View of a market from within

[rockstar.esq]

I have been the Chief Estimator of an Electrical Contractor for the last four years.  Prior to that I spent a few years as the estimator for a mid-sized commercial General Contractor.

 

Recently I attended a professional seminar geared towards construction estimators (sounds fun huh?).

 

That event left several impressions that I imagine the sponsors didn't intend.  First off, an estimator from a GC piped up at one point exasperated that some subcontractors were not bidding exclusively to him.  He was angry because he felt the explanation they provided (can't afford to put all our eggs in one basket) ignored that helping him win would lead to them getting work.

 

This same gent later interrupted when the topic changed to discussing bid results post deadline.  He stated that it was his policy to withhold bid results if he won (standard procedure) AND if his competitor had won but wasn't underway.

 

As a subcontractor it would have been impolite to answer either statement but here's the thing.  This GC is soliciting and accepting approximately 5-7 bids per trade.  Absolutely every project I've ever been awarded I had to compete for.  The question becomes, how does this GC compete for my bid?  If this GC won even half the projects he competitively bid- he would have the highest hit rate of any company I know.

 

The situation is that he's just not a real contender and his subs know that.  He's also unwilling to give bid results so when it's time for me to show my boss that I'm hitting the mark and doing things right - I have nothing to show for it.

 

GC's withhold bid results when they win because they want to give their Project Managers a chance to review the estimators work.  If upon review, they find a mistake that means that bidder B was actually low - the Project Manager can award to bidder B.  If the bid results were made public right away - Bidder A would contest the award even though they weren't really the low bidder which creates bad blood.

 

It's a policy meant to allow for quality control - it shouldn't affect your outcome as a subcontractor.  If I had to guess why this guy withholds bid results until the job's underway I'd say it's because he's holding out hope that the awarded GC will pull their bid before getting underway which might lead to his firm getting the job.  If you're not 2nd low - there's very little risk that will happen.

 

This brings me to another point.  General Contractors typically blast the marketplace with emails that are either sent by their staff or by a bid service company.  Absolutely everything necessary for a bid is dumped into my inbox including nag emails asking if I'll bid. As an average the projects will take me about six hours  to bid.  I average 320 bids a year.  A typical GC bids about 1 or 2 projects a month - some bid five times that.  The companies that bid more often - win less often.

 

None - not even one client will share bid results voluntarily.  I have to contact them an average of four times to get an answer.  The bid results I do get virtually never include actual numbers or accurate percentages.  I get "competitive",  "close", "I used your number", and so on.  As an average, I will only get bid results on 40% of the projects I bid  typically three to five weeks after the deadline.  This means my feedback look is delayed by a fiscal quarter.  

 

Keep in mind that the majority of the GC's bid's are read aloud within 15 minutes of the bid deadline. 

 

One lesson taught at the seminar I mentioned earlier was that successful bidding practices means bidding less and winning more.  I have a couple of clients that my boss can't seem to admit are bad for business.  They bid roughly 50 projects apiece in a given year.  Out of those projects, they'll award us one and they'll be terrible projects.  Most of the time they tell me that I was low but they didn't win.  If you take my billable hourly rate to their annual workload it's obvious that we're losing money by associating with them.  

 

As a businessman it's important to see that every time you lose a bid- you must find a way to win other work that's profitable enough to pay for that lost investment.  I took a moment a while back and did some calculations.

 

Taking my average win percentage (excluding these two clients) I'd need to bid 105 projects to win sufficient work to break even on the cost of bidding to these two clients.  That means that my bosses loyalty to these firms consumes about two thirds of my output!

 

To put that another way all the profit we make in a year comes from whatever I bid approximately two days a week.  Not bidding these two clients would literally double the annual profit.  Any company with a 2% win rate should overhaul their estimating and marketing programs before wasting any more of the markets time.  I genuinely can't imagine how they've stayed in business this long.

 

The takeaway from this is that the perception that loyalty and relationships should trump all in business is based on the presupposition that the work in common will be profitable.  GC's who call begging for bids are inevitably out of options because they chase bad work, for broke clients that they never win.  It's odd to actually say it, but I genuinely feel that these folks are unethical for wasting the markets time.  

