The Curse of the Low Bid Mentality

There is an incorrect assumption amongst most project owners, that comparing pricing of construction projects it’s just like comparing pricing of any other products in the market. This incorrect assumption has led for years to the common practice of going for the lowest bidder. The greatest evidence that this assumption is wrong is that the norm in construction projects are delays and cost overruns. According to a recent article by McKinsey, “Control capital project duration-and cost-with schedule optimization” (2020), large investment projects across the major construction segments are delayed on average 2.18 years.

Construction is not like any other industry where you can compare products by just comparing prices, for the simple reason that it is not a standardized industry, and do not produce in an industrial-like manner. We do not even have standardize construction methods or processes within the same city, much less within the same country. Here are a few reasons why construction has not been able to standardize its processes:

·       Ground conditions. The same exact project might need different structural requirements depending on the type of soil its built in.

·       Weather. Materials, construction processes, practices changes depending on the local weather conditions.

·       Skill labor availability.

·       Local material availability.

·       Government regulations. Every county, city, state and country, has its own building code and regulations.

·       Local construction practices.

·       Custom architectural designs. This may change the construction process, sequence, materials, etc.

·       Seasons. It is not the same to build on summer than winter, you need to adjust your construction processes according to rain, humidity and temperature.

This is just within the same country or region, if we start talking about international construction there are a lot more factors to consider like, legal documents, estimating and contractual documents, construction management styles, etc.

To simplify the problem and get to the point. Let’s assume you are comparing two proposals from two different construction companies for the same building, on the same city. For an inexperienced owner it could be easy to look at the price and, given the fact that both companies are quoting the exact same building, assume both proposals are the same and pick the lowest number. You would be wrong to do that because when you buy a construction project, you are not buying a finished product, you are hiring a team of professionals that are going to put together that product, and therefore you should look at it more as hiring a service, not a product. The process should be more like hiring a chef to make a special custom cake, as oppose of buying a pre-made one from the counter. You want to know the chef’s curriculum, how many years of experience he have, reputation, pictures of other cakes he has made and reviews from previous customers. You also would like to know what is his speciality, you don’t want a chef that do child birthday cakes doing the one for your wedding! Reviewing a construction proposal should be more like that, you want to know the company’s curriculum, experience, portfolio, review and who is the management team. Let’s remember that a construction company is a group of people, so what’s important is who are those people, because they are the ones putting together your project. All of this is irrelevant in a highly standardized industry like the consumers industry, because when a machine is putting together a product in a factory, it does not matter who pushes the buttons.

What happens when you go for the low bidder just based on pricing? Here a few consequences:

·       Promotes the use of cheaper low-quality materials.

·       Incentivizes expediting project completion at the expense of quality.

·       General Contractors are forced to use the low bidder in their proposal, even if they know those companies have a bad reputation or bad quality, if they don’t, they stop being competitive based on pricing.

·       Promotes the use of low-quality contractors.

·       Safety might be neglected to save money.

·       Incentivizes companies to pay less to their employees, which attracts entry level workers and professionals, and not the best talent available for your project. Remember that these are the people putting together your building.

·       Inhibits the use of new construction technology, its unaffordable.

·       Higher risk of default of smaller contractors, which led to higher cost of replacement, supplementing, and/or litigation.

·       Sustainability goes by the window. When trying to squeeze out the last dollar in savings, everyone stops caring about the environment.

A new building is one of the most expensive investments and a very exiting milestone for an owner, so why putting all of that at risk by basing such an important decision just on price? Remember that old of phrase of wisdom “all that glitters is not gold”, there are countless examples of projects going south because the owner though it was going to save a little bit of money by going with the low bidder.

Another important point to consider in construction projects is that the price is not the final cost, because again, you are not buying a finish product. By taking the lower price we might be taking the highest cost, since many things can go wrong in the process and normally the owner ends up paying for delays, bad quality or contractor’s defaults. Another important cost to consider is to our environment, communities and to the workers putting that building together, by hiring the lowest bidder just based on pricing, all these areas are neglected. As a society that wants to do better for ourselves and our environment, we must hold ourselves to higher standards.

So, what is more important than just the price? Here are few points to consider:

·       Reputation. Is it a company with a good reputation?

·       Experience. How many similar buildings has the company successfully completed?

·       The construction team. Who will be the captain of the boat and the crew that will get your ship to the desired destination?

·       Company’s commitment with the environment.

·       Company’s commitment to the community they serve.

·       Company’s commitment to their employees. Construction is built by people, and you want does people to be treated and compensated fairly, to make sure you got the best talent working in your project.

If you are building your dream home, your new retail store, or corporate offices, don’t risk your vision and investment going for the low bidder, let’s break the curse and elevate the construction industry to higher standards, it’s up to us to start the change.

What do you think about the low bid mentality? Share with me your experiences, good or bad, let’s open the conversation! I’m reading you.