Bidding is an essential and integral part of the construction industry, but it can be a challenging skill to master. It appeals to humanity’s inherent competitive streak, pitting us against others in a head-to-head challenge. The best bid secures both the contract and guaranteed employment for the immediate future. It can be tempting to underbid a project to ensure your company is the one that ultimately gets chosen for the job.
While this can be a useful strategy to employ in some circumstances, underbidding comes with its own risks. Here are some of the dangers of underbidding (especially if it’s a regular practice) and what sort of impact it can have in the long run.
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What is underbidding?
Underbidding is the practice of submitting a bid that’s lower than the competition’s bid. In theory, there’s nothing wrong with underbidding if the bid is accurate and you can actually complete the project for the bid price.
But problems can creep in when contractors adopt a strategy of habitually underbidding in order to win contracts. This is esspecially true when they know they can’t meet the bid price according to the contract specifications.
8 risks of underbidding in construction
Here are eight of the biggest risks to contractors who engage in underbidding on a construction job.
1. Hurting your reputation
They say you never get a second chance to make a first impression, and that is essential in this line of work. In the construction industry, reputation is everything. In this sector, when networking and word-of-mouth have such power, you live or die by what others think of you. Underbidding can help you secure work in a pinch. Unfortunately, you’ll become known for being the cheapest option on the market if you do it frequently.
This might sound like a good thing at first. You’ll be at the forefront of everyone’s mind when they’re looking for an inexpensive contractor. However, over time, you’ll find that it becomes impossible to bid for more lucrative jobs because that reputation will be standing in the way. Clients you’ve worked for in the past will see your higher bid and may disregard it entirely because they’re expecting you to be at the bottom of the pack.
2. Damaging your bottom line
Many companies turn to underbidding when things get lean. Or, they’ve spent a lot of time between jobs, and need to earn extra cash while they wait for things to pick up again. The problem with this is that it’s easy to fall into the trap of underbidding. You start bidding low, and you find yourself stuck in a loop. It can be nearly impossible to get back to a point where you can begin bidding on better and more lucrative jobs.
Large companies and those with well-established reserves can afford to occasionally underbid without damaging their bottom line. However, small companies that are working from job to job don’t have that luxury. It doesn’t take much to move from stability and profit to instability and loss, and perpetual underbidding can contribute to this negative shift.
3. Jeopardizing future jobs
Many business owners underbid on jobs to fill the calendar while they’re waiting for a new and more lucrative opportunity to cross their path. Underbidding occasionally for this purpose usually doesn’t have any adverse effects — but making it a habit could potentially jeopardize your ability to secure those better jobs in the future.
This can take several different shapes. You may find your calendar is filled with these low-end jobs when a lucrative opportunity comes along. Your bid may be ignored by clients that have grown accustomed to your underbidding. You may not even be invited to submit a proposal on the projects you really want to work on.
4. Encouraging industry-wide deflation
Underbidding doesn’t just affect you and your company. It can have far-reaching impacts on the entire local industry, because so much of this sector is based on direct competition. If you start securing all the low-dollar jobs that are on the market, everyone else will likely begin to do the same just so they can compete. Over time, this can encourage the entire sector to deflate.
If this trend continues unchecked, it can cause irreparable damage to the local construction industry. Underbidding once in a while won’t cause the economy to collapse, but making it a habit could lead to deflation that no one is equipped to recover from.
5. Causing payment disputes
Payments are the lifeblood of every aspect of the construction industry, from the contractors to the business owners and everyone in between. When you add underbidding to the mix, payments become challenging.
Underbidding can lead to everything from workmanship disputes and schedule delays to change orders — that can all, in their own way, lead to payment disputes. Underbidding means you may not be able to maintain your payment schedules, especially if change orders or delays cut into your profits, making it impossible to pay everyone on schedule.
In this case, the easiest way to prevent payment disputes is simply to avoid underbidding. The risk of underbidding isn’t worth any potential benefit where payments are concerned.
6. Missing deadlines
Every construction company owner knows that deadlines are to be respected, but they’re not set in stone. If you’re constantly underbidding and taking on more jobs than you can handle in an effort to keep the metaphorical lights on, keeping up with all those deadlines will become nearly impossible.
In addition to costing you more than you’ll likely make from the project, perpetually missing deadlines will damage your reputation even more, making it harder to secure work in the long run. No one wants to work with a company that can’t make good on its promises and won’t be able to meet deadlines.
7. Delivering poor-quality work
If you’re buried in contracts that you secured through underbidding, you may be struggling to keep your head above water. In this case, it’s easy to get overwhelmed, which could lead to cutting corners. Constantly delivering poor-quality work will lead to costly repairs and replacements, as well as damage to your reputation that may be impossible to repair.
You don’t want to be known for being a substandard or nonperforming contractor. Even if you rectify the situation and return to delivering high-quality work, that history will continue to follow you like a dark cloud, forever coloring future interactions with clients.
8. Reduced bondability
Bid bonds are often required to protect the project owner from the financial risk of underbidding. If the contractor can’t complete the project as bid, the bond surety steps in to make it right.
Surety companies frown upon construction companies who can’t bid accurately — it increases the risk of contract default. When underbilling causes a contractor to default and leads to a claim against the bond, the surety company will likely raise bond costs on the next project — or flat out refuse to issue one.
Avoid underbidding whenever possible
In a pinch, underbidding to fill your schedule or bring in a little extra cash can be an option, but it’s not a behavior that should become a habit. There are too many risks associated with this practice, both for the company and the local construction community as a whole. Perpetually underbidding can damage your reputation, your bottom line, and even your competition as everyone tries to make the most of the scraps that are left.
It might not be the easiest way to secure contracts, but we recommend avoiding underbidding whenever possible. In the long run, you will be able to build a better and more lucrative business without cutting corners and taking on all sorts of risks.