 

During my tenure as a GC estimator I had a policy of posting bid results within 24 hours of receiving word that I'd lost.  I posted a spreadsheet listing the companies and their bids along with a note on who I'd used and why.  I posted the spreadsheet on the same bid letting system we used for the invites so anyone who'd bid got all the results.

 

Within weeks I started receiving bids from subs I'd never heard of before simply because they knew I would provide bid results if I lost.  Bidders quickly learned how they compared in the markeplace and adjusted to stay competitive.  I got better pricing and won more often than before that policy.  The solution to reducing high prices can be as simple as being a better client.  

 

Finally, I'd like to share an observation.  Business owners are always attracted to "shiny objects" i.e. a project that's burst onto the scene that starts tomorrow, is fully funded, and has incomplete drawings, but if you'll price their alternates, unit prices, and come in under budget the job's yours.  These are the hallmarks of a dirtbag client.  There's never enough time to fully design it, define it, or price it - but there will be time to ask for umpteen revisions before they call and "negotiate it".  "Hey - your number looks good and you're apparent low but we budgeted 20% less waddaya say?"

 

You'll lose money - it'll hurt your business, and trying to outsmart a career grafter isn't a resume builder.  The fact is that there will always be a surplus of terrible projects.  People don't go out of business because of jobs they lost - they go out of business losing money on jobs they won.

[doc]

Rockstar!!!

 

Absolutely Love what you've said and agree !!!!!!!! 

[rockstar.esq]

Thanks Doc.

[Frosty]

Rockstar: Chief estimator I guess! Anyone doing business on the open market lives or dies by the bid and that was a darned well said presentation. I think the last sentence sums up the essence well.

 

Excellent post, thank you.

 

Frosty The Lucky.

[Steve Sells]

Some people wonder why I sold my shop 14 years ago. Bidding was the worst, the "dirt-bag" types you mentioned I finally figured out were not fools, they knew what they were doing most of the time,  but were trying to pull it over on us Subs.

 

I caught one after the fact near the end.   I had bid of about 14 for the electciral for a job and the GC called me stating they may not get the contract if I dont lower my bid.   I refused to lower my price, and said feel free to get another sub for the power.    Later I found out that same GC was charging the owners 32 for my 14 of work, to the client.   

 

It apprears I was not the one that was pushing the bid over the budget when a GC has that big of a margin.

[rockstar.esq]

Frosty - thanks for the kind words,

 

 

Steve. It's a shame that kind of thing goes on with the shady characters - they're bringing the slash and burn method to construction with similar long term impact on the system. 

 

Taking the agriculture analogy further, the guy's trying to harvest a dust bowl will take you down with them even if they don't try to cheat you. 

[John McPherson]

You have a valuable lesson here, and one that you need to find an appropriate way to introduce to your bosses. Cronyism is hard to work around, especially if you can't go over someones head. Having the figures to back you up may help, but there is no way to guarantee acceptance. 'Shooting the messenger' is a time-honored practice by management.

 

I found out long ago that some clients were far more trouble than they were worth: lawyers were usually the worst to deal with and get money out of. One in particular left me holding a check "until funds could be put in that account". (He had plenty of money in other accounts, he just had the one checking account that he put funds in for closings, etc.)  Weeks went by. Having a relationship with the local branch manager with his bank, I would go in frequently and check the account status until he put funds in for something else. When he did, I took it all as cash on the spot, instead of making a deposit in my bank and it taking days to go thru channels. Of course, he called me and screamed on the phone, because he had put just enough in that account to cover another deal, and I had made him overdraw it. I told him I would never do work for him again, and would he like me to make a formal complaint to the bar about his business accounting practices? Good riddance.

 

Long story short, sometimes your best business deal is hanging up on some clients, and taking your family to a movie. At least it is entertaining, and you will lose less money in the long run.

 

They say that cream rises to the top. Unfortunately, so does pond scum.

[Jacques]

That is a very well written post. It should be immortalized.

 

Now if I can just get my boss to read and understand it. 

