Transparency In Pricing

On today’s show we’re talking about several bids that were out of whack. You’ve sent the drawings over to three subcontractors and the numbers comes back with a wide variation. One of the bids is quite low and seems attractive. The other two are from subcontractors that you know better, but the numbers are much higher. What do you do? Do you take the low bid?

You go back to your tried and true subcontractors and ask them if they can do better. The answer is no, that’s the best they can do. You’re left scratching your head, wondering why such a large variation.

Contractors have a lot of experience with negotiations and they experience being played against each other on a daily basis. As a result, they tend to become less transparent in their bidding process in order to maintain their negotiating leverage. But that lack of transparency actually hurts the negotiation because you can’t tell why they bid what they did. You can’t tell whether they misunderstood the scope of work, whether they’re greedy and uncompetitive, or whether there is a structural problem that is causing the bid to be out of whack.

We had a situation with an electrical contract and all the bids came in much higher than we had ever expected. The numbers were truly out of whack. The numbers were truly double what we had expected. But they were consistently high. All three bids were high. 

Only when we brought in another subcontractor who knew and understood our architect’s drawings did we get a bid that made sense. 

So in that instance, the scope of work was not well understood. The contractors had misunderstood that the allowance for fixtures was not to be added on top of the specific fixtures that had been specified in the design. There was an absolute double count on the cost of the materials. But unless the contractors are willing to be transparent, you have no way of knowing why they bid what they did. 

It would be too easy to point the finger at the contractors and say these guys are way too expensive. 

In another instance, the engineer had specified items that was not what we had asked for. They specified surface mounted transformers which would require multiple levels of conduit buried in the ground at our expense. Instead, we requested that they change the design to incorporate pole mounted transformers from the electric utility and the final service from the transformers to the buildings would be buried in the ground resulting in a much shorter cable length and much less conduit in the ground. The bids from the contractor were high, but its because the specifications from the engineer were forcing much higher costs than were necessary in the project. 

So how do you manage to get competitive bids that you can have confidence in?

You focus on developing relationships of trust with a small number of subcontractors who you commit to give regular business. You will treat them fairly if they commit to treat you fairly. Once that relationship of trust exists, you can create the transparency that is necessary to uncover problems in a bid. It starts with a conversation with the contractor whereby you let them know that transparency is required in the bidding process. You promise not to use the transparency against them. Hiring a contractor isn’t just a matter of getting the lowest price. It’s a matter of getting the job done reliably and with quality at an acceptable price.