“The riskiest position that any owner can find themselves in on their construction project is when working with a contractor who is losing money.” This is the warning that I give every owner or developer planning to go with the “low bid” approach on their project. Yet many owners still believe just the opposite—that making contractors compete on a low bid basis is the best way to “protect” themselves and ensure that they get the cheapest price. Well, they are right on that front—they’ll get the cheapest price alright, but they won’t necessarily get the right price or the project they want. At least not without a bunch of change orders resulting from things missing in the design documents that neither the owner was knowledgeable enough to detect, or the architect was aware were needed in the first place. This is just one of the reasons that I am such an advocate for design-build or any approach that allows the designers and contractors to work directly with the owners at the earliest stage—to establish the “right price” for the level of performance and value the owner expects. This can’t happen in a siloed, segregated environment. And because contractors are often the last party invited to the table, and forced to compete based upon low bid, they can only price what’s in the documents and nothing more if they expect to win the job. As a former project estimator, I know firsthand how the game must be played in a low-bid competition, and it serves no one’s best interest—not the owner, not the architect, and not even the contractor. It’s downright frustrating to be constrained from offering up your expertise and knowledge because of some antiquated process that was conceived some 150 years ago. This approach is a lose/lose proposition but here in the United States we are addicted to this low-bid mentality. In a sentence—we are addicted to cheap, and it is at the core of what has held this industry back for so long. There’s a very high cost to the low-bid mentality. It has kept us from addressing major issues in our industry such as the chronic albatross around our necks—low productivity; not to mention the absence of innovation, the lack of research and development investment, and the failure to embrace technology at a level that would catapult the industry to a whole new frontier. Many owners still insist that they must go down the low-bid track to get a fair price. I always wonder – fair to whom? Is it fair to anyone to price improved productivity, higher quality, innovation, originality, and better performance out of the spaces we design and build? Spaces like schools, and hospitals, and workplaces, and even our homes? What’s so fair about that?
Let’s get real. When folks say they want a fair price, they often mean they want a cheap price. Fair is getting what you pay for. Fair and cheap are incongruent when your expectation is something other than what cheap delivers. Have you ever watched a baseball game or a concert from the cheap seats? Yeah – the nosebleed section with binoculars. Cheap begets cheap. Fair implies reasonable, honest, and just—NOT cheap. And yet that’s what many owners demand of contractors—a cheap price, and in the same breath complain that the quality just isn’t what it used to be. Really?
Let’s STOP confusing low-bid for a fair price. The reality is that Americans, including buyers of construction services is addicted to cheap (developers, government agencies, private business owners). If you want to understand just how much this addition has cost us as a nation, read the book “Cheap – The High Cost of Discount Culture” by Ellen Ruppel Shell, written in 2011. As one reviewer shared,
“Americans have always loved a good deal. But that love has evolved into a destructive obsession. Our never-ending hunt for discounts has fed a plethora of social ills. By moving our production to the lowest-cost labor markets, we have sacrificed such basic values as craftsmanship and product integrity. As Cheap ably proves, you get what you pay for.”
In the book the author points to what I think is at the core of the fallacy associated with the low-bid mentality in construction.
“Most of us have absolutely no idea what goes into setting a price. Consumers don’t think about the costs behind what they buy. They link price to profit, and they grossly overestimate profit margins.”
This ignorance is often the basis for what keeps the low-bid practice in play. This ignorance fuels our fear—the fear of paying too much. The fear of being ripped off. The fear of price gauging. Yet, according to Conexpo Con/Agg, “commercial construction is a high-risk industry with low profit margins. They state that the average profit margin before taxes for general construction services is just 4 percent,” and those margins continue to shrink. In today’s market the profit margins are probably closer to 1-2 percent given supply chain challenges, increased prices, and the labor shortage—not to mention the added expense of COVID. In what universe is a margin before taxes of 4 percent on projects that have exposure to multiple risk factors beyond a company’s control, over months and months, or even years of time, a rip-off?
They say ignorance is bliss but, in construction, the ignorance that keeps the low-bid mentality in play is a travesty that is hampering the advancement of the industry and the contributions it makes to society.
So, what’s the alternative? It’s called best value and there’s a few different ways to achieve this goal while still utilizing a competitive process among project teams. Best value allows the owner to establish a reasonable budget for their project, hopefully in collaboration with folks who understand cost, quality, and the dynamics of the supply chain, without cutting corners. Then they can ask their design and construction teams to compete based upon the greatest value that they can provide for the established budget. You’d be amazed at how much more a team can offer an owner when they can leverage their knowledge, expertise, connections, ingenuity, and buying power to compete based upon their efficiencies, originality, and resourcefulness. Instead of general contractors beating the creativity out of their sub-contractors and suppliers so they can squeeze another few pennies off their unit prices to win your job, they’d be working together as a team to figure out how to give you more value than you asked for in the first place, to win your job. Bottomline, the research shows that owners typically pay less for their projects under a best value scenario than they do under a low-bid scenario. The idea that low-bids yield a lower project cost is a myth—a myth that must be put to rest.
I am convinced that the low-bid mentality has outlived its effectiveness in the construction business. It is keeping us stuck. It is keeping us unproductive. It is keeping us from innovating and advancing as an industry. We are never going to be able to address the grand challenges and complexities of the built environment such as energy consumption, transportation, urbanization, infrastructure, housing, health care, education, etc. unless we can break free from the archaic notice that the cheapest price wins.