[rockstar.esq]

John, Jaques,

 

Where I work if the messenger hasn't been shot it just means management is reloading!  The facts and figures I bring to them don't resonate for several reasons.  The most significant is that they don't track their own job accounts with enough precision to see what works and what doesn't.

 

The old "common pot" technique conceals lots of information.  For example: the job ran over on labor costs but caught a break with a profitable change order.  The manager doesn't see where the problem is and the ownership doesn't realize how much they're losing in the process.  Nobody complains because the common pot job account is "Net positive".

 

Another reason they don't want to hear me is because I'm telling them something they don't want to hear.  Every company is going to have an efficiency of scale.  Toyota makes a car cheaper than I could because they've built their infrastructure to meet their business model.

 

Entrepreneurs are naturally ambitious and optimistic.  I've found that very few can accurately define their target market, key profit makers, or even their most effective practices for making money.  I've found they consistently think that "big, new, and long term" are all qualities to strive for when selecting opportunities.  They love the notion that they'll camp out on a job site for a good long time and just make steady paychecks.  They rationalize that brand new stuff is "clean" and "easy" as compared to say - remodels.

 

None of them consider that the laws of economics will govern all.  If everyone's convinced something is better - competition will mount around those opportunities.  The potential profit is therefore diminished, your odds of winning are lower, and the client knows they don't have to try as hard (so they don't).  

 

Winning such work generally requires you bid with less profit.  Everything that made the job "clean and easy" will be used to deny change order requests for stuff everyone missed.

 

Another way to define this situation is risk.  You're committing your company resources for a long time to this low profit venture with low odds of change orders.  Basically you've waived the opportunity to do other, possibly smaller jobs for higher profit.  The monetary difference to your bottom line is called the "opportunity cost".  Taking the big job is potentially still a risk to your bottom line.

 

In contrast, the humble contractor who chases ugly remodel projects often doesn't compete as much for them.  These folks are specialists who've built their operations to be efficient at producing one thing in the market.  Their knowledge and client relationships effectively reduce risk by driving design decisions and including contingency funding to cover changes.

 

Way too many entrepreneurs think their business is held together by the gravitational pull of their charm.  Market downturns push the country club buddies aside because you simply can't compete when people aren't on top of their game.  These guy's get their false footing during good times and commonly their only corporate strategy is "Growth".  Cancer operates along a similar line with the same outcome.  

 

The fact is, if you can't reliably find and win work you can do profitably - you're digging a financial hole.  The key is to use your job accounting to determine what you're good at rather than accolades/complaints from the field.  Chasing work that isn't profitable with the "plan" of sticking it to the owner in change orders is gambling.  In the long run, the house always win on gambles.  I don't care for those odds when providing for my family which is why I do honest work for a living. 

 

It's better to become rich doing something unpopular than going broke with your banner on the big job.  

[doc]

Rockstar,

                I'm voting for your posts in this thread to be made a sticky in the business section here on this site :)

 

 

We do not take votes, but we do listen to our members

[rockstar.esq]

Again,  Thank you Doc.

[SJS]

Rockstar you are spot on. I loved the money line from the first post " People don't go out of business because of jobs they lost - they go out of business losing money on jobs they won."  You see your bosses slapping their ladders against the wrong wall, looking for the big score type jobs, instead of hustling up a bunch of smaller higher profit jobs.  For those of us trying to make a living doing what we love, (or even just make a little something to cover the habit... ;-) you remind us to watch the numbers. Some dead guy said the unexamined life is not worth living...  Well if we don't know if we made any money, we are putting our business and families at risk.  It is fine to do a few jobs here and there, at a loss because you want to do the job, but you cannot make a living doing that! Figure out which work you do that is profitable, and keep looking for other work you can do profitably.  Try not to leave all your eggs in one basket, but make sure you don't neglect the basket.  Do what makes you money, make sure you are making money, and in between times have fun looking for other ways to make money.  If you want to blacksmith as a BUSINESS, as your day job, and not just a hobby, you have to make sure you have enough income. I have only done one architectural commission and I gave it away, other wise I never had the time, or they never had the money.  I needed the kick in the butt to push me to examine what I am doing, and where I am making money, and if I can change that.  I make most of my income shoeing horses, I love blacksmithing, and making really cool things you cant find anywhere else, I sell a little bit...  But I am sure I can do better, and make the blacksmithing side of things be more profitable, and less a starving artist act of passion.  As I get older I am slowly figuring out how to work smarter and not harder.  This thread and the one on subcontracting are pushing me to be more profitable, cause isn't it more fun to be successful;-)

[Dan P.]

