I recently encountered an estimator lodging a familiar complaint. “My competitors are bidding at a loss.” Sure, on the surface it’s entirely possible that the low bidder stands to lose money at the amount they proposed for the work. People make mistakes all the time.
However there’s a tendency for some folks to assume that being low-bidder implies low quality. The time-worn comment attending every perceived failure is “What else can you expect of the lowest bidder?”
To be fair, the losing bidders are a bit biased …
Somehow it escapes notice that it takes a lot of investment to produce something cheaply. Consider how affordable cars are made possible through huge factories, infrastructure, and training. The total investment to make a luxury hand-made vehicle is minuscule in comparison. Sure we may appreciate the craftsmanship of a luxury car, but few can afford it. Unattainable quality has no practical value beyond inspiration.
Low bidder could be compared to the winning golfer who faced the same conditions as every competitor, yet took fewer strokes to achieve the same end. Market leading General Contractors (GCs) attract market leading subcontractors (subs). The very best sub prices go to the very best GCs which means those GCs can build the same project for less money than their competition. In some cases the advantages for the market leading GCs can be so profound that not only are they unbeatable, but they are making higher profit than the high-bidder stood to gain if they’d won.
These relationships don’t happen overnight, and they certainly don’t happen from random chance. There is absolutely no substitute for knowing your market.
At the subcontractor level there can be enormous disparities in material costs depending on the scale of the firms revenue. A subcontractor who buys their material by the train-load enjoys prices unattainable to a competitor who buys a fraction of that amount. Efficiencies of scale play decisive roles in determining who will be market-leader. However it’s here, we encounter another tiresome excuse.
“The big guys can afford to call the shots and push everyone aside. There’s just no beating them.”
It’s foolish for estimators to pretend that every company is excellent at all things. Chasing opportunities that are too big, or too small sets you up to fail. Bidding work you know you’ll overprice or underperform is disrespectful of the opportunity and a waste of time. Perhaps the biggest mistake that estimators make is failing to prove the relationship between being able to pick a good target, and hitting your mark.
That being said, smaller firms offer more direct access to stakeholders than their larger counterparts. It’s often possible for a hard-working but small firm to build a relationship with a bigger client than they could otherwise attract. Not every project hinges upon the purchasing power of a small-fry company. Clients find occasions where the agility and dedication of a smaller firm is worth paying a premium for. Estimators at small firms must look to leverage their size against lumbering bureaucratic competitors.
It takes a lot of patience and even more follow-through but this is how little firms compete with big ones. It bears mentioning that for every company with a huge sign on a huge project, there are hundreds of smaller ones quietly building everything else.
Only they that lost, knew what they were doing.
At the heart of these excuses is an effort to claim that the estimator who lost is the only one who knew what they were doing. If this were true even half of the time, we’d see near-constant business failure across the construction industry. Many of the estimators making these excuses haven’t collected enough information to say what happened with much certainty. Knowing you lost by $X amount or Y% only illuminates a very small portion of what goes into a bid.
Right off the top, it should be obvious that so long as there are differences between the competitors, there aren’t equal odds of success. With observation and experience, it becomes obvious what firm constitutes the long shot in every bid letting. If that firm is yours, you’re probably chasing the wrong opportunities, or your company hasn’t adapted to the available work.
Starving Artists and poorly informed bidders
Competitive bidding proves market value over time. Under-bid work is a self-correcting condition. GC’s who can’t accurately define market value often struggle to be competitive. A lot of companies like to believe that they are delivering a higher level of quality than going rate will pay. As estimators, we cannot allow our firms to become “starving artists”. If you’re selling up-market services, then by all means pursue work higher in the market. If these options are scant, then it’s time to diversify goods and services to meet actual market needs. Every business must meet its customers’ needs at a sustainable profit level. Even non-profit entities need surplus funds to allow for growth, and the occasional set-back.
Winning perspective vs. losing percentage.
Again, estimators must actually know the market value and the market demand before suggesting a structural change. Estimators learn their way around by digging into to every win and loss. The monetary difference is a single number outcome of a huge variety of factors. Estimators face a great deal of uncertainty trying to determine what factors played the commanding role to determine victory. Start by roughly defining the differences in each proposal. Then move on to define what’s “behind” each proposal in terms of sub roster, schedule, site logistics, relationships, market segment, and so forth. Breaking down the “winning combination” can be immensely instructive. The goal isn’t to exclusively look for quantitative differences, so much as differences in perspective. These are the insights that mold options into opportunities.
