Same number of bids. More wins. (Part 4 of 6)
For most of my time as a VP of Preconstruction & Sales for a specialty subcontractor, I never considered how a GC’s Agreement with the owner might change how we bid and win projects. In my mind, it didn’t matter! Build relationships, be low (or close to it) on bid day, and hope the GC isn’t a jerk. That’s what I knew. And it honestly worked well enough to win some great and profitable Contracts. But it always seemed like way too much work—a 10%-20% win rate just isn’t enough!
Then, I learned that the GC’s agreement with the owner matters a lot, and in fact, subcontractors can gain a competitive advantage by being smart about it—especially because most subcontractors are like I was: clueless! After that, while other subs were out there bidding every job the same and treating every client the same, I started treating each project and client in a unique way depending on their agreement with the owner. It made everything about the bidding, sales, and preconstruction processes so much simpler.
Over the next 6 weeks, I will give you a clear understanding of 6 common delivery methods used in the construction industry and some really good tools to get smarter in how you approach each of them. Today is about Method #4: Competitive Greatest Maximum Price (GMP)
In this series, I hope to help you subcontractors who want to increase your win rate. I also want to help general contractors understand what their subcontractors go through when pursuing a project.
Please note that there is increasingly very little difference between the terms GC (General Contractor) and CM (Construction Manager). As a result, I use the terms interchangeably throughout the below. Let’s dive in.
Method #4: Competitive Greatest Maximum Price (GMP)
What it means:
Competitive means that the project will be bid out to multiple GCs/CMs. The award may go to the low-bidder or to the best-value bidder—it depends on the procurement method determined by the owner. Regardless, the CM has to be very competitive to get the job.
Greatest Maximum Price (GMP) means that there is going to be an absolute ceiling to what the owner will pay to build the project. For example, if a GC wins the project for $100M, then $100M is the GMP, and includes all subcontractor pricing, contingencies, and fee for the GC. Whether the jobs ends up costing $100M or $110M , the owner only pays for $100M (assuming no change orders). An extra cost of $10M—or whatever the number is—is paid for by the GC and—you guessed it—the subcontractors!
The key difference between GMP and lump sum is this: first, in both lump sum and GMP, in the event the project goes over budget, the contractor is left to pay the bill. But, in GMP, if the project comes in under budget, then the contractor and the owner will share those savings. So, if the GC brings the job in $4M under the GMP, then the GC gets to keep $2M and the owner gets to keep $2M. In lump sum, the GC would get to keep all $4M. Owners like this method because there is shared incentive for the GC to save money.
How it works:
CMs receive drawings from the architect and send them out to their subcontractor community. Like the PSA, this usually occurs during the design development phase. (Please note: a GC can be asked to budget a project without receiving a PSA, meaning they are stuck doing “free con” like many of their subs. Whether an owner awards a PSA or not depends largely on their project building philosophy.)
Once the drawings have reached a “for construction” state, the CM will send them back out to their subcontractor community to receive their final bids—sometimes called best and final offers (BAFOs). The CM collects the subcontractor pricing, and presents their desired choice for each trade to the owner. That’s right: the CM will actually show the owner the subcontractor’s bids, which means, the awarded subcontractor usually has to be the low-bidder for that trade. Why? Because otherwise, the owner could say, “Why are you awarding company X over company Y? Company X is $500k more expensive! I’m not paying an extra $500k for you to use Company X unless you have a darn good reason about how we’ll see that value returned to us.” And because the GC is competitively bidding against other GCs, they want to make sure their number shows up as low as possible.
With that said, sometimes owners are extremely understanding as to why you’d want to award a subcontractor with a higher bid—they just need to really understand why it makes sense. For a GC to be willing to do this for a subcontractor, they need to clearly understand your value proposition and like you so much that they’re willing to go to bat for you with the owner. This is rarified subcontractor air, but it is very possible to achieve it.
Why it’s used:
Owners usually get a fairly-priced project when they go out to their GC community to get competitive GMP pricing. Plus, GMP is a great model for owners because they get to have an open book with their GC—where they can see all subcontractor pricing, how the GC will make money, etc.—while also getting to have a very clear dollar amount that they will pay to build the project (the GMP). It really is the best of both worlds for the owner. And most large GCs/CMs don’t mind it because they are sophisticated enough to make money on a small (0-5%) fee.
What you need to know:
GMP is an increasingly common delivery type for building large projects. As a sub, if you are bidding a competitive GMP project, you need to get low or close to it. Only in special circumstances will the GC go out on a limb for you.
Plus, don’t budget these projects blindly. In competitive GMP, it usually matters very little if you budgeted the project along the way. Typically all that matters is whether you are low on bid day. The exception here is when you have a fantastic relationship with the GC. If they really understand the value you add, then they will reward you for participating in the budgeting exercise. More reason to go out and build amazing relationships with GCs before blindly budgeting or bidding to them!
Ask questions like:
Is this your project?
What other subcontractors in my trade have you sent this out to?
Can you tell me more about the award criteria for this project?
Imagine we budget every round with you. If we beat our budget on bid day do we get the job?
Imagine we budget every round with you. If we are within 5% on bid day, do we get the job? 10%?
Key question to ask yourself: How can we build relationships that move the needle on a competitive GMP opportunity?
The Great Ones Have Coaches
The owner of one of our general contractor clients once said to me (we are both huge Baltimore Ravens fans): “Lamar Jackson didn’t get a $250M Contract by going at it alone. He has coaches for almost every part of his game. That’s the same reason I wanted to hire you guys.”
And he’s right! Hiring a coach or a consultant is something all the great athletes do to up their game, yet business owners are often hesitant to do the same! (Imagine trying to play tennis against Roger Federer without ever going to a coaching lesson)
So, if you’re reading the above and wondering:
How do we become sophisticated like the top Contractors out there?
How do we set a strategy for the type of company we want to be?
How do we set a strategy for the type of work we want to chase?
How do we create a sales process that increases our hit rate?
How do we make our operations truly better and different?
Then I hope you’ll reach out to us. Our consultants and coaches have hundreds of years of construction experience and are well-suited to help you make the kind of changes you are looking to make. If you’re ready to talk, then email me at mverderamo@wellbuiltconsulting.com
Good luck, and happy growing.
Spark Notes:
Competitive GMP means multiple GCs/CMs bid on a project, with the award going to either the lowest or best-value bidder, and the final price is capped to protect the owner.
Unlike a lump sum contract, GMP allows the contractor and owner to share savings if the project comes in under budget, creating a mutual incentive for cost efficiency.
Subcontractors must submit competitive bids, as GCs typically select the lowest bidder unless they can justify a higher-priced sub’s value to the owner.
Success in competitive GMP relies not just on low pricing but also on strong relationships with GCs, ensuring they recognize and advocate for your value when awarding contracts.