Fascinating, true and important.

Please can anyone posting a "I want to be a blacksmith" type post be required to read this.

It's a lot quicker and easier than taking five or ten years working it out from scratch!

[petehdgs]

I love this post! I worked for a large CAT engine generator dealer for over 20 years. It was funny how management would watch every penny as the DOLLARS flew away! You are so right about how management at big companies won't listen to things they don't want to hear.

I started GenTune in 2006 as a diesel generator repair and maintenance company. I don't sell new generators, I don't sell parts outside of the jobs we do, and I don't bid any job to lose money. As a small business I have to make money on every job. I can afford to wait for the jobs that pay but I can't afford accepting any jobs that lose money.

Our average job lasts one or two days. I'd rather have 100 one day jobs instead of 1 100 day job. More interesting, more profitable, fewer headaches and more fun! I love this business!

[xixia]

learned                                                                                          

Edited June 3, 2015 by xixia

[picker]

I re-read this gem of a thread.

In my younger days, as I entered the competitive business world I learned many of these lessons through trial and error. Success came in fits and starts. I managed to maintain a blacksmith business for 13 years. Now, after a hiatus of 18 years, the economy has dealt me out of the career field I've been working. I'm seriously considering re-opening my business once again.

I'm conducting a feasibility study, and wanted to re-read this post to confirm the things that at one time evolved into a second nature in my business dynamic.

Thanks again.

[Culver Creek Hunt Club]

Rockstar. 

 

A couple comments. I have worked for GC's as well as Large Subcontractors. I have worked in the field and came up from my tools , I have managed projects as a PM and a Superintendent. I have spent years in estimating and have run an estimating department that bid a billion in work a year and had 15 estimators working for me. The market is changing. Very seldom are we involved in projects bids any more that are "read 'em and weep". Most are negotiated, best value procurement, design assist or design build. I really liked those days when the envelopes were opened. Most of our work is Government and large private like Pharmaceuticals, labs, data centers and such.  I will say that the two companies I worked/work for have a strict confidentiality policy. A sub's number or their standing in the group was never talked about. I can't tell you how many subs would come back after awarding to another sub and tell me they had money that they could have come down, after the fact. We found that that strict confidentiality with the numbers actually kept things on a more fair playing field and got the best available numbers to start with. 

There may be discussions once we win a project to assure that the scope is complete and it is an apples to apples comparison. It amazes me how many subs to a crappy job understanding scopes or just bid the portions of work that they feel they want to. (Painters, caulkers, firestoppers and yes even electricians can be the worst at this) Bid day is hectic, I know when the last minutes roll around for getting numbers in electricians are typically the last number the GC's see. That is usually due to the gear suppliers holding out until the last minute. But imagine trying to get a 150 million design build prison number together and fully understanding every nut and bolt, or what sub left what out of their number. There has to be after bid day evaluations of the scopes and numbers. 

 

That said I am now with a large Sub and I know our numbers get shopped by the GC to pad their bottom line more. It sucks. 

 

Just a different view from the inside. 

 

Side note( Sorry didn't see the OP was so long ago.)

[rockstar.esq]

Culver,

One point you made sticks out.  The last minute bidding is an absolutely intentional practice to prevent bid-shopping.  Bidders, vendors, and distributors are trying to deprive contractors of time to shop their numbers around before the deadline.  General contractors often insist that they "need more time" to scope proposals after the bid. 

The truth of the matter is that subs don't trust the GC's not to screw them out of a job they rightfully won.  GC's may not have much loyalty to the team of subs who earned them a bid-day victory.  The entire situation exists because there is no trust.  There's no trust because GC's aren't willing to prove they're ethical and accountable.

