Creating an Edge when Bidding
The difficulty, when competitively bidding work, is finding that edge. How can you determine where to find that edge within the project, as well as the resultant proposal, allowing you to have the most competitive bid, and still make a profit. Each contractor that has experience bidding work, will have a different rationalization of how they ensure that their proposal will win the award. Obviously the moral, ethical and basic business ideals of individual companies, will play roles in developing the attitude and methodology of contractors who are willing to compete, by competitive bidding.
Understand, that there are contractors that simply refuse to bid work competitively, and rely on contacts and business development to provide the opportunities for future projects. The majority of these contractors will have a very positive reputation within the industry, and may have already established their own specialized segment of the industry, that they excel in. These are the fortunate contractors that can basically pick and choose what projects they will perform, and understand the negotiation techniques required to establish their edge.
For the remainder of the building contractors, the only method of establishing their work load is to interact on a competitive basis, with other contractors in their own peer group. What are some of the basic methods, or techniques that contractors may incorporate to seek that edge within the competition.
1.) Bid only what is clearly noted on the documents.
When reviewing construction plans and providing a bid, there are various attitudes that can be taken towards the documents. One particular technique, is to view the plans exactly as they appear. For example, if the plans fails to identify specific handicap requirements, and the specifications do not establish any precedent, the contractor will not incorporate any handicap equipment, or the labor to install this handicap equipment, in their bid proposal. This particular contractor understands that the handicap requirements will be required, however, in their attempt to gain that edge, they would rather not include the handicap equipment in the initial bid, and argue their case, once they are awarded the project.
Another example, is the contractor that is bidding a project, that is adjacent to a very, old formal church. The new project requires extensive rock removal, immediately adjacent to this old church. The engineers and architects have failed to identify the specific requirements for ensuring that the adjacent excavation does not damage the existing church or its foundations. The experienced site contractor is fully aware that special line drilling, small explosive charges, extensive underpinning, or whatever other specialized technique, will be required, to ensure that damage is not done to the adjacent church. However none of these requirements have been specifically identified within the contract documents. This contractor does not include any of these costs, nor the time to perform this specialized work, even though they fully understand it all will be required, in the project. This contractor is hoping that other contractors will include the specific actions required to ensure that the church is not damaged. This will be their edge.
2.) Use the ” as equal ” technique.
The ” as equal ” technique of obtaining an edge, is basically not using the specified equipment or products clearly noted within the contract documents. Understanding the concept of a priority specifications, but ignoring the priority aspect of the specification, this contractor is using the ” as equal” card, when attempting to obtain that edge.
An example of this technique would be if the architects and engineers specified a specific flood control panel to be used on the project. This flood control panel, is identified within the specification as XYZ Flood Control, and is the only specified manufacturer and supplier of this product. The contractor researches this particular product and finds another competitor of XYZ Flood Control, that will provide the identical, or even better product for less money. This contractor understands very clearly, that one of the principal techniques used by manufacturers to convince architects and engineers to specify their product, is for the manufacturer to stimulate this priority specification with incentives. The contractor understands that in many cases, the incentive is the reason that the product or material is specified, and not necessarily the superior quality or performance of the specified item. The contractor is anticipating that once they are awarded the project, they will be able to submit their alternate product, and convince the owner that this product is actually superior to the specified product. Therefore this contractor has obtained the edge on the project.
3.) Incorporate ” in house ” labor, to perform some of the activities required within the contract scope.
Some building contractors employ their own laborers, masons, carpenters, etc. By employing their own manpower, the contractor is hoping that this will offer them the needed edge to compete on the project. This technique has gained popularity, due to the fact that many contemporary builders have eliminated an extended payroll, as a financial obligation. In years gone by, general contractors and builders have employed laborers, masons and carpenters to complete specific requirements on projects. This tendency of using in house labor, reverted back to a simple management type of general contractor that subcontracted out all of their work in efforts to reduce weekly payrolls. This contractor would hire a mason, a carpentry firm, or a concrete firm to complete these activities on the project. Currently the trend is starting to return to the ” in house ” capabilities of contractors to perform their own work. To some contractors, this is their edge on the project.
4.) Take the project at cost / or less.
There are several contractors that will estimate the project, and either submit a proposal without any profit margin, or even reduce the bid proposal to a value under the actual hard costs of the project. Obviously this will provide an edge when competitively bidding the project, however, there are several downfalls to this approach.
