A sobering reminder

[rockstar.esq]

I've been posting about estimating here for quite a while in an effort to share what I know and help where I can.  This week I got word that one of my competitors is going under.

 

Businesses go out of business all the time, that's understandable but there's a story and a lesson in this one I think is worth sharing.

 

Two years ago I bid on a large project that involved two buildings on a single site.  All the bid communications from the GC's indicated that both they and the client wanted a single build team for both buildings.

 

When I prepared my bid, I specifically separated the pricing between buildings because I had a sneaking suspicion that knowing what the breakout cost was going to come in handy.

 

The deadline came and I sent in my proposals to all my GC's.  A few minutes later, one firm called asking me for a breakout.  I was assured it was purely  an "informational" request.  I gave them the breakout, they hung up and an hour went by. The phone rings again, this time the GC's asking if I'd be willing to build either one of the two buildings.  The estimator would not tell me which building they were planning to contract with me.

 

Months later my boss is given "the opportunity" to revise his price on both buildings.  The GC claimed they had achieved nearly $100K in savings by splitting the work between two contractors but they wanted to consolidate to one.

 

Here are a few critical bits of information.

 

My bid for both buildings was the lowest bid on bid day by: 0.8% or roughly $5K.

 

One of my competitors claimed their "Big building" cost was $100K cheaper than mine.

That same competitor's "Small building" cost was $105k more than mine.

 

Astute readers have already noticed what happened.  My competitor guessed on the building breakout and made a $100K error.

 

It's not reasonable to think that you could split the work between two contractors and save TWENTY TIMES  the difference in their hard bid totals for the entire job.  This made the aforementioned "opportunity" a poisoned chalice.

 

My competitor has been in business for 30 years.  A lot of people are losing their jobs.  The individuals at the GC who set this up went to a competing GC right after the contracts were signed.

 

This all started with "Hey quick question; how much is XYZ portion of this job worth?  I'm just asking for my information..."

 

And like so many sad stories, there comes a moment where the moral path is clear for everyone involved.

 

The GC's staff acted in bad faith to exploit an opportunity which they escaped as quickly as they could.

 

My competitors estimator violated the trust of his company by gambling on his guess.

 

My competitor's owner had ample opportunity to reveal what had happened, and what was at risk. The GC clearly had no loyalty to them since they were blatantly bid shopping the project.  I can't think of too many charitable reasons why a company owner would steer his ship into that dark, spiraling abyss.

 

None of this was a simple mistake, a misunderstanding, or random chance.  The simple solution was acting with honesty and integrity. If my competitor had simply withdrawn or revised their bid when they knew of their error, the GC would have incurred the loss for their dishonest dealings. 

 

Without that vital check on their power to corrupt the market, these firms wreak havoc on the local tradesman.  GC's by and large are management firms that physically "do" very little beyond selling subcontractor services.

 

The owner of this particular GC was interviewed for an article on the decline of local tradesman.  "New oil-field jobs are to blame for pulling the skilled trades away from the construction market".  This person, this individual person owns a company that intentionally cheats, undercuts, and bankrupts the tradesman they've worked with every day for the last twenty years.

 

Far from an isolated case, this firm is an esteemed member of every three-letter-acyronm association pertaining to construction, business, and local affairs.

 

My final point to this windy post is this:

 

Professionalism, honesty and integrity protected my firm from a contract that ruined my peer.  Up to the point that he guessed, my competitor was less than 1% away from a lucrative contract.

 

 

[LawnJockey]

Wow, reading that was like reading a law school contracts exam question.  At first I thought calculating error so sue on the principal of quantum meruit rather than on the contact and get fair value for the work.  Then you bring up the GC's ethical issues, we used to call guys like that sub busters, and it is clear there is an unclean hands issue.  One of my all time favorite legal quotes came from Justice Cardozo, it goes something like this "Unclean hands will not be allowed to polute the pure pools of justce".  I always chuckle when I think of that one.  But seriously the unclean hands doctrine says that if you were involved wrong doing you are barred from equitable relief.

 

This is important because (generally speaking here as all jurisdictions vary somewhat) if you make a calculating error and you have not started the work when you discover it you may be able to get relieved from the contractual obligation.  If the work has been performed then you may be able to recover the fair value of the work even though it is in excess of the contract amout.  This is particularly true when the other party knew or had reason to know that the price was too good to be true.  But if you have not behaved in good faith, with honor and honesty the other side will claim unclean hands and you could be barred from any equitable relief such as not being held to the contract price or getting fair value for the work.

[rockstar.esq]

LawnJockey,

 

That's an interesting insight into how courts would view the situation. I've never heard the "unclean hands" quote before, it's certainly astute.

 

I think a lot of subcontractors are afraid of the cost's of purusing a legal case against a shady GC so they "take the deal".  It took me years to convince a hard-headed boss that bad deals are only painless if you decline immediately.

[Ratel10mm]

LawnJockey, that's some interesting and useful information there.
Would you mind explaining the legal terms please? I think I've 'got it' but I want to see if these principles hold in the UK as well, and the yerms may be different?

