Prioritizing a low bid over contractor performance is a lose-lose procurement strategy. Unfortunately, low bidding is an accepted practice for both owners and contractors alike. Owners will say that focusing on the lowest bid possible ensures they get a good price. But low bidding is a zero-sum game: When owners push bid prices down, cost savings often come at the expense of performance. And any savings on paper are usually lost mid-way through the project in change orders. It’s time to re-educate the construction industry and reframe the “low bid wins” philosophy.
Who’s responsible for low-bid procurement?
While owners are responsible for choosing the low bid, they aren’t the only ones to blame. Contractors fall victim to the low-bid mindset as well, believing that if they are always the lowest bid, they will win more jobs and therefore increase revenue. They believe they have to be the lowest bid in order to win the job and they need to win the project to make sure they have “money coming in the door.” It is a dangerous thought process – and it rarely works to a contractor’s benefit.
More often, the loss in margin on the project means that while they win more jobs, their ability to perform the project to the standards required decreases. And their personal wellbeing and the company’s financial health suffer. In addition, they make less per project and ultimately end up with too little profit, if any, to grow.
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The low-bid approach starts on the wrong foot
Owners or developers frequently push for the low-bid procurement method in construction. The low-bid method sends the wrong signals to a contractor about their role in the project:
- You are less valuable than the architect or design firm
- The owner does not trust you to offer a fair price for the work performed
- You are a commodity, and therefore have less control over how the project goes
Are architectural and design firms held to the low-bid method? No, because they have traditionally marketed their experience, their performance, and their value.
Related: How an Earned Value Report helps control costs and avoid delays
Owners perceive these industries as highly-skilled experts essential to the success of their project. And they are – but so are the contractors who will actually build the project.
Construction firms, on the other hand, rarely market themselves in terms of value – contractors often market themselves in terms of price. But that is almost always a bad idea.
Tension between project stakeholders
Right from the start, the low-bid procurement method creates tension between the stakeholders: owner or developer, architect or designer, general contractor, and eventually subcontractors. Every challenge becomes a math problem: How do we complete the project without losing what little margin we are making on this job?
And guess what? Most owners will find that their bid to save money with the low-bid procurement process fails in the end.
Change orders inevitably increase costs, and schedule delays eat into the project’s budget. A low-bid strategy causes death by a thousand cuts to a project’s budget, and it’s totally avoidable if you adopt a more collaborative mindset.
The famous Warren Buffett quote comes to mind whenever I think about owners and low bid procurement: “Price is what you pay. Value is what you get.”
Which do you want to focus on: The short-term cost or the long-term value?
Remember, designers and architects conceptualize projects. Contractors build them. Recognizing the importance of both, and bringing them to the table at the beginning as equals, will ultimately drive home a greater value for the owner.
Inviting contractors to share value
What if an owner or General Contractor asked for an estimate to do the project but also asked:
- Do you see anything on this project that would make it better?
- Are there any suggestions you can offer to allow the construction process to be more efficient for all the trades?
- What are the 3 most critical paths for project success?
If I were an Owner or GC of a project and asked those 3 questions to be answered when submitting your bid I think I would gain some pretty good insight from project experts. I would certainly have a higher level of attention paid to my project when trade partners were bidding it.
Low Bidding Impacts Contractor Cash Flow
General contractors, I don’t envy you. The average pre-tax net profit for general contractors is between 1.4 and 2.4 percent, according to the Construction Financial Management Association. You’re starting the project at a disadvantage, and then you get the lucky job of sending out bid requests that essentially ask your subs to do the same thing.
Subcontractors, the waterfall of lack tumbles down right onto your shoulders. When a low-bid request comes in, you only have two choices: go low or stay home.
And I think you should think long and hard about staying home more often than you go low.
Let’s start with the practical reasons to avoid low-bid scenarios. If you compete from the low bid mindset, whether imposed or because you think it will win you more business, you take on an unnecessarily large amount of risk. You have little to no margin for error or changes, like rising material costs, for example.
Schedule delays on the project will delay your ability to get paid. That disrupts your project’s, and your organization’s, cash flow. It’s not an over-exaggeration to say that a low bid project can actually end up costing your company money, rather than earning it a profit.
Separating price and value
When you operate from a low bid mindset, you are likely to think that your price is your value. The two could not be more different.
Your value is the combined technical knowledge, proficiency, and work experience of you and your team. It’s actually what your customer gets when they hire you – the feeling you give them knowing you’re on the project, making it happen, solving problems, making everyone better. Your value never changes, regardless of your price.
Your price is simply what it will cost to get that value.
You set a price. You build value. Your price should be based on the value that you create.
Cash flow shortages impact performance
When you sit down to estimate a job, do you start by thinking, “What will it take to get this job done to the highest level of performance my team can deliver, and make sure that I earn a fair profit?”
Or are you thinking, “How can I get this job done with this budget? How can I make this work? How can I make sure I win this project?”
