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Southeast
Construction Magazine: March 2006 Issue |
By Ted Garrison
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Even contractors that bid work can
improve their profit margins by avoiding some of the
traps created by conventional wisdom.
In the first part of this series, I emphasized how
conventional wisdom traps contractors in a low-priced
game. The article stated contractors should avoid prospect
that only care about price., because these owners are
never loyal. However, contractors that avoid low-price
prospects have higher profit margins. The good news
is that price-only buyers are a small minority.
Thom Winninger in his book, Price
Wars, reported that only 27 percent of consumers
are totally price driven, while 17 percent are totally
value driven. This leaves 56 percent of consumers who
are both price- and value-based, but this group buys
based on price when they can’t determine relative
value. Further complicating the situation is the fact
contractors rarely see owners from the 17 percent group
because these companies usually already have secured
their preferred contractors, so their requests never
hit the street. This leaves the impression that virtually
all remaining owners care only about price. In reality,
when the middle 56 percent is educated to value, 73
percent of the marketplace buys based on value.
In construction this is further complicated by public
work that is usually competitively bid and by private
companies that require at least three bids. However,
the truth is that many of these groups would rather
avoid competitive bidding because they realize they
are getting low value by awarding work in this fashion.
Many buyers of construction services have concluded
that selecting contractors based on low price produces
poor quality, confrontation, inefficiency, poor profitability,
low value, and generally allows the poor performers
to compete.
The challenge for most owners is how to evaluate contractors.
Most general contractors agree that analyzing subcontractor
bids is one of their most challenging tasks. If experts
in the industry recognize this challenge, how easy do
you think it is for the average consumer to evaluate
contractor bids? They can’t so the simply go to
the default—price. The challenge for the contractor
is to explain the value the firm will provide to the
prospect.
However, telling them that you produce higher value
than your competitors is almost useless, because all
the contractors say the same thing. A better way is
to show them. Of course, this means you might have to
get the initial job by being the low bidder, but that
isn’t always unprofitable, if you understand the
customer usually has needs other than low price. Two
examples illustrate the point.
The first involves an e mail I received. A contractor
wrote that his company always attempted to address the
customer’s concerns on their bid projects. He
continued in this manner, but eventually he decided
to raise the bar. This resulted in one of his most profitable
projects and with a customer claiming it was one of
its best projects. Of course, in the bid market the
actions the contractor can afford to take are limited,
but by simply avoiding any confrontation and working
to improve project efficiency through collaboration,
both parties can benefit.
In another example, a road builder was awarded the
contract because he was the low bidder. Unfortunately,
after receiving the award he realized he had bid too
low. The president of the company told his people to
go back to the city and sit down and find every way
they could work together to speed up the project so
that they could earn the early completion bonus, because
without it they were in trouble. It worked, and the
contractor was able to finish early. The surprise was
they made money before the bonus and the bonus turned
the project into a very profitable project. The best
news yet was that other cities started calling and saying
they wanted them to design-build their next road in
order to take advantage of their aggressive schedule.
Even public entities are attempting to find alternative
delivery systems because they realize that awards based
solely on price create lose-lose situations. Other choices
include design-build or value based procurement processes
similar to Dr. Dean Kashiwagi’s of Arizona State
University. Once contractors begin to understand that
price is not the only consideration, it opens doors
to other possibilities. While some of those doors present
their own challenges, they do represent better alternatives
than the conventional wisdom that customer only cares
about price.
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