Michael Stone has posted comments about a developer/general contractor’s offer to subs, worded like this:
We are in receipt of proposals from several well-qualified general contractors, all of whom have shown interest in our project. . . . We anticipate that the eight homes . . . immediately followed by seven more homes . . . this will lead to the kick-off of the 55 (additional) homes Housing Development.
A review of the proposals shows a very tight grouping of competitive estimates by the various contractors, with no one contractor standing out as being the “low bid.” That being said, we are not necessarily looking for the “low bid,” and are more concerned about establishing a long-term working relationship that treats all parties fairly. This would be with a contractor who can work with us regarding value engineering in an effort to meet our projected building costs . . .
We would like to schedule an interview with you . . . and request that at that meeting you provide us for an outline of a “Cost Plus Proposal” with a maximum not to exceed. This would include the following:
- Cost of General Requirements
- Requested “mark-up” on all subcontractors and materials
- Identify “in-house” labor costs, inclusive of superintendent if required, and what those costs are
- Profit & Overhead
- Outline of how Change Orders will be accomplished
Please let me know your availability . . .
Stone’ advice: Throw this one in the trash. You are giving all of your confidential costing and business information to the potential client, who will selectively apply the data to deny claims, and you are effectively assuming all the risk while (if successful) the developer makes good money.
But it is tempting to say “yes” to this sort of deal, because of the volume and forward growth opportunities. And Stone acknowledges that if you play by the wording here, you might find the relationship appears to be mutually beneficial, at least until the four letter word hits the fan (which it often does).
The project might turn out well for the contractor for a while. With a commitment for that many homes, they’ll have cash flowing steadily through their company. It’ll be fine until they reach the last house, the cash stops flowing, and they still have bills to pay. When cash stops flowing, that’s when the stuff hits the fan. That’s when you feel the impact of pricing your jobs too low.
It’s not just the general contractor who can be hurt in a project like this. The general will lean on subs to sacrifice their profit margins, and subs and suppliers take the biggest risk of not getting paid when the project is complete.
Far too many contractors operate their businesses with a paycheck-to-paycheck mentality and the limitations of this attitude are reflected in Canada at least by the efforts of associations representing subtrades to implement prompt payment legislation. They chase work based on “low price wins the job” arrangements, and often put far too much stake in one or a small number of repeat high-volume clients, only to discover how vulnerable they are when things head south.
Stone’s answer (and one which I naturally support): Contractors need to develop their sales and marketing capacities to attract and retain clients willing to pay better-than-rock-bottom prices based on the contractor’s reputation and service value (ie brand).
This change requires a really significant mind-shift and because it takes time to develop the skills you need. Because the sales cycle within the industry is generally not immediate, it can be scary to hit the switch, turn down dangerous proposals, and seek out opportunities where there is real growth. But if you don’t, and you take offers like this, your risk of failure goes through the roof.