Low Margin Mentality

February 3, 2012

Q: We lost yet another bid this week by over 20%. Is there any way to succeed in the bid market? What am I missing??

A: Here’s my opinion on what’s driving the low margin mentality in the bid market. First off many of our members are entering the year with a backlog far lower than in prior years. This causes the mindset of needing to pick up a certain number of jobs to cover overhead. This “overhead recovery” pricing mindset is used to keep from having to reduce headcount. In some cases the contractors are bidding at cost to keep the vendors happy. Or, perhaps they were pricing the project with erroneous information from a sales person. Often we hear of low initial bids from firms who have hopes for substitutions during the submittal phase. Some companies use installation subcontractors when they can to get a lower cost of labor. The bottom line for most who submit what seems like a crazy low price is that they can’t stand the thought of letting a project slip away and get nothing from that lost job.

Everyone has a strata or range of project size they work best in. Some companies do the smaller projects well and so efficiently that the companies who are most efficient on larger jobs simply can’t compete on price. I urge you to find that sweet spot with your company and stick within the range where you are both competitive and profitable. The same is true for vertical market specialization and system type expertise. Most every company has a niche that they perform better than others and have learned to be profitable as long as they stick to that.

One other consideration that you may be overlooking. Many times when we analyze pricing models we find that the low bidder was actually using a factoring method. By this I mean they weren’t actually looking to make money on the initial equipment sale but rather building a profit model over a 3-5 year timeframe. Their mindset and business model is to discount off of the equipment cost, not add mark up to it. In some cases that can be as little as 50% of the cost of materials. This is common in a business where RMR is achievable such as security, life safety, fire, etc. That too is a difficult situation for a contractor/integrator who is simply looking to make money from the project itself. As you know, I’m not a fan of the bid market, so if at all possible look to move at least 50% of your revenues to a design-build model or only chase bid work where pre-qualifications and spec integrity can be assured. — CW

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