Stop Bidding & Start Negotiating

Every year, successful construction companies stop and look at their last 12 months, and then they make decisions and commitments to next year’s contract and sales goals. Does your company have a winning customer contract award strategy? Consider the following customer types:

1. Customers who award contracts based on the lowest-price lump-sum bid per plans and specifications. They seek contractor bids from any company and accept numerous bids without any pre-qualifications or screening requirements.
2. Customers who award contracts based on the lowest price lump-sum bid from multiple contractors on their list. These are often repeat customers who award contracts after all bids are sorted, shopped and cut to the bone. Being a repeat customer only means you are awarded if you are the cheapest price they can find.
3. Loyal customers who have a short list of select contractors they use on a regular basis and award contracts based on service, schedule, experience and past performance.
4. Customers who negotiate contracts with contractors they trust and rely on.

Which type of customer do you want to do business with? After my company focused on the type of customer award we wanted, we performed over 85% of our work with loyal customers who negotiated contracts with our company. 

To make that happen, we started striving for 25% new customers every year, plus 75% repeat. Then we worked hard to convert these repeat customers into 5-6 loyal customers who only used our company to build their projects. As a result, we were able to eventually negotiate 85% of all our contracts. 

Select the Right Customers & Projects

When selecting customers and projects, ask yourself these questions:

1. Is this the right project for us considering size, experience, expertise, capacity, manpower, etc.?
2. Do we have a differentiating factor to set us apart from the competition?
3. Who is our competition?
4. Do we have competitive subcontractors or suppliers for this project?
5. Can we fit it into our estimating and construction workload schedule to be successful?
6. What’s the risk factor and profit potential?
7. Should we bid and is it worth the effort?
8. What are the odds this customer will award us the job?

Prior to agreeing to bid or propose on projects, always ask:

1. How many other bidders are you asking to bid? Who are they?
2. What contractors have you used in the past? What did you like and dislike about them?
3. Are the funds available to finance this project?
4. How will you open the bids and award the contracts?
5. What are the most important criteria you value to award the contract?
6. Who makes the final decision on awarding contracts?
7. What are the chances this project will be built?
8. If all else is equal, would you award us the contract?

Rules to make sure you choose the right projects to propose on:

1. Only pick the jobs you want and work them hard.
2. Never bid on projects you don’t want, don’t have an advantage on or can’t win — no matter how cheap your bid is.
3. Never waste time on estimating or bidding on projects without meeting the decision-maker in person.
4. The purpose for your bid is to get a meeting with the decision-maker and then negotiate a win-win contract. You must give them valid reasons to meet. Tell them how you will help them finish faster or save money. Offer value-engineering options, review the inclusions and exclusions to add more scope to your proposal, offer to do more than the minimum, or share how the specifications provide chances to lower your price.
5. Always ask for the order. Estimators are not professional visitors and generally not the best salespeople or negotiators in your company. Also, leaving a message like “How do we look?” never gives you a competitive advantage.
6. Follow up all bids and proposals aggressively in person. Remember, if they won’t meet or talk with you, they’re negotiating with your competitor.

The five-step approach to negotiate more contracts with potential customers:

1. Get on short bid lists (no more than three competitors) with new customers.
2. Get awarded contracts based on low price and then do a great job.
3. Convert new and one-time customers into repeat customers.
4. Convert repeat customers into loyal customers who only use you to build their projects.
5. Negotiate every project with repeat and loyal customers. 

Will They Negotiate?

The most important question is to ask is if they’ve considered or will negotiate the contract. Often your company is asked to meet several times, review preliminary plans and then provide multiple versions of a budget. Without a commitment from the customer, you are now working for free. You must get a commitment early in the process — or else they’ll continue to use your free preconstruction and estimating services until they finally ask you to bid against several other contractors. 

At this point, stop and confront your potential customer. If they are planning to bid the project to many other contractors and award based on the lowest price, tell them that you are not a free estimating service. If you want to continue the pursuit, tell them that when the plans are complete, you’ll gladly provide them with a price if there are only 3-4 other qualified contractors bidding. Then explain the value of negotiating with your company versus the risks of bidding.

As customers consider seeking to negotiate construction contracts, there are several factors to consider. The first is to decide what potential construction customers want. Every construction customer wants and expects you to meet a fast schedule, provide quality craftsmanship and be very competitive. These project requirements are the minimum required to just get on their bid lists. So, to convert a repeat customer into a negotiated loyal customer, you must provide more than is expected. Customers who are willing to negotiate contracts want more than the minimum construction services provided by most contractors and subcontractors. 

What do customers who negotiate construction contracts want?

• Less risk without field problems, fewer headaches or hassles.
• Full service and value plus open-book communications.
• Limited cost overruns or change orders.
• On-budget and guaranteed completion date.
• Design assistance and coordination.
• City approval, permit processing and utility company coordination.
• Expertise and technical skills.
• Trained and competent project management and field supervision.

