Gregg M. Schoppman is a consultant with FMI Corporation, management consultants and investment bankers for the construction industry. Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing and multifamily markets. He holds a bachelor’s degree and master’s degree in civil engineering, as well as a Master’s of Business Administration. Schoppman has expertise in numerous contract delivery methods, as well as knowledge of many geographical markets. Visit fminet.com or contact Schoppman by email at firstname.lastname@example.org.
Contractors who live in the hard-bid world know the difference between first and second place is measured in dollars. The spread, or “delta” in the negotiating world, is often viewed in alternate terms. The fourth letter of the Greek alphabet—the delta—in math simply represents the difference or change in a certain quantity, or an increment of a variable. The delta may seem basic, but it’s more complex than one might imagine.
On one side, losing a bid is always hard. For instance, how often has the losing side said, “There is no way they can do it for that price.” Yet, 6 months later, the project is complete and the competition is still thriving.
Of course, there are always competitors who do completely insane things in the bid process—bid at cost, below cost, no profit, etc. On the flip side, there are also competitors who are simply more efficient or better equipped than you are.
A great litmus test is to have three estimators within one firm bid the exact same project. If you want to make it interesting, normalize certain aspects (e.g., labor cost, material prices) and examine the outcome. Without a doubt, there will be three dramatically different prices. This internal delta could be due to anything from crew sizes to methodologies.
How’s Our Bidding?
It is easy to take a home-field view of a bid loss because no one likes to think their approach was wrong. However, this is the time that the estimating team should conduct a post-bid analysis.
Assuming the firm knows the bid results and possibly the magnitude of the delta, conduct a careful examination of your competitor’s approach through observing the following. (Disclaimer: This is not espousing or endorsing corporate espionage, but, rather, the observance of what is happening in the marketplace and reconnaissance on an ethical level.)
• Approach—For a site contractor, how is the competition approaching areas, such as mass excavation, clearing and grubbing, and hauling (as observed from a distance)? For a steel contractor, what sequence of erection is being taken? For other contractors, what is the approximate crew head count?
• Vendor selection—By simply driving past the jobsite, determine what vendors/trade partners are being utilized? What trucks are on-site? Are the names those of familiar players or new entrants to the marketplace?
• General conditions—If the bid tabulation is available, it is possible to reverse engineer for approximate general conditions? With all other areas equal, including assumptions on dumpster, buck hoists, cranes, etc., a firm could establish relative cost variances.
The endgame is not to recreate another contractor cost profile, but to determine if the approach taken in the bid is the most effective way to build. There are an infinite number of ways to approach a problem, and firms must avoid fixating on their way as the single-handed solution.
What Do Customers Think?
Another aspect of the delta that is often overlooked is customer perception. What about the delta works against you? For instance, are you lower in overall price, yet your competition is selected? Brand B may be more expensive if they are a known entity, so it helps if you have a relationship with the customer that you know will ensure their service.
Maybe the delta represents a higher commitment to quality or safety. The questions to ask a potential customer long begore the proposal or bid even goes in are:
- What are your biggest concerns when it comes to capital improvement projects within your firm?
- What are the biggest frustrations you’ve had with a contractor (or even Brand B)?
- Obviously, price is important, but what other things at your organization should I know (e.g., work in an occupied space, neighbor disruptions, conditions, etc.)?
Knowing the customer’s hot buttons ensures the delta is covered appropriately and possibly helps trump deep-rooted relationships with Brand B.
Why Do We Win or Lose?
Lastly, there is one other aspect of the delta that should be considered. If you are always the low bidder or contractor that is selected, this may be a great thing on the surface. Who doesn’t like to win all the time? However, this begs an important set of questions.
First: Is your firm selected for the right reasons? It is nice to think your firm is selected because of their quality and service, but if it comes down to a simple dollar decision because the customer sees no true differentiation between contractors, then you have a problem.
Every firm likes to think they are special, but you must confront the brutal fact that you may not be an industry leader, but simply the lowest number. Being the low bidder might mean you are more productive than the competition, which is a strong positive. However, careful introspection about how a firm starts a project and, more importantly, how it finishes, can be the difference between being like every other firm and being best in class.
The delta may also shed light on aspects of the business, such as overhead recovery and cost control. For instance, some firms introduce their organization to a customer with a low margin to get a foot in the door. However, achieving margin gain with these repeat customers becomes a harder proposition. If a contractor is failing to deliver top service, a customer will feel that delta and have a hard time accepting any price increase.
Firms that conduct a complete project analysis can learn jaw-dropping facts about margin contribution from customers, niches, sectors or divisions. Too often, firms are not only bidding below their project costs, but also failing to achieve a final gross margin that covers overhead. As these customers add to a firm’s volume over a long period of time, the firm’s profitability is negatively affected, and resource allocation is inappropriately assigned due to not understanding opportunity cost.
There will always be a first and rest of the pack. The leaders of top firms will always ask why they are or are not selected. Objectivity and a healthy dose of organizational improvement can mean all the difference between being the leader and the first loser.