The contractor that takes this type of edge, is anticipating that the project will provide them opportunities to recoup the money deducted at bid time, and make it up during the management of the project. This gamble is based upon the anticipation of change orders and delays that will provide a financial cushion for the contractor. The attitude of, if you aren’t awarded the project, you have NO chance of making any money, is the foundation of this type of gamble. Good luck to all contractors that jump into a project, substantially lower than cost. It is a gamble that must be skillfully managed.
5.) Use unit pricing as a tool to make money.
On many projects, there is unit pricing that is required to be submitted, at the same time as the bid proposal. This unit pricing, is in many cases, used by the bidder to attempt to reduce the base price of the project by elevating the unit pricing. For example, if the bidder is convinced that the project will incorporate large quantities of rock removal, and this rock removal is based on unit pricing, the creation of higher unit values, will provide the financial edge that the contractor is seeking. If there is 1000 cubic yards of rock to be removed and the unit value is $200 per cubic yard, as opposed to $100, then the financial win is $100,000.00. If the contractor gambles that there will be 1000 cubic yards of rock involved, they can reduce their base bid by the $100,00.00 knowing that they will make up the money when removing the rock.
In most cases, the contract is based upon the lowest base bid, and not a combination of the anticipated unit costs, together with the base bid. By reducing the base bid by the $100,000.00, and making this money back up in the execution of the project, the contractor has succeeded in obtaining that edge.
6.) Incorporate specific subcontractors in a mutually beneficial agreement.
By incorporating key subcontractors into the inner circles of the company, some contractors are able to negotiate special deals, with primary subcontractors, to create that financial edge. This type of mutually beneficial agreement involves special financial compensation, to the contractor bidding the project, by the key subcontractors that the contractor intends on using for the project. If the electrical and mechanical contractors offer this individual contractor, special financial consideration, by reducing their bids for specific portions of the work, the general contractor has created a financial edge.
This type of mutually beneficial agreement, between general contractors and specific major subcontractors, is very common, and can allow the general contractor with the most compelling management style, to obtain the financial edge required to obtain the project.
6.) Develop a specific avenue of financial profit, that can be used to offset the entire cost of the project.
This technique is used almost exclusively by site work contractors. For example, if the project requires the excavation of several thousand cubic yards of rock, this requirement could be considered a profit opportunity for an excavator, that is capable of excavating and crushing the rock. If this can become a profit center for the excavator, the hiring of personnel that are accomplished in bidding the remainder of the projects scope of work, will allow this contractor to obtain the edge. Rock crushing and the ability to use the manufactured stone on the project, as well as sell any of the product that remains, is a perfect example of finding that legitimate financial edge. Remember, if you use the rock on the site, this also eliminates the need to export the rock, and import the gravel. There can be a tremendous financial edge to this ability.
7.) Decide that the bidding of the project is merely for financial gain or cash flow.
Unfortunately, there are contractors that will bid a project, to succeed in being awarded the project, no matter what the budget or the actual value of the project legitimately is. There are contractors that will look at a ten million dollar project and purposefully present a bid for eight million dollars. These type of contractors, understand that they are presenting a value for the project, that is not based upon any legitimate estimating of the values to complete the project. They are presenting a bid on the job to secure the project only.
It is very difficult for an owner, especially if privately funded, not to be enticed by the low number. This type of contractor, is very well aware of this owner tendency, and uses this owner characteristic to secure the project and establish the edge. In many instances this contractor has no intention of properly paying their subcontractors, or in many cases, even completing the project. This type of contractor is only looking for the financial stream of money that will occur, at the onset of the project. If the contractor can obtain half of the eight million, before the owner, architect or engineers, understand the contractor’s objective, then they have this money to float their company.
This type of arrangement will end up in lawsuits, however, as we have noted elsewhere within this website, there are contractors that simply want to keep all of the legal balls in the air, and only care about the money flow!
Those are ( 7 ) of the most common methods of establishing a bidding edge. There are obviously other methods such as lobbying the owner of the project directly with various incentives, establishing a dominant resume that will overshadow some minor financial shortfalls, or maneuvering within the various governmental regulations that provide incentives for companies that comply with certain requirements.
Competitive bidding is an extremely difficult and stressful method of securing work.
There are contractors that will bid hundreds of projects in a calendar year, to only win a handful. In the majority of instances, winning a competitive bid, has both its positives and negatives. To win a competitive bid, that means that you anticipate that the cost to perform the work, will be less than all of the other bidders. That is rarely the case. The majority of the time, the low bid resulted from a mistake in the interpretation of the scope of work or simply a mistake. When this occurs, the contractor must now rely on the skill, and experience of their management team, to resurrect enough money by skillful supervision and management of the project.
GOOD LUCK / WHEN THIS IS THE CASE!