Negotiated Advantages & Disadvantages

Most customers fear leaving money on the table and not hiring the lowest price contractor or subcontractor. To overcome the preconceived notion that negotiated contracts will cost more, offer the following solutions to potential customers. A negotiated contract will:

1. Create common project goals and objectives.
2. Develop a single point of project responsibility and reduce customer involvement.
3. Enhance project communications and get everyone on the same page.
4. Focus all project team members on solutions versus saving money and increasing their profit.
5. Ensure the project is not over-designed.
6. Provide full value to the customer and ultimately end up with a lower overall cost.
7. Complete the project faster and eliminate safety issues of concern.
8. Reduce field problems; eliminate disputes, claims and confrontations; and stop adversarial challenges.
9. Make the project a success for all.

Conflicting Goals With Low-Bid Contracts

The traditional “design-bid-build” approach to construction creates adversarial goals and roles between the owner/developer, general contractor and subcontractors. When companies are awarded projects based on providing the minimum per the project plans and specifications based on the lowest price, conflicting priorities and challenges will occur. These low-bid companies protect their profit by maximizing their returns via change orders, providing the manpower that best works for them, and not caring about the overall project goals. The pressures of pleasing several customers on numerous projects at the same time increases conflicts for contractors awarded contracts based solely on price.

With a negotiated contract or subcontract, the customer has awarded the project based on getting full attention from the contractor, extra services they’ve committed to perform and a goal to help make the project a success. This trust and contractual format binds the parties together with a common mission. This overcomes the low bid mentality and gets everyone working as a team.

Contracts & Liability

The traditional lump-sum bid contract places most of the responsibility on the owner or developer to guarantee that the bid documents, plans and specifications are perfect. The developer typically hires an architect who processes the plans through the city. Without any contractor input, the owner is on their own when problems, changes or conflicts occur. Contractors are only contracted to build what’s on the plans and included in the specifications — no more, no less. Any interferences from the developer such as field changes or poor plans will require a cost increase and extension of the completion date. 

Using a negotiated contract approach, much of the responsibility shifts to the contractor or subcontractor from the developer. By negotiating, the contractor assumes much of the developer’s liability and responsibility 

When the developer, general contractor and major subcontractors negotiate, they work together to determine the project goals. They assign responsible parties for the different project requirements, and then work together to make these goals become a reality.

Contract Clauses

When negotiating a general contract or subcontract, consider the following contract clauses that may entice your customer to negotiate with your company:

• Guaranteed maximum price — Offer a guaranteed maximum price based on an agreed-upon scope of work. Work together to create the required scope of work for the project. Mutually develop a budget that works and is realistic. Guarantee that you will not exceed the budget and you have anticipated everything required to complete the project or your scope of work.
• Fixed fee — Rather than hiding your profit from customers, explain what it takes to operate your business, cover your overhead costs and make a fair profit. Convince them your markup percentages are fair and competitive. Then, offer a fixed overhead and profit fee for the project. A percentage fee gives the wrong impression: When costs increase, so does your profit. In the customer’s eyes, this doesn’t give you an incentive to help them reach the project’s budget goals.
• Open book — Tell your customer your books and financial job cost records are open for review. You’ll hide nothing, and your customer can participate in the financial, purchasing and estimating decisions on major items as you arrive at the guaranteed maximum price. At the end of the project, offer to show your customer every dollar you spent. If the final costs exceed the guaranteed maximum cost, your company will be responsible for any overruns. If your final cost is under the estimated guaranteed cost, you’ll share the savings with your customer.
• Savings clause — Offer a savings participation for every dollar you save under the guaranteed maximum cost and the final job cost. After you receive your fixed contractor fee, offer to split the savings on a 75%-25% or 50%-50% basis between your company and the customer.
• Change orders — A fair markup on change orders for increased scope should be anticipated. Mark up the changes in a negotiated contract at the same markup percentage as you used when calculating the guaranteed maximum price. Don’t charge more as it gives the impression that you want lots of changes. A tactic is to offer no markup on the first $10,000 to $50,000 in changes. This shows customers you are trying to offer a guaranteed maximum price which covers everything imaginable to complete the project without additional costs.
• Contingency — Offer to carry a contingency fund in your contract amount for the exclusive use of your customer. As field problems occur, it’s easier to work out small extras by using this fund for unforeseen extra costs that occur. At the project completion, refund any unused contingency to your customer.
• Discounts — Offer all trade and material supplier discounts to your customer. Use a contract clause that states when discounts are available, the contractor shall inform the customer and ask for necessary timely funds to maximize the discount opportunities. These discounts will then accrue to your customer who made the funds available.

Negotiating Is a Privilege

Your customer places an extra level of trust  in your ability to perform. The best way to develop trust is through several years of working together. The second-best way is to get customers to negotiate with your company and then offer you referrals. Word of mouth and making loyal customer relationships a priority will ensure you’ll negotiate more contracts in the future.