A contractor recently started a thread on Michael Stone’s LinkedIn Construction Business Owners group with this question:
“If it’s not about price why does it still seem to be about price?”
Because Stone’s group is invitation-based and I don’t have express permission, I won’t identify anyone in this posting, but since the group has more than 8,000 members, I don’t think the thoughts here can be considered to be confidential. This will be one of the lengthiest posts I’ve ever published, but bear with me, as the topic is undoubtedly important.
I know I read time after time that price is very low on a customers list of items when choosing a contractor. Yet, I constantly find that it’s quite high on the list. Before you ask, I present myself and my proposals very professionally. I’m dressed in dress business clothes, my proposals are well thought and detailed including full descriptions of what we will do for the price quoted. I stress that I choose my subcontractors not only for the quality of their work but for the content of their character. I discuss other similar past projects that we have done and show pictures when I have them. I even try to make sure my truck is clean and always presentable. Despite this I find that price always plays a big part even for customers that I know are comfortable. Perhaps my problem is that I need to adjust my expectations. I close about 50 per cent of the jobs I bid. From what I read that’s not too bad but I can’t help feeling that it should be better. When a job you thought you had and were counting on gets away it makes you get a bit nervous and think about what you are doing. How do you find that price issue figures in to your bids and how do you handle it.
The responses are interesting, provocative, and challenge our perceptions. They also relate to our own circumstances, where we had a roofing job done on our house and price trumped everything including association relationships and bidding integrity.
As well, I have been seeing some Canadian examples of challenges to the public-sector bidding rules for architectural and engineering professional services. In the U.S., price is explicitly banned from consideration for federal and many state and local projects because of the Brooks Act, which sets the requirement for Quality Based Selection (QBS)
The Canadian rules are different, and indeed price becomes the driving force, tearing at margins or encouraging less-than-ethical behaviour. (The Quebec provincial construction industry is currently mired in a scandal involving organized crime, price-fixing and massive kickbacks to municipal and regional officials. A provincial inquiry has resulted in some incredible testimony, including one official who brought in a few hundred thousand dollars in cash to demonstrate how much he had collected before the problem was exposed. In Gatineau, which neighbours Ottawa, a local engineer explained that, while there weren’t kick-backs in his community, there was collusion among engineers to divide up the work so that everyone could make a profit by pricing things effectively.)
In Ontario contractors, architects, and engineers have teamed up to lobby for Brooks-Act style QBS systems, with mixed success. See this Ontario Construction Report story on the topic.
Obviously, major public-sector infrastructure projects have different challenges with pricing than individual consumer-based jobs, but the basic challenge remains the same: Can we truly escape the importance of price in winning work?
Two answers emerge in the thread.
The first is, if you are qualifying your leads and sales opportunity correctly, if you are winning more than a relatively modest portion of your initial leads — one contractor said 25 per cent — you are probably pricing too low. In other words, no matter how good your reputation, you will still need to deal with competitors who will under-cut you, and will win the job primarily because of price.
The second is that in situations where the work involves bid solicitation, you can’t escape price (except, perhaps, in situations like the U.S. public sector where the Brooks Act precludes price consideration as a primary selection factor):
I find that in a bid solicitation process, either directly with an owner or through an architect/engineer it’s always about price. You just don’t have enough contact with the owner to shape their opinion that much. The only time it’s not going to be about price is when you are selected through an interview process before pricing.
Assuming your business is additions, remodeling and new construction, 50 per cent is a really good number. To me 50 per cent of leads that come in are a wrong fit for any number of reasons. If 50 per cent doesn’t get you to the volume you want/need to be at then you’ve got to generate more leads or close more, but closing more than 50 per cent probably puts you into work you don’t want to do.
It’s hard to not think about the ones that got away but unless your actions are causing them to go away don’t worry about it. It’s probably energy better spent on finding new leads/projects. I find you can’t really know the mind of a perspective client. Most of them are playing poker with you. Even if you ask what were the determining reasons for picking the other guy they’re most likely not going to give you full un-sugar coated reason. Of the people who do call you back to say thanks for the time and quote, which is less than 5 per cent, but we’ve decided on using someone else, they’ll tell you something along the lines of it was just a better fit. Don’t let the ones that get away undermine your confidence.
To give an answer to your question of how the price issue figures into your bid, I don’t think you can let it. You price a job for what it costs plus your needed mark ups and that’s it. Anything less and you’ll just be putting your self in a hole.
A few renovation contractors suggest that you need to be very careful in not giving away too much information — certainly by providing a comprehensive and detailed quotation — until you have a design agreement committing the client to work with you. This is the approach pioneered (to me) by the late Sonny Lykos.
I’m not sure if this will help but I recently changed my tactics to avoid that exact problem. I was giving information and pricing just to hear that someone beat my price. I figure if I keep doing the same things, I should expect the same results. I have been using Michael Stone’s method in Profitable Sales, a Contractor’s Guide. Things have changed for the better! I no longer waste my time giving out designs, information, pricing and trying to convince a buyer that I am the best contractor for their job. After I qualify the client (on the phone) to be sure this is a job I want and the owner’s seem to have reasonable expectations and a budget that matches that, it’s only then that I make an appointment to meet and discuss their project. The initial meeting is not to get a contract for work, it’s to establish a rapport (we both need to feel good about each other) and to have a design agreement signed. After I have that agreement signed and a deposit in hand, then the client can have the information. I may not sign every potential client but then again I don’t lose business strictly based on pricing. If I don’t get that design agreement, then I start looking at what I did or better yet, failed to do. I can’t blame the other guy for beating me now, my success or failure is solely in my hands.
This approach works in higher-end projects, but is harder to pull off in certain commodity-type services or trades, such as roofing or painting. There, if the trade is working as a sub-contractor, the GCs generally will still insist on price-based quotes, and of course residential consumers will balk at paying a design fee for a quote in a field where “free estimates” are the norm.
Yet I’ve seen plenty of contractors thriving with repeat clients, and extensive ongoing business with major vendors and developers, and I expect that price quotes don’t really enter into the decision (though the trades can’t cheat — they’ll eventually be caught out if they are over-charging.) The answer here always comes down to the qualitative value assessment, and the painful fact that when price becomes the deciding factor, often the purchaser in the end is dissatisfied with the actual value received.
I don’t have a perfect answer to this challenge. In residential work, if you are performing higher end projects with significant up-front design and estimating costs, you should of course follow the Sonny Lykos/Michael Stone practices — and make sure you have a true commitment before providing detailed quotations. If you are working on lower-end trade-based work where free estimates are the norm, your marketing and sales packages will need to be strong and you’ll need to manage your work to ensure you can at least be in the ball-park price-wise with the norms, but you want to be in a place where you aren’t winning every job, or you are so desperate for leads that you’ll lower your prices to win something, anything, to do.
In larger public projects, the challenges are different. Obviously, openly bid, public projects will default to price unless something else prevents this, either legislative rules such as the Brooks Act or (alas) less-than-ethical collusion or rule-bending, such as I reported here about Quebec, or, as an other example, where a local hospital and general contractor pre-arranged change order decisions, and then the general contractor always came in “low” knowing that he could put through the change orders and achieve profitability. The work-around here may involve variations of Integrated Project Design (IPD), value-price quoting on projects (showing alternatives and possible savings) or, if you can build enough justification into the story, earning solid sole-source opportunities.
I welcome your comments and observations on this important topic.