Selecting a Project Team on Price

Posted on July 2, 2010


Competition is always beneficial to elicit a fair price, but does selection by price make any sense? No, because price is as arbitrary as the weather, and not a reliable criterion on who can do the best job.

For discussion, let us over-simplify the numbers behind a bid.  Assume all subs are providing roughly the same prices to do the work (all local, sourcing the same product, etc.).  If we then treat bid price as a function of overhead (number of people and resources allocated to getting the work done), and overhead burden as an indicator of service (less overhead = less tools available to service the client), it could be argued the lowest price will offer the lowest service level. I doubt this is what an owner is after in a bid situation.

Add to that the practice of throwing out the high and the low bid (often times based on tradition or simply because the low guy allegedly missed something and the high guy is gouging), and randomness skews the process even more. Unlike a consumer good (commodity), where a premium price pays for the name brand, the snazzy packaging and expensive marketing, price is one of the least telling attributes of a professional service provider. Basing a job selection on it is as random as selecting based on height. In fact, why not select on average age? At least that might have a correlation to experience.

When a project is attractive, builders will compete to do the work. But the selection process must be objectively based on a differentiating quality like speed, design quality or customer satisfaction history (price is not a long-term competitive advantage; someone will always come along and do it for less).

In this economy people are hungry for work, but never hungry to sink thousands of dollars into a bid to compete on price. If it costs a contractor $4000 to assemble a bid and a winning bid garners a $40k profit, but his company only wins 25% of the time, the expected payout per bid is a measly $7000.

But that is a mathematical expectation; three out of four bid submissions is a loss. No one can afford to constantly bid work and only win 25% of the time—and with a 20% win percentage, the expected payout drops to $4800. The results are even more exaggerated with more competition and more expense invested in assembling bids.

Integrated design-build offers the best of both worlds:  a fixed price (guaranteed maximum or another arrangement) and a distinct team advantage based on the ideal combination of quality, speed and price—attributes the owner deems is important. We all have budgets to adhere to, but let selection be based on what really matters which, in the end is rarely price, and the project experience will be much improved.

Posted in: Project Cost