“After a lot of effort, it became clear that Mark doesn’t see a pattern here”
Risk is relative
Estimators are keenly aware of the quantities of all the building components. One area where each estimator is looking at the same job and getting different measurements is risk. Risk is the potential for loss presented in a deal. Estimators must understand that some portion of the risk in a job is quantifiable according to the strengths and weaknesses of the GC.
Estimating is about controlling risk and uncontrolled risk is very expensive. In some bids, it could be said that the lowest bidder was the least afraid of the opportunity. In other situations, the lowest bidder might be the least informed of the risk they’ve undertaken. Estimators work by bounding uncertainty. Every job could potentially suffer catastrophic and costly problems, but we’re in the business of preventing them. The better we are at our business, the less likely the problems are to occur. Better firms have lower risk. Perhaps more accurately, better build teams have lower risk. To this end, estimators should become very curious about which subcontractors were on the winning team. By tracking the results across the GCs and subs, a picture will emerge of who’s the market leader for any given scope of work. Like anything worthwhile, it takes a lot of work to develop this knowledge. Growth doesn’t always mean expansion. As businesses mature, their ability to do more with less grows in proportion to their commitment to excellence.
Nagging, price checks, and why cashiers don’t win bids.
Some GC’s are prone to assuming that broadcasting an invitation to bid (ITB) to every sub in a five state radius guarantees they’ll receive the best bids that the market has to offer. Many subs interpret the “cattle call” ITB to be a waste of their time. As a rule, the very best opportunities tend to be discrete because the leader of the “winning team” begins their campaign by enlisting their best players. If you’re a GC who must constantly resort to nagging subs for bids, you’ve probably wasted their time in the past, or your projects are simply unappealing.
Both cases are a symptom of a GC without any sense of who their subs are and what they’re good at. Estimating this way becomes little more than a cashier demanding a price check over the stores intercom. Lots of waiting, incomplete information, and very little money saved. When such a GC loses by an amount roughly equal to their profit, they assume their competition has bid at a loss. This cashier mindset leads to “checking the receipts” rather than comparing stores.
A roster of the awarded subs could potentially reveal an exclusive GC-sub relationship. It could also reveal that the winning GC carried a sub who wasn’t competitive among the bids you collected. This could imply that sub bid a lower amount to the winning GC. It could also imply that the winning GC found the make it or break it cost difference in a different trade’s proposal. Often, these look too good to be true, so the estimator has to sink a lot of their precious bid-day into deciding if it’s legitimate or not. This can lead to situations where low-value scopes of work are laid on trusted subs even if they’re not the cheapest.
It’s also possible you’ve found an angle to defeat that GC on the next similar project because you’ve got a better sub. Be advised that your precious sub may find their way to the competitors bids if you don’t reliably land work. It’s incredibly frustrating for market leading subs to bid to a GC who keeps a few dullards on the roster to pull the whole bid into a loss.
Protip: The sub who’s never cranky about the losses is the one causing them.
GC’s typically have the benefit of timely bid results from their clients, especially those with public readings. However many GCs would benefit from considering all avenues of information, including asking their subs. It’s terrifically common for clients to indulge in post-bid pricing requests with one or two of the bidders. Some clients believe in remaining silent until they feel certain of the decision to award. Many otherwise honest clients fail to reconcile that they transcended from bid scoping several proposals, to negotiating a different deal entirely with a favored bidder.
Subcontractors are often involved in these rapid post-bid pricing requests which in turn often requires that distributors and vendors be consulted. Everyone in the supply chain has personal and financial interests involved which means things won’t stay secret for long. GCs who can’t get their client to answer the phone should reach out to trusted subs to see what’s going on.
Bid shopping is a serious problem that thrives in secrecy and delayed information. I know of many jobs that were successfully won against bid-shoppers through coordinated efforts between the legitimate GC and their subs. Your average estimator would absolutely love to do their part to hurt a cheating competitor. I should point out that GCs who consistently and voluntarily provide accurate, and timely bid-results on everything they do earn the subs best efforts.
