Bidding philosophy

[rockstar.esq]

I posted a while back about what it's like bidding work and I was honestly taken aback at how well I was received.  I'm hoping that I can share a bit more that may prove useful to folks in business or who are working for a business and wondering why things end up the way they do.

 

Recently a colleague contacted me to tell me he'd started at a new job for an out of state company.  He wanted help bidding local projects with an eye towards opening a satellite office for his firm.  More on that in a moment.

 

As a subcontractor I have a list of General Contractors that I bid to ranging from quite small to outright huge.  Among them are some firms that are bidding much more often than average.  I call such firms "bid mills" because it's endless grinding out bids without any concern for winning or losing.

 

Recently I politely asked one such firm to take us off their invite list.  I received an immediate reply asking me why I wanted to be removed.  It's not easy to politely say "Your firm isn't going to win the unprofitable job you're chasing because your plan is to chase everything hoping whatever you win will be enough".

 

Thinking all of this over it occurred to me that there are some prevalent philosophical differences that really get to the heart of how bidding relates to their business.  I've found that there are some that work, and others that don't.

 

The two examples above are what I'd call the Parasite.  The parasite does one thing - it clamps on to the adjacent host and tries to suck it dry.  One host is as good as another.  Parasites aren't sophisticated - they do the same thing over and over again because survival is their only goal.  This mindset carries beyond just mindlessly chasing whatever is in front of them.  It's notable that the bid mill contractor's reply demanded an explanation from me.  It never dawns on these folks to reply with "you may want to reconsider - we've won X amount of work last quarter and we're gearing up for the summer rush".  They bid for survival so they view every invite as a lifeline - they have nothing to offer beyond shared survival.

 

My colleague thinks that it's a simple matter to just "win whatever" then build it profitably with folks he hires once he's got work for them.  The "plan" relies entirely on luck and growth to return a profit. He will likely discover that he needs to include more overhead to deliver quality work AFTER he wins a job.  Then he'll want to add more overhead to the next bid - so he'll lose.  He won't be winning enough work so he'll want to bid more jobs and so the parasitic philosophy is born.  These folks live in a state of constant disappointment going from week to week or job to job hoping for a big break.  It's depressing to think how long some companies have been doing this.

 

There's another group I'd call Farmers.  These folks have a very short client list - sometimes only one or two.  They tailor their operation to please their client(s) and they rely upon the work they're given for their entire survival.  Farmers are as good as their client.  In most cases Farmers with good clients are relying on relationships built over long periods of time.  Establishing those relationships is incredibly difficult.  In most of the cases I've seen, it's some combination of being in the right place at the right time.  It's pretty easy to know when you've found a farmer with a good client because they don't try particularly hard to announce their existence.  They get famous for doing whatever they're good at and subcontractors flock to them.  Farmers like this are generally very risk averse so they're not as focused on low bid as they are on perfect performance. They're also some of the happiest people you'll meet - it's a good life if you can get it.

 

Farmers with bad clients are as pitiful and dangerous as an abused dog.  They flinch every time their client rattles the chain, and they pass every abuse down the line.  There's a national grocery chain that used to conduct "reverse auction" that's a prime example of this.  A reverse auction has all the bidding contractors submit their bid to a website by a deadline.  A moment after the deadline, the website posts the current low bid amount along with a countdown timer for the amount of time you have to revise your number.  It depends on the conditions set by the client but I've encountered such bids where you must cut a minimum percentage of the low number in order to revise your bid amount.  Some display all the bidders - some just show the low number.  If they only share the low number - you don't necessarily know that you'll stay the low bidder.  Even worse - some of these systems keep updating the timer to prolong the bid for as long as people are cutting their bids (hurting themselves).  Some go for hours.

 

It should go without saying that the countdowns don't allow sufficient time to contact subcontractors to ask for better pricing, or to consult with anyone.  GC's have certainly cut beyond the lowest number they could achieve on bid day - where's that money going to come from?  As a sub, I can tell you it'll come out of your pocket one way or the other because the farmer with a bad client can't/won't just get work elsewhere.

 

The last group I'd identify are Apex predators.  These companies are very selective about what they will target because they know that bidding less means winning more.  They don't chase low profit work, bad clients, or pick fights with farmers.  One such firm opened an office in the local Metro area.  They have five metropolitan offices in as many states.  This firm started out by aggressively targeting high end clients that have select bid lists.  They took high end client jobs at a loss for over a year in order to build a local resume.  It's incredibly important to point out that they paid the local subcontractors promptly, and fairly.  They also delivered quality.  As they got onto more select bid lists, they tapered off on buying lesser work - choosing to invest in their target demographic.  After two years - they're on equal footing with firms going back 50 years in the market.  I would surmise that they plan on seeing a return on their investment many years down the road from now.  This is an incredibly expensive undertaking but every move they made was strategic.  Now this firm is doing something truly noteworthy.  They are choosing two subcontractors in every trade to bid on their work.  They make it clear that they're partnering with what they believe are the best firms to target the best jobs.  They expect better pricing and service from their subs and they offer lower competition, higher win rates, more profitable work, and prompt payment regardless of whether the client pays.  These promises hold weight because they invested in a plan that is clearly working.  The better sub pricing allows them room to add profit to their bids without exceeding market value - thereby making their final situation fiscally stable and sustainable. All without bid shopping, cheating, shortchanging the client, or screwing anyone.