[Frosty]

Rockstar: When I got to an age Dad started showing me some of the ropes in hopes I'd carry the family business on into the future he started showing me how he bid jobs largely by showing me his competitor's bids after the fact. Studies I guess you'd call them, he had several large folders of past bid competitions.

 

The thing that struck me early on was how low a percentage of jobs he bid he won. His reply being I should study them all and tell him why. Well, of course he'd bid too high, that took me maybe 15 seconds to think about. Did I mention I was around 13-14 when he started doing this? Being a teen I KNEW what the problem was so eventually he sat me down and showed me what was important in the process and how it worked.

 

The single most significant thing I remember from these lessons was discussing one of the recent bids we'd lost. The competition had underbid everybody significantly but the math just didn't add up in Dad's file, by his formula. Dad asked me, "Why didn't we get this this job?" I replied something like, "We bid WAY too much!" Dad's response was something like, "Get your stuff, take the folder and get in the pickup." WE went to the competitor's auction.

 

The general rule of thumb I've posted here more than once is what I learned from Dad. "If you win every bid you're underbidding. If you don't win any you're overbidding." Metal spinning in 1960's So. Cal. was fiercely competitive with aerospace taking off as hard as it was. Dad was satisfied winning something like 10-20% of the bids and going to auctions.

 

The number of guys who'd work for Dad for a year or two then jump ship to open their own spinning shop really ticked me off. Dad on the other hand told me it was going to happen and not to let it bother me, we'd go to the auction. What Dad never taught anyone was how he bid jobs, not even his business partner. IIRC the only machinery in Dad's shop newer than WWII was bought at auction.

 

"You live or die by the bid." and "You can't cheat an honest man." Were two of Dad's favorite sayings off the shop floor. Sayings on the shop floor were almost all safety related.

 

Frosty The Lucky.

[LawnJockey]

In the US our laws evolved out of the British Common Law so they are similar in some ways but not always the same.  Furthermore in Louisiana their laws evolved from French law which is evolved from Roman law which is what is called Civil Lawn or a Civil Law Jurisdiction.  Our Common Law heritage is one of the greatest gifts we recieved from Great Britan.

 

The written document we all call a contract is not the real contract, it is evidence of it.  The real contract is what is called the meeting of the minds, that is each party agreeing on a certain obligation toward the other.  There is what is called the Covenant of Good Faith which is simply that you are required to deal with each other fairly in regards to the contract.  If you under bid a contract just due to bad judgment and the other party did not know there was something wrong with your bid you are stuck.  However if you make a calculating error, not a judgment error, and the other party knew or should have known there was something wrong with the bid and sought to take advantage of the error then the party who made the error may be able to get relief from it.  If you receive a bid that looks way out of line on the low side but you don't know why you are put on what is called Inquiry Noitice, simply something doesn't look right and you need to investigate to make sure everything is OK.  Failing to investigate in such a situation can make the contract unenforceable.

 

There is a duty to disclose all material facts related to the contract to the other party.  In real estate transactions this is the duty to disclose all know issues with the property.  In construction is could be something like there unusual condition for the area such as  solid rock 6' under the surface and the party asking for bids knows of the condition, he must disclose it.  It could be that there will not be any utilities available at the site or that the residence is going to be occuppied during the construction or thousands of other things that are known to the one seeking to have the work done and not to the one bidding it.

 

These known as defenses to a contract.  What a lawyer does is first look to see if there was a proper contract formed by each party commiting themselves to some future act (one does the work and the other pays) and then he looks to attack the contract with one of the many defenses.  If the contract is found to be void, voidable or otherwise unenforceable then the lawyers look to Equitable Relief.  That is where the court can order certain things in fairness.

 

Here in California there is a law that contractors must be licensed to contract for work over a certain dollar amount.  So if an unlicensed contractor sues a customer to collect on the contract the other party can claim the contact is void because of the lack of a license.  The court would agree and rule against the unlicensed contractor but there is equitable relief.  The unlicensed contractor can claim the other party is being unjustly enriched and the court can order payment of the fair value of the work, even if it is in excess of the contract amount.  But the other side will claim that the unlicensed contractor had unclean hands by not having a complied with the license law.  It goes on and on and gets quite complicated.  That is why lawyers do so much reasearch, they want to find cases that support their client and ones that deflect their opponents case law.

 

The take away from all this is that you are not automatically sunk if you blow a bid.  If it has not been accepted you can usually recind it.  If it has been accepted all the defenses to the contract are available.  You must act in good faith so to limit an unclean hands defense against you.  If there is a problem you can not sit on your rights, that creates a Laches Defense.  If there is a problem you must bring it to the attention of the other party as soon as possible.

 

The best thing for a small or any business to have is a good relationship with a good accountant and a good attorney who practices in the field it works in, you don't want a divorce lawyer for a construction contract case.  For a small business the best firms are smaller local or regional firms that have a few attorneys, not hundreds.  You don't want to be just a source of billable hours.  Ask your friends in the trades who they use and then check them out on Martindalae and Hubble, an attorney pier rating service.  A firm with an AV rating is best.  Stay away from law firms that advertise on billboards, etc.  Like cigars, the bigger the band, generally the lower the quality.