The difference between the two impacts the way you plan the job. It guides how many crews you put on the job, when you order materials, and so on.
Learn more: 12 tips to manage cash flow on construction projects
How improving cash flow improves project performance
Let me tell you a quick story to illustrate my point.
A roofing contractor in Texas had a project estimated to take 12 weeks. The owner and I sat down and estimated the project cash flow using a weekly cash flow spreadsheet. (Mobilization Funding has one here.)
I asked him how he would run the job if cash flow wasn’t an issue. He saw quickly that with a small influx of funding from us, he could start the job with two crews instead of one and bring on an additional supervisor.
He gained even more efficiency, and saved on costs, by ordering the materials early. All in all, his crews were able to complete the 12-week job in eight weeks (a 33% reduction in labor cost from what he originally bid).
That’s quite a bit of margin saved. And imagine how happy the GC was.
The loan from us isn’t the important part of the story here. It’s about planning projects with excellence in mind – not cost-cutting. It’s ensuring that right from the bid, you have the money you need to get the job done the way you want to do it – which I assume is to the best of your team’s capabilities.
That is the power of planning from a place of value, rather than just price.
Get materials now, keep your cash.
Enjoy 120-day payback terms with any material supplier.
A low-bid mentality holds the construction industry back
A low-bid mentality has everyone in the industry fighting for survival. It puts the entire industry in a scarcity mindset, which limits our ability to adapt and innovate.
A scarcity mindset narrows your focus to immediate gratification and short-term problem solving, which in turn reduces original thinking and creativity.
It also perpetuates the false perception that this is a dog-eat-dog industry, that we must all operate from an “us vs them” mentality. The truth is, no matter where you fall on the timeline, everyone on the project is in it together.
Finally, low bid procurement and the low bid competitive tactic continue the narrative that this industry is tough and toxic, and everyone is scraping the barrel just to get by.
Those of us in the industry know it isn’t always true. But the outside perspective is what informs the young new talent who could line up for careers in construction.
We have low bid ourselves into this situation. Which means we can fix it.
How to Break the “Lowest Bid” Cycle
Collaborating on project design
In the Design-Build model, as the name suggests, both the design and build stakeholders come together to collaborate before the project begins. Everyone benefits.
The designers can ask contractors how their proposed innovations will affect build time or cost. General contractors can approach their subcontractors with confidence, knowing that the project was budgeted to include their value – not just their lowest possible price.
This is what value engineering is all about: When owners involve the contractors who are actually building the project in design and spec discussions, they can actually improve performance and reduce costs at the same time.
Sharing your numbers
GCs and subcontractors: It’s time to show your numbers. If you can’t step up to the table and say, “This is how much it will take to perform this work and this is how much profit I’m making on this job,” you either need a re-education in your value or you need to reconsider your business practices.
We all have to make a profit to keep our businesses alive and growing. It’s time to stop being ashamed of wanting to earn a profit.
And it’s time to have real conversations about what it takes to get a job done the right way. Imagine how much less tension and stress you’ll have when you know you aren’t getting gouged by the other party!
Related: 9 tips to improve communication in construction
Showing your numbers has another benefit. It means you can plan the job with performance in mind, rather than strictly the budget. You can identify and address concerns – cash flow, schedule, payment terms, or design – early in the process, and collaborate to bring about solutions.
Speed up payments
Think about it: If you could be paid in 15 days from invoice instead of 45 or 60 days, how much more value could you offer your customer? I can tell you that if you are paid within 15 days, it costs you less money to perform that project and makes it a lot easier to offer a lower price.
If owners are asking for the lowest bid and are also taking 45 days to pay, they need to know that slow payments are adding real cost to their project. Maybe they can do something about it, and maybe they can’t. But they don’t even know that right now because no one is having a conversation about it.
Transparency also means paperwork. It may not be everyone’s idea of a great time, but it is critical for project cash flow tracking. Getting change orders in writing and submitting preliminary notices keeps everyone in the loop and on the same page through every step of the project.
Emphasize the cost of low bids
Most of all, to shift the industry’s low-bid philosophy, we have to shift the prevailing mindset. We need to emphasize the real costs of low-bid procurement versus quality-based procurement. We need to prioritize value and see where price lands.
Start showing in your bids where their design is adding significant cost, or the project schedule and work flow is adding cost. Offer solutions with your observations – your ideas add value and will separate you from the others much more than your price will.
The Bottom Line: Focus on value, not price
Owners and Developers: Construction trades take an incredible amount of skill and technical aptitude. These are high-value roles that are critical to the success of your project. Bring them to the table and treat them as such.
Contractors: It’s time to start focusing on the value you deliver, rather than the price in your bid.
Let me say that one more time. Focus on the value you deliver, rather than the price in your bid. Be proud of the work you’ve done and will do in the future. Be confident when you show what it takes to get that work done.
You are worth it, but only you can show that to the world. More importantly, if you don’t believe you are worth it, how do you expect anyone else to?