Has Conventional Wisdom Trapped You In a Low-Price Game?

Part 2: For Contractors Who Bid Work

By Ted Garrison

Ted Garrison, author of Strategic Planning for Contractors, works with businesses in the construction industry. He can be reached at Growing@TedGarrison.com

Even contractors that bid work can improve their profit margins by avoiding some of the traps created by conventional wisdom.

In the first part of this series, I emphasized how conventional wisdom traps contractors in a low-priced game. The article stated contractors should avoid prospects that only care about price. That's because these owners are never loyal to the contractor, only the price. However, contractors that avoid low-price prospects have higher profit margins. The good news is that price-only buyers are a small minority.

Thom Winninger in his book, Price Wars, reported that only 27 percent of consumers are totally price driven, while 17 percent are totally value driven. This leaves 56 percent of consumers who are both price- and value-based, but this group buys based on price when they can't determine relative value. Further complicating the situation is the fact contractors rarely see owners from the 17 percent group because these companies usually already have secured their preferred contractors, so their requests never hit the street. This leaves the impression that virtually all remaining owners care only about price. In reality, when the middle 56 percent is educated to value, 73 percent of the marketplace buys based on value.

In construction this is further complicated by public work that is usually competitively bid and by private companies that require at least three bids. However, the truth is that many of these groups would rather avoid competitive bidding because they realize they are getting low value by awarding work in this fashion. Many buyers of construction services have concluded that selecting contractors based on low price produces the following: poor quality, confrontation, inefficiency, poor profitability, low value, and allows the poor performers to compete.

The challenge for most buyers of construction services is how to evaluate contractors. Most general contractors agree that analyzing subcontractor bids is one of their most challenging tasks. If experts in the industry recognize this challenge, how easy do you think it is for the average consumer to evaluate contractor bids? They can't, so they simply go to the default - price. The challenge for the contractor is to explain the value the firm will provide to the prospect.

However, telling them that you produce higher value than your competitors is almost useless, because all contractors say the same thing. A better way is to show them. Of course, this means you might have to get the initial job by being the low bidder, but that isn't always unprofitable, if you understand the customer usually has needs other than low price. Two examples illustrate the point.

The first involves an e mail I received. A contractor wrote that his company always attempted to address the customer's concerns on their bid projects. He continued in this manner, but eventually he decided to raise the bar. This resulted in one of his most profitable projects and with a customer claiming it was one of its best projects. Of course, in the bid market the actions the contractor can afford to take are limited, but by simply avoiding any confrontation and working to improve project efficiency through collaboration, both parties can benefit.

In another example, a road builder was awarded the contract because he was the low bidder. Unfortunately, after receiving the award he realized he had bid too low. The president of the company told his people to go back to the city and sit down and find every way they could work together to speed up the project so that they could earn the early completion bonus, because without it they were in trouble. It worked, and the contractor was able to finish early. The surprise was they made money before the bonus and the bonus turned the project into a very profitable project. The best news yet was that other cities started calling and saying they wanted them to design-build their next road in order to take advantage of their aggressive schedule.

Even public entities are attempting to find alternative delivery systems because they realize that awards based solely on price create lose-lose situations. Other choices include design-build or value based procurement processes similar to Dr. Dean Kashiwagi's of Arizona State University. Once contractors begin to understand that price is not the only consideration, it opens doors to other possibilities. While some of those doors present their own challenges, they do represent better alternatives than the conventional wisdom that the customer only cares about price.