Think about it for a moment.  More GC's will lose than will win.  That means the losing GC's have literally nothing to lose in providing bid results voluntarily and publicly.  Many GC's claim they're the lone ethical player in a field of cheats.  The truth is that the losing GC's can expose their cheating competitors by arming the subs with information to see what happened.

That's not only hurting a cheating competitor or cheating client, it's also helping build your reputation for fair dealing.

The GC's who prove they're trustworthy get sub bids in plenty of time to scope them BEFORE the deadline.  In fact, I would say the insidious code of silence is the entire reason bidding is so hectic, adversarial, and last minute.  GC's need to understand that bids are submitted for free in exchange for either a contract, or the information to make their next bid successful.  

As for the incomplete proposals, I'd have to point out that few GC's spend any amount of time actually providing direction to their bidders.  Subs have WAY less time to spend with the project drawings, and Architects regularly bury requirements where nobody would look for them.  GC estimators should be streamlining the process for their bidders.  Sifting through proposals is bid collecting, not estimating.  If more GC estimators communicated what needed to be done in order to win a job, there would be less scoping and lower prices on bid-day.

More to the point, if a GC's regular bidders are hacks, what is that saying about the GC's ability to compete?  Market-leading subs are going to pursue market-leading general contractors.  If a GC can't attract better subs, they should seriously consider  the implications on their reputation. 

GC's that bid lots, win little, and never share bid results are the lowest common denominator.  They naturally attract like-minded professionals so it's hardly surprising that bid day isn't much fun for them.

 

[Kozzy]

Throwing a monkey-wrench in this whole thing:  Recently we've been hosed by mega-corporations who have instituted a 
computerized "reverse auction" bidding process.  You get to see what everyone else has bid which might be a good thing but the process does not take into account anything but the bottom line.  Specs are usually spartan as a way to encourage even lower bids.  There is no value adjustment on the corporate end for material, responsibility or workmanship quality involved, just who decides to be cheapest.  

2 results:  Some jackass ALWAYS underbids and then chases ways to cheapen his job after the fact as soon as that "oh-crap.  We underbid" moment rolls around.  The company conducting the reverse auction has shot themselves in the foot by looking at nothing but bean-counter issues.

This is not truly competitive in any way.  It's nothing but a race to the bottom and eventual disaster for both parties.  As a company, we decided that we don't want to work with companies who's value system is so skewed toward only the bottom line so we made a decision to pass on these.

Just tossing that out because it's ta new way to put your company out of business quick.  Welcome to the new corporate world, though.  Expect more of it when the look-ahead of corporations is about 1 fiscal quarter rather than several years.

[rockstar.esq]

Kozzy,  The online "reverse auction" has attracted a fair amount of legal attention because it's an incredible opportunity for fraud.  Most of the participants are simply staring at a site online.  Who's to say that what you're seeing is the same as what your competitor is seeing? The system I dealt with had a minimum percentage that you had to cut to revise your price.  Every time someone cut their price, a countdown timer would reset extending the bid by a minute or two.  The system only showed the current low-bid and didn't indicate how many bidders were competing.  At the end of bidding I know I was the low bidder.  However it took me three months of trying to get anyone at the client to answer.  When they finally did, it was to tell me that they "went another direction" with the contract.

I've only encountered two firms that used reverse auctions and both of them are absolutely terrible to work for.  You're absolutely correct that there's a tendency for "winners" to attempt re-negotiations with their subs after they bid away all their profit.  It's interesting how shady clients tend to attract like-minded professionals.  I'm happy to let them ruin one another.

The mega-corporations also love to take their sweet time about paying.  There's a growing trend to use these "Construction Management Tools" which are pay-per use services that handle billing bureaucracy.

In practice, some banker in the middle of nowhere decides to review change orders at whatever random interval they choose.  They'll think nothing of deferring a payment simply because they didn't like the format of your documentation.  You can easily end up fronting your client the cost of material and labor for months on end without any recompense for the interest.  Plus, and this is significant, YOU pay for this service as a percentage of your total contract amount.

Until the change order is approved by the remote banker, the system won't even admit it exists, so you can't bill for it.  Yet you're staring at a signed change order on your desk, obligating you to additional work that you'll face penalties for not performing!  From the client's perspective, this isn't a bug, it's a feature.