Crazy pricing: The challenges of ‘unfair’ competition

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In the last few days, we’ve received several visitors to the old Construction Marketing Ideas blog at http://www.constructionmarketingideas.blogspot.com as contractors participating in the Mikeholt.com forum read through a challenging thread “Man its getting bad”, referencing one of the blog’s most popular postings:  My search and tracking down of the source of a viral Internet image of a boat named “Change Order”.

The discussion relates to the challenge of competing against low bids which simply could not make any economic sense, unless the sub-contractor is truly willing to work for free (or at worse) a loss.

The original poster started the thread with this frustrating observation:

I just bid a 3000 sq foot office lease shell, 16 – 2×4 3- 2×4 emergency fixtures 28 down lights and 3 exit lights 7 oc sensors 3 ceiling sensors 54 plugs…ect.

My fixture package (and I have 4 prices) was $6500.00
The general got 3 bids, mine $20,356.00, $17,100.00 and $11,781.00

The Change Order theme is part of the answer of how these low bids are purportedly sustainable:  You go in low and then seek to recover your margins from change orders — especially when you know the plans are flawed and changes will be required.

Of course, this sort of practice is a double-edged sword because change order disputes are common, creating payment problems and litigation issues which can bury a sub-contractor.

Worse, the problem may be much deeper and no amount of change orders can change the story.

Consider this observation by one person on the thread:

With the time off, I’ve been able to make nice with one of the head project managers at an established GC. We go out for lunches and I have spent some time in the GC’s estimating dept.

Here’s what I saw the morning of the bid opening for a million (1.5 mill about) dollar job.

All of the sub-contractors were faxing in their quotes for the job, some had faxed in numbers the day before, to the GC’s estimating dept.

The project manager (PM) was looking over the bids, prices for mechanical work (plumbing, electric, HVAC); low prices were just over 100,000, prices from established mechanical outfits were right at or above 200,000.

The established mechanical contractors were the high price. Most had a boiler plate of exclusions attached to the bid with wording that stated if you don’t put OUR exclusions in the contract then this price is void. Also had a lot of language about payment & billing & scheduling of work.

Most of the low prices had no exclusions.

The PM penciled in a LESS than average price for all the mechanical trades and laughing said “let’s see if we can get it done for this dollar amount”. The PM said that established contractors that have estimating departments and were good for getting prices on work; smaller contractors had lower prices but were unreliable for prices and work. The PM also stated that he liked smaller contractors because most of the time they would come to his terms. Established contractors were a “pain in the neck”…….

Now it’s about 9am the man who owns the GC sticks his head in the door, the PM starts to complain how he hasn’t been able to vacation due to the economy. The owner of the GC said to the PM “you have the SOANDSO job coming up, if you can beat your subs up and get the job done for less, with NO EXTRA’S, take the saved money and go on a cruise (~9000.00).

The PM grabbed the SOANDSO job folder and called all the subs (on speaker phone). In a nutshell the PM would say that the sub was too high, come down in price, I’ve got more work for you. Most of the subs caved.

What I saw is that the lowest bidders caved no problem; the established businesses would not budge much on price. This is interesting because the guy with the lowest price would lower it more, but the guys with the higher prices would not drop the price much….

PM also made the point of saying that if he was forced to use one of the established sub contractors (high price), that he would try to make the other trades (low price already) cave and come down in their price more to make up the difference for the established sub contractors high price.

This sort of stuff is scary, indeed.  I don’t know how common these practices are — obviously no one is going to issue a news release announcing their less-than-ethical practices — but my sense is these bidding games happens more often than any of us would like in a recession-type environment.

Then what should you do in this sort of situation?

One approach some sub-contractors have practiced is simply to close up shop, mostly.  If you’ve been prudent and not spent every cent you’ve earned, you could essentially put your business into hibernation, working with a small crew on maintenance projects and the like.  But of course you need low overhead and cannot be carrying high debt service costs to survive working at that level.

(If the debts are starting to kill you, I recommend you seek out competent legal counsel well before you need to file for bankruptcy/reorganization.  With careful planning you can reduce the risk of ‘fraudulent conveyance’ claims and properly segregate your personal and business assets.  This cannot be done at the last minute.)

The other road to survival, the high road, is of course to think marketing more than bidding.  If you are able to develop relationships to the level that the general contractors will take you into their confidence (as this poster achieved), you have a real edge.  Some jobs, even in hard times, are not price sensitive.  There are embedded funds, established relationships and some owners will pay full price for reliability or because they really enjoy working with the general contractor.  (I’ve cited several times the contractor who always wins low bid jobs with a local hospital — with the pre-arranged understanding with hospital administrators that change orders are expected and will be approved without question.)

Your challenge, of course, is that these kinds of high quality relationships do not generally arise out of desperate low bidding and price shopping as you scramble from bid to bid, hope to hope.  You will need to think differently.  You can.

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