators are expected to get everything included in the plans. However remodel projects aren’t necessarily handled the same way. Change orders are expensive, so clients naturally want the most inclusive proposals they can get. However estimators can structure the risk of changes by establishing some reasonable default conditions, along with fixed rates for additional work.
For example: If a remodel requires demolition of walls that might contain mechanical, electrical or plumbing, (MEP) the default condition might be to exclude any MEP work since you don’t know that it will be required. However it wouldn’t be fair to make the client or the subcontractors assume this unbounded risk. The estimator could provide an allowance for MEP re-working in their proposal along with sub provided hourly rates for demo work. This provides the client with a way to stave off unnecessary costs at change order rates while limiting the GCs exposure to risk. This also allows the estimator to bid more competitively. This is critical because bids are not free, estimators need to control risk at market value.
Ugly to the bone
Underfunded and incompletely designed projects are extremely common at the smaller end of every construction market. The risk in these projects can be very high because the budget and design are working in opposition. In the worst examples, there’s little to recommend these projects since they typically start badly and get worse from there. Bidder ambition and positive thinking have no effect on increasing a clients budget. Correspondingly, there is only so much that can be cut from a project before it fails to meet it’s intended function. Contractors soon discover that while the budget is capped, the project risk continues to grow.
Production punished by empowering everyone
Large and bureaucratic clients can present unique risks to contractors making their work particularly difficult. For example, a large facility must be remodeled without shutting down production. The facility has a safety officer enforcing a policy precluding all hot work. If the project requires soldering water lines, structural welding, or some types of roofing, it will be very difficult to get anything accomplished while following the rules. Simultaneously, the security staff require all workers be monitored. The security staff may not be around in sufficient numbers during evening shifts to monitor full crews, further hindering production. In many cases, the construction work is a low priority for auxiliary departments. Carefully written departmental policies rarely take construction work into consideration meaning that bidders must promise to “coordinate” with rule-making officials once they’ve got the job. The people with authority to make policy judgment calls are rarely accessible when they are most needed.
This is sharply contrasted to the well-defined penalties for delays, cost over-runs, or violated protocols. The bidders know that they may not expect cooperation, facilitation, or autonomy from the client. Their responsibility to make production is bureaucratically opposed at every level. While it’s possible to get along with the myriad of officials, contractors must bear in mind how easy it is for minor misunderstandings to blossom into full-blown work stoppages. Clients who “empower everyone” to stop construction for any reason can add great risk to a contractor.
I’ve often written that estimating is about controlling risk. In the example provided, the risk is in the dysfunctional behavior of a bureaucratic client. Previous experience and/or established relationships are about the only ways a bidder can hope to control the risk these opportunities present. Gaining experience with such a risky client has made many firms pay dearly for the wisdom earned. New competitors facing off against experienced bidders are well advised to be cautious. It’s good advice not to interrupt your opponent when they’re making a mistake. Letting the upstart win the poisoned chalice betters their odds on the next opportunity.
What makes a project ugly to the bone is whenever the project opposes its own creation. There is an economic balancing act where conflicting forces converge. For example, a client’s budget must roughly align with the market value of the project they’re trying to build. Half-priced work doesn’t happen without problems.
While there’s no helping the insincere, unethical, or unfunded client, the answer to successfully bidding ugly work is quite simple; build your bid to the challenge. If the job is a high-pressure remodel to be done only during night working hours, a General Contractor (GC) chasing such work is well advised to canvas their subcontractors (subs) looking for interested partners. Building a team who’s willing to commit to the necessary steps to making that ugly job profitable reduces the risk for everyone. That includes communication about how the work is scheduled, staged, and facilitated.
This is profoundly different from simply sending out an Invite To Bid (ITB) asking all your subs to bid the ugly job. Some clients have extensive property holdings that all need “ugly” remodels. There’s a largely unseen cadre of GCs who’ve tailored their operations to these clients needs. The reward is profitable work with a repeat client and very little competition. Some national chains even have contractors literally camping in their parking lots as they travel around the country doing their remodels. It’s not for everyone, but they’ve found a way to make it profitable.
Estimating is about controlling risk. Taking on a risk assuming that necessary controls will rise to the occasion is a gamble. Contracts make the penalties for gambling on projects very one-sided. “The house always wins” isn’t simply a saying in Vegas, it’s a business plan. Estimators need to soberly appraise their firms ability to control risk on difficult projects regardless of their size. Successfully running huge and clean projects does little to qualify someone to handle the thorny nuances of an ugly job. Even those with great appetites will perish from a single poisoned bite. Estimators have a moral obligation to protect their firm from project risk. Often ugly projects aren’t worth bidding. Market pressures balance things out by driving the price up on risky work . Clients often respond by reducing the contractors risk and re bidding the job, hoping to fall within their budget.
Hard bidding the ugly job; Everyone’s handicapped, out of their depth, and the winner gets stung.
GCs who bid every round of risk revision might lose to a GC who only bid the final and least risky iteration. Therefore GCs bidding risky work should expect clients to select bidders based on the original plans. The GCs should be loyal to the low subs who bid the original plans as well. Professionals have no use for moral flexibility.
Difficult projects are like white-water rafting, everyone depends on one another to keep the raft afloat and running true. When it works, it’s an amazing testament to adversity overcome. When it doesn’t, nature takes its course on everyone. Estimate a difficult job with an eye towards making the build team flexible, buoyant, committed, and led by someone who’s run tough jobs before. Let your competitors watch your success, wondering how you’ve made the ugly work profitable.
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© Anton Takken 2015 all rights reserved