 

I can tell you that there are very few Apex predators on the market.  Some of them do really small work but they're always profitable. That's an important point - it's not about having huge capital behind you - it's about knowing what you're good at, scanning the field, picking a worthy target, and applying your resources to make it successful. Companies that do that, are consistently at the top of their game.

 

Farmers are a little more common.  A bad economy is especially tough on good farmers because they struggle with how to scale back their operation to compete profitably on the hard bid market.  They're also relatively unknown to the hardscrabble subs who are offering market pricing. They also fall into traps with bad clients because they're entire mindset is on cherishing a single client rather than appraising them more critically.

 

There's never an end to the parasites - they're just the lowest common denominator wherever they reside.  It's really hard to tell someone at the bottom that they should be a picky bidder.  These guy's all believe the "big job" is going to come along and it'll be a gold rush for them.  Lots of gold panners died broke while grizzly's got fat swatting salmon out of the same water.

 

Know what your good at and go where it pays.

 

 

[SJS]

And have the courage to fairly judge a client/contractor and walk away if they are only there to bleed you dry.  There are some jobs that the grief you suffer through isn't worth the amount they are paying you.  And people who offend your sense of justice and fairness should be shunned, bad contractors should reap what they sow.  People who don't play fair, shouldn't get to play. A bad reputation should be a serious limitation in business...  Things have gotten bigger and we all play in a Global Marketplace, whether we want to or not.  But if you feed the bad dog they grow and they can bite you again.  Times are hard and it is hard to turn away work. (I don't say no often enough either...) I almost always regret working for someone I don't like and don't trust.  If in your gut you know you don't trust them, and its a bad deal, walk away.  You need work, you just don't need bad work.  Remember "you don't go broke on jobs you lose, you go broke on jobs you win and lose money on..."

[rockstar.esq]

SJS - well said. 

[doc]

Rockstar You know I've agreed very favorably with your other two posts, but am I missing something here?

 

  "They took high end client jobs at a loss for over a year in order to build a local resume."

 

   " it's not about having huge capital behind you "

 

       I don't understand how these two statements jive ? If you don't have a decent amount of capital to invest so you can afford not to make money on the job and yet still have the money to pay all your subs on time how can it be said that they didn't need alot of capital?

 

      The only answer I can think of is that when you say " at a loss " you mean with a shorter profit than what would normally be expected.

[rockstar.esq]

Doc,

 

You're right and I could have expressed that better.  The company I used as an example was likely bidding with no or very little profit to start with.  Viewed as an individual start-up,  this office burned through a serious capital investment by delaying incoming profits.  Viewed as a 1/6th or 16% of a firm that's otherwise profitable - the payback delay on that investment is strategic.

 

They an extreme example because they started chasing the highest echelon market in the metro area without any local history. They're going after work that's consistently high profit - during a recession so it's a pretty dramatic example.  I can see why it's in-congruent to use them as an example then I stated that huge capital isn't the deciding factor.

 

There's a small company I work with that wins roughly three times more often than their competitors.  The two principals of that firm used to work for a contractor that is a perfect example of the parasitic method.

 

Both guy's made names for themselves with the clients and subcontractors as being sharp, honest, and efficient with their time. Before long, the clients were asking them to break off on their own.  When they started their firm - they had a client roster, and an experienced team of subcontractors eager to work with them.  It's not easy working for someone who's wrong - headed but these guy's are proof that perseverance and staying true to your course is a worthy investment. 

 

They launched during a recession and have slowly grown.  They know their target market, and they built their operation to optimize those opportunities.  They pass on jobs that are too big, or too small and they don't bid if they sense anything's amiss with the client.  They're equally selective about subcontractors - they stay updated on cost data and they monitor performance strictly. Just like the earlier example - they get better subcontractor pricing because they are less risk to work with than their competitors. 

 

That pricing advantage allows them to maintain a reasonable profit margin while still being lower cost than their competitors.  

 

A critical point here is that the apex bidders see the necessity of investing in their reputation to gain market share.  The small firm was built on the investment the two principals made in their reputations over many years.  The bigger firm invested capital to build a local reputation in a shorter period of time.  Corporate buyouts/takeovers are another way towards that end.

 

The philosophical difference that sets apex people apart is that they're very selective and strategic about how they apply themselves. That's true regardless of their capital position. 

 

I hope that makes more sense.

[forgemaster]

Thanks for this info Rockstar, it makes good reading and is a useful resourse.  Again thanks.

 

Phil

[John McPherson]

I have a phrase that I drop on my students that I like to call McPherson's Maxim: 'It may be lonely at the top, but it is crowded at the bottom. Do something to get ahead of the pack of also-rans.' The example of apex bidders is an excellent illustration of that.

[Dillon Sculpture]

Great insight, please keep up the post Rockstar. 

Thanks,