The High Price of Low Bidding: How Contractors Can Escape the Grip of The Low Bid Trap
Read time: 4 minutes and 50 seconds
Welcome to Building Balance, a weekly newsletter where you'll get actionable strategies to help you build balanced construction companies, careers, and people.
Today's Highlights:
The Goal: Help you escape the trap of low bids and bad Contracts.
Contractors go out of business all the time because they bid work cheap, don't mark up the contract, don't perform, and then get backcharged an exboritant amount.
There are 4 strategies I have seen Contractors use to escape Low-Bid scenarios and bad Contract Agreements. Read them and then give them a try.
In my 9 years in Construction, I have watched or heard about dozens of Contractors that went out of business — or close to it — because of one bad project. Almost every one follows the same pattern:
They were the LOW-BIDDER.
They didn’t mark up the Contract.
They operated the jobsite with no pre-planning.
They fell behind schedule.
They got back charged for a ton of money.
I call this the Low-Bid Trap because — in my experience — it happens to the type of Contractor that chases exclusively low-bid work (as opposed to best-value negotiated work).
It’s crazy to me that Contractors willingly bid jobs as low as they can justify, don’t mark up the Contract, and give the Owner or GC no choice but to back charge them when they’re not performing. In fact, I think most Contractors don’t realize that they have the power to avoid the Low-Bid Trap.
But what happens when your firm gets caught in it? If you don’t go out of business, then the best case scenario is:
You lose credibility
You use all your cash paying for back charges
You spend years trying to build up your equity in the business again
In other words, it sets you back personally and professionally. Not to mention all the stress associated with nasty emails, bonding, money woes, and taking care of your people.
But there's good news:
You can avoid this trap once you start building strategies that focus on the long-term success of your business rather than the short-term gains of a single project.
Why does this work? Because all of the sudden, you’ll stop chasing every job, trying to be the low-bidder, and being so desperate for work that you sign the Contract without marking it up. With good strategies, your focus will go from “putting out the hottest fire” to “this is all a part of the plan.”
As a young industry veteran who has studied tons of great Contractors in the last 9 years, here are some strategies I have found that Contractors use to avoid the Low-Bid Trap:
Stop working with firms that don’t respect you.
You have to control what you can control. And one of the main things you can control is who you work for.
Different Owners and GCs have vastly different reputations. Some are known for working exclusively with Low-Bidders who are willing to sign the Contract without marking it up. Why? Because they can make sure if there’s any money to be made, it will be theirs, not yours. This is a sign of disrespect.
There are plenty of other Owners and GCs who want everyone to make money. Why? Because they know that’s what gives the project the highest likelihood of success.
So Strategy #1 for avoiding the Low-Bid Trap is to stop working for firms that don’t respect you.
Garbage in → garbage out.
Develop partnerships.
Once you stop working with people that don’t respect you, you’ll free up your time to go develop some real partnerships. And I can say with confidence: any firm willing to develop partnerships will inherently be a much more respectful firm to work for.
Developing partnerships is easier said than done, but I have found the best ways to do that are:
Set up tons of “potential partnership” meetings (like as many as you can call).
Go meet with them in person and describe your desire to be partners.
Set boundaries for the type of work you think you can best align on.
Bid every project within those boundaries.
Come back every 3 months and ask if you’re meeting expectations.
Eventually, they will see that you are invested in the relationship, learn about your company’s values, and as a result start giving you work. If they don’t, then stop bidding them. It’s that simple.
This strategy takes some time but man is it worth it.
Outsource Contract review.
Besides being the low-bidder, the other half of the Low-Bid Trap is signing the Contract with no markups.
When you do this, you yield any power you could possibly have to protect yourself if something on the project goes wrong. The Contract is already going to be written to be in favor of the Client, but that doesn’t mean you shouldn’t have some standards that are a MUST for you to feel protected.
If you don’t feel like you have the expertise to do Contract review in-house, then outsource it. I know of some really successful Subs and GCs who use outsourced lawyers to make sure they’re protected. It’s a different strategy from just signing away your rights and it’s one that you need to plan and budget for.
Yes it will cost you money, but it has the potential to save you your business.
Hire a Business Consultant or Coach.
I feel like this is an underutilized strategy in Construction. There are some great Construction Business Consultants and Coaches out there. Why not hire one and have them help you develop these strategies? Most owners struggle with the cost of a consultant and think “I don’t need one”, but once you talk to a good one, you realize that they don’t COST you anything.. they are in investment with a high return.
The best strategy may be to have someone come in and help you build your strategy.
Matt's Mental Health Corner
I have a bunch of friends in town this weekend for one of my best friends' wedding.
I always talk about the importance of getting rest for your mental health, and this weekend I'm going to live it.
No LinkedIn, no checking email, no worrying about work - just spending time with great friends and celebrating two great people.
I can't wait!
I hope you can follow my lead and get some rest this weekend too.
Spark Notes:
The Low-Bid Trap puts companies out of business, or at the very least, puts them at risk of it on every one of their projects. You can escape the Low-Bid Trap, and the best strategies to do it are:
Stop working with firms that don’t respect you.
Develop partnerships.
Outsource Contract review.
Hire a Business Consultant or Coach.
Start by asking yourself, “Are we in the Low-Bid Trap?”
And if you are, then consider utilizing one or more of the strategies above.
If you do, let me know how it works.
I hope this newsletter gives you some confidence to go out and change the trajectory of your life and your business.