[rockstar.esq]

Frosty,  I've thought about your dad's motto's a lot over the last few days.  I think there's great truth there. "You can't cheat an honest man" is one that's particularly wound me up.  I keep thinking of jobs where we got cheated in one way or another trying to find a time where the adage was wrong. 

 

I had an "aha" moment when I realized that if we'd withdrawn or simply not bid to companies that demonstrated an interest in shady dealings, we'd have been honest with ourselves about where we were heading.  Many shady contractors behaved ethically with us on our first job with them.  We never got invitations to bid shop until we'd completed that first job.  Typically we thought GC's just had bad luck with other trades falling down on them.

 

In hindsight it's clear to me that a jobsite packed with firms working at a loss won't be a pinnacle of cooperation, productivity, or professionalism.  Too often we bought into the naive notion that we were "hero's" for getting our job done despite laggards surrounding us.  My boss in particular is given to swooning whenever a client says they like us.  Again, if the firm was serious about cultivating professional relationships, they wouldn't likely have so many trades falling down on their jobs.

 

Cheats are often charming as everything is falling down around them.

 

An honest man would be honest with himself about what's really going on.  Knowing the firm's going to cheat, the honest man walks away.  Frosty; your dad was wise!

 

LawnJockey, I really appreciate you sharing that knowledge.  One thing leaps out at me as an estimator; the arguments hinge on what's presented and what can be implied from there.  Practically speaking this means that sending in a lump sum proposal with a whole lot of contributing factors serves to "bury the lede" in terms of giving the recipient a way of identifying where a mistake was made and how much it's worth.

 

Even before stuff gets to a court case, like the initial negotiating following the discovery of a mistake. Being able to point out where your proposal gave them sufficient information to question the figures is helpful to establish the good faith of the bidder.

 

Really often information is suppressed for fear of it being used to assist competitors.  Not including pertinent information may open you up to getting hammered when you make a mistake.

 

If you're afraid to share pertinent information because the firm will bid shop you, you should take a moment to consider how ruthlessly they'll be if you made a mistake!

 

There is no reasonable expectation of fairness with a cheater, that's like expecting a lion not to eat you because you didn't eat him!

[LawnJockey]

If it looks too good to be true it probably is.  If you know or have reason to know something doesn't look quite right, clear it up before you proceed further.  Lawsuits are expensive and take years.  They are best avoided.

[george m.]

Dear Lawn Jockey,

 

The basic common law definition of a contract is offer, acceptance, and consideration.  If any of these is absent there is no legally enforceable contract.  If you agree to do something for free you cannot be forced to do it if you change your mind because there has been no consideration transferred. 

 

As you point out contact law is complicated and sometimes not obvious.

 

That said, most contracts are accomplished with everyone happy.  A written contact is for that small percentage that go bad.

 

"A verbal contract isn't worth the paper it is written on."

 

George M.

Colorado Attorney Reg. #16972

[LawnJockey]

George:

 

A donative promise with detrimental reliance can be enforced. Not under contract law but through quasi-contract principals and equitable relief.

 

Retired 

California State Bar

[george m.]

Ah, yes.  The equitable remedy for detrimental reliance.  It seems to be an unlikely set of facts though with someone not being a "reasonable person."

 

I'm gratified to learn that there is at least one other lawyer/blacksmith out there.  A pretty rare bird.

 

GM 

[LawnJockey]

Recovering lawyer here.

[Frosty]

Here's a retired lawyer friend of mine's current works for your perusal.

 

Frosty The Lucky.

[george m.]

Dear Frosty,

 

Nothing attached.

 

Dear Lawn Jockey,

 

I'm a recovering geologist who went back to law school in the '80s when the bottom dropped out of geology.  Whenever I feel a compulsion to hit a rock with a hammer or make a map I call someone up and the talk me out of it.  "Hi.  I'm George and I'm a geologist."  (applause)

 

This law stuff has worked out.  Inside job, no heavy lifting.

 

Recoveringly,

George M.

[Frosty]

Here's a retired lawyer friend of mine's current works for your perusal.

 

Frosty The Lucky.

 

Try 2.  Maybe I need to hold my tongue on the other side?

 

https://www.flickr.com/photos/jurustic

 

Frosty The Lucky.

[LawnJockey]

Great stuff Frosty. 

 

George, I didn't go straight to law school either.  I started working on boats as a kid.  I spent my misspent youth racing sailboats and paying the bills by working as a general contractor along with some boat work.  I have always liked working with my hands and figuring things out.  Even when I was practicing I was always building something.  I was a litigator and I liked winning.  I would think about my work 24/7 which isn't a good thing.  In the late 90s my wife had a temporary assignment in DC so that gave me an excuse to get out of practicing.  I then went to work for a VC which involved lots of transactional work, managing a complex estate plan and the investments therein.  I still do a little of that, as little as possible.  The interest in blacksmithing started when I needed hardware for a project and it wasn't available.  The more I learned the more I wanted to learn.  Blacksmithing has its addictive qualities.