Risk/Reward and Consequence

Charles Mahaffey

March 2006

What are risks, and when should you take them? We are all faced with decisions when preparing a bid; the question is, How we deal with them?

Do you need work? Is the competition hungry too? What is the market going to be like in six months or a year from now? Are you working with a good set of plans, or are they filled with ambiguity, errors or omissions?

The major factors affecting your final bid are labor, materials and margins. The other risks are out of your control but still offer opportunity.

Labor is the largest variable and poses the greatest risk. Perhaps you have a great crew that wants to continue working for you; however, you have no future work on the books. Are they willing to make concessions and accept less money? Could they work more efficiently? Are you prepared to bid a project hoping for reduced labor cost? Can you create a carrot for your labor force that guarantees success if you submit a bid based on reduced labor? How much risk can you take with labor?

For years one of the competitors in my local market would take several nice jobs in a row during the months of January and February. The company obviously made a conscious effort to make sure they were low bid because their bids were just above our cost for those jobs. Each time the bid results were revealed, I would shake my head and wonder why this trend continued.

As it turns out, the company that was buying these jobs at the first of each year actually did have a plan. First, they would go to great lengths to make sure they had a good estimate and that they had all their material, labor and job-related costs covered. They would then send out the bid with little or no markup. Right now you are probably thinking that this sounds like a risk—and you’re right, it is a risk.

Their plan was all about making sure they secured work to keep their crews busy and avoid layoffs. Then, as the year progressed, they would start pricing jobs that were more in line with their competition.

They had a plan: They took a calculated risk and were rewarded with a stable work force.

Having a stable work force probably also provided a more predictable labor cost.

What about material costs? Can they be reduced by talking to your major suppliers or changing to a less costly equal from an unknown supplier? Is pre-purchasing, even if only a portion of the total, a viable or acceptable risk? If you sense a slight downturn in short term future work, most likely your supplier has seen the same thing and may be willing to lower his margin to secure a future order. Locking in future prices allows you to bid with confidence and lessens your risk of material over-runs in the event they rise; the down side is that you will lose any windfall if prices drop.

What risk are you willing to accept? What rewards do you expect, and what consequences are you prepared to live with? By carefully analyzing, you can create a plan that will maximize the rewards and minimize the consequences.

About the Author
Charles Mahaffey is president of Accuest, LLC, Marietta, Ga. Accuest provides estimating and consulting services for commercial drywall subcontractors.