Glory follows virtue as if it were its shadow: Marcus Tullius Cicero
GC estimators must understand that there’s no sense in being an ethical bidder if you don’t prove it by acting virtuously. Success lies in being the best, and nothing sets the field of close competitors apart more starkly than the measure of their honesty.
But if it’s the client’s job, don’t they get to change their mind?
It’s absolutely and unequivocally unfair to send a Request For Proposal (RFP) promising contractual award to the lowest complete bidder by the deadline without committing to the low bidder on those terms. Once they’ve fairly awarded the contract, they’re free to negotiate any further changes with that GC at their convenience and according to the terms of the contract. If they want greater range to negotiate with a specific GC, they should dispense with the competitive bidding in the first place.
If an auctioneer accepted an offer after bidding closed, the entire auction is little more than a fraud. GCs need to hold clients to their own terms. The practice of proving market value by competitive bidding is why bids are “free” in the first place. Moving the goal posts to suit the client’s desires after the bid is dishonest and unfair. No good comes of pretending otherwise.
Submitted without comment
It takes a lot of losses to know what you’re doing
Uncertainty is the reason estimators exist. If it were possible to simply tot up everything perfectly, we’d use cashiers instead. Estimators must continually switch between deductive (top to bottom) and inductive (bottom to top) reasoning to balance uncertainty against market value. Inductive reasoning starts with the presumption that profitable work exists at market value. Working “backwards” from that market value, the estimator looks for ways to make that happen. Deductive reasoning is the comfortable and familiar “add everything up” practice of QTO’s bid-scoping, and spreadsheets. Both systems of reasoning involve uncertainty, however there is a cross-canceling effect when the systems are properly applied to one another on the same project. In most cases, you stand to learn more from your losses than your victories because the winner gets no feedback beyond the contract award. Losing a bid is a costly endeavor, so estimators should gain knowledge to improve from every effort.
For example. Let’s say you lost a bid on a simple remodel project. Working deductively, you did a QTO, and made sure that all the obvious scope was attributed to a subcontractor bid, or vendor. In your view, the majority of the risk of the project was driven by unknown/concealed conditions. You may have decided that approximately 15% of the shared wall space would require some measure of re-work in order to facilitate the project. Many estimators will provide a bid-directive to that effect to all bidders. Some subs will interpret this to be an open-ended question intended to prevent change orders. As such, the 15% of re-work might well be priced at change-order rates.
Working inductively, we compare the winners bid against our own. Unless specifically indicated, we must assume that their bid was complete, and that the work stood to be profitable at that amount. Compare the competitor’s operation to your own. If the competitor consistently wins similar projects, they probably have extensive experience mitigating the predictable risk. This doesn’t mean that they bid less than 15% of rework. Repeat business is the goal of most companies. Subs who regularly win work with a GC tailor their proposals to suit that GC’s preference. Subs learn what the GC will and won’t consider a valid change order. If some rework will be expected without a change order, the subs will include that work at their much-reduced bid-rate. Lacking a specified amount, the subs exercise their judgment. The more expert the team, the better the judgment, and the more likely the victory.
Working inductively, you might inquire with trusted subs to see how your competitor addressed the risk with their bidders. This conversation opens up avenues to compare the subs competitors and gain insights thereto. Keep yourself open to multiple premises to explain what happened. The rework was necessary in your opinion based on your perspective. Your competitors past experience in the building, or knowledge of the client might have altered your view of the bid-day situation entirely.
Be wary of gossip, or mean-spirited conjecture. We’re working by inferences and deductions that are based on corroborated information. Curiosity, positivity, professionalism, and kindness open the doors of opportunity. Everybody wants to win work, and everybody takes a loss from time to time. Begrudging a competitor their victory is a petty move, which is unworthy of a professional. Take the opportunity to share what you know to cultivate future communications. As with anything in estimating, you never get a perfectly certain view of what’s going to happen, but you can get very close. With time and experience, it becomes possible to see the critical dimensions of projects that drive your chances of winning the job profitably. With good information, the only thing you can’t make, are excuses.
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© Anton Takken 2015 all rights reserved