Negotiate More Contracts
George Hedley / January 2021
Every year, the successful construction companies stop and take a look at their last 12 months and then make decisions and commit to next year’s contract and sales goals. Our company’s estimating and bidding strategy is to negotiate most of our construction work. We attempt to convince customers not to award contracts based on low price, and negotiate exclusively with our company to build their projects.
This takes a concentrated effort and specific goals regarding our sales and marketing strategy. We use a five-step approach to negotiate more contracts with potential customers.
Step 1. Get on short bid lists (no more than three competitors) with new customers.
Step 2. Get awarded contracts based on low price, and then do a great job.
Step 3. Convert new and one-time customers into repeat customers.
Step 4. Convert repeat customers into loyal customers who use only us to build their projects.
Step 5. Negotiate every project with repeat and loyal customers.
What Are Your Customer Contract Goals?
Does your company have a customer contract strategy? Consider these following business development targets and goals as you think about what type of construction business you want to seek or go after:
- Lump sum bid versus negotiated contracts
- New versus repeat customers
- Repeat versus loyal customers
Our company typically strives for 25% new customers every year. We shoot for 75% repeat customers. Our strategy is to convert these repeat customers into five or six loyal customers who use only our company to build their projects. But our biggest goal is to negotiate 90% of all of our contracts. What are your goals? Are they written? Do you track them?
As you consider seeking to negotiate more construction contracts, there are several factors to consider. The first is to decide what your potential construction customers want. Today, every construction customer wants and expects you to meet a fast schedule, provide quality craftsmanship, and be very competitive. These project requirements are the minimum required to just get on their bid lists. So, to convert a repeat customer into a negotiated loyal customer, you must provide more than what is expected. Customers who are willing to negotiate a contract, want more than the minimum construction services provided by most contractors and subcontractors.
What else do customers want who negotiate construction contracts? This is what they want:
- Less risk
- No field problems
- Full service and value
- Open book communications
- Fewer headaches and no hassles
- No cost overruns or change orders
- An on-budget guarantee
- A guaranteed completion date
- Design assistance and coordination
- City approval and permit processing
- Utility company coordination
- Financing programs
- Expertise and technical skills
- Trained and competent field supervision
So, if you want to negotiate more contracts, here are real questions to consider:
- What else do you offer that your customer will value enough, to earn trust to negotiate a construction contract?
- Why should a developer or general contractor negotiate a contract or subcontract with your company?
If you don’t offer more, shouldn’t customers just ask you to bid the project?
Negotiated Advantages & Disadvantages
Negotiating a contract with your customer has many advantages. But the big disadvantage that most customers fear is leaving money on the table—not hiring the lowest price contractor or subcontractor.
To overcome the preconceived notion that a negotiated contract will cost more, offer the following answers to your potential customer. A negotiated contract will
- Create common project goals.
- Develop a single point of responsibility.
- Enhance project communications.
- Focus all project team members on solutions.
- Ensure the project is not over-designed.
- Provide full value to the customer.
- Ultimately end up with a lower overall cost.
- Complete the project faster.
- Eliminate safety issues of concern.
- Reduce field problems.
- Reduce the customer’s involvement of time.
- Help eliminate disputes, claims and confrontations.
- Stop adversarial challenges.
- Get everyone on the same page.
- Make the project a success for all.
Conflicting Goals with Low Bid
The traditional design-bid-build approach to construction creates adversarial goals and roles between the owner/developer, general contractor and subcontractors. When companies are awarded projects based on providing the minimum per the project plans and specifications based on the lowest price, conflicting priorities and challenges will occur. These low bid companies protect their profit by maximizing their returns via change orders, providing the manpower that best works for them and not caring about the overall project goals. The pressures of pleasing several customers on numerous projects at the same time conflict companies awarded contracts based solely on price.
With a negotiated contract or subcontract, the customer has awarded the project based on getting full attention from the contractor, extra services they have committed to perform and a goal to help make the project a success. This trust and contractual format binds the parties together with a common mission. This overcomes the low bid mentality and gets everyone working as a team.
Contracts & Liability
The traditional lump sum bid contract places most of the responsibility on the owner or developer to guarantee that the bid documents, plans and specifications are perfect. The developer typically hires an architect who processes the plans through the city. Without any contractor input, the owner is on his own when problems, changes or conflicts occur. The contractors are only contracted to build what’s on the plans and included in the specifications—no more, no less. Any interferences from the developer, such as field changes or poor plans, will require a cost increase and extension of the completion date.
Using a negotiated contract approach, much of the responsibility shifts from the developer to the contractor or subcontractor. By negotiating, the contractor assumes much of the developer’s liability and responsibility, including some or all of the following depending on the specific contract negotiated:
- Design accuracy
- Complete plans
- Scope of work
- Site conditions and requirements
- Contract management
- Quality of materials
- Overall Budget
- Field conflicts
When the developer, general contractor and major subcontractors negotiate, they work together to determine the project goals. Then they assign responsible parties for the different project requirements, and then they work together to make these goals become a reality.
When negotiating a general contract or subcontract, consider the following contract clauses that may entice your customer to negotiate with your company:
Guaranteed Maximum Price. Offer a guaranteed maximum price based on an agreed upon scope of work. Work together to create the required scope of work for the project. Mutually develop a budget that works and is realistic. Guarantee that you will not exceed the budget and you have anticipated everything required to complete the project or your scope.
Fixed Fee. Rather than hiding your profit from your customer, explain what it takes to operate your business, cover your overhead costs, and make a fair profit. Convince him that your markup percentages are fair and competitive. Then, offer a fixed overhead and profit fee for the project. A percentage fee gives the wrong impression—when costs increase, so does your profit. In the customer’s eyes, this doesn’t give you an incentive to help him reach the project’s budget goals.
Open Book. Tell your customer your books and financial job cost records are open for review. You will hide nothing, and your customer can participate in the financial, purchasing and estimating decisions as you arrive at the guaranteed maximum price. At the end of the project, offer to show your customer every dollar you spent. If the final costs exceed the guaranteed maximum cost, your company will be responsible for any overruns. If your final cost is under the estimated guaranteed cost, you will share the savings with your customer.
Savings Clause. Offer a savings participation with your customer for every dollar you save under the guaranteed maximum cost and the final job cost. After you receive your contractor fee, offer to split the savings on a 75%–25% or 50%–50% basis between your company and the customer.
Change Orders. A fair markup on change orders should be anticipated. Mark up your changes in a negotiated contract at the same markup percentage as you used when calculating the guaranteed maximum price. Don’t charge more; it gives the wrong impression that you want lots of changes. A tactic I use is to offer no markup on the first $10,000 to $50,000 in changes. This shows my customer I am trying to offer a complete guaranteed maximum price that covers everything imaginable to complete the project without extras.
Contingency. Offer to carry a contingency fund in your contract amount for the exclusive use of your customer. As field problems occur, this makes it easier to work out small extras by using this fund for unforeseen items that occur. At the project completion, refund any unused contingency to your customer.
Discounts. Offer all trade and material supplier discounts to your customer. Use a contract clause that states when discounts are available, the contractor shall inform the customer of them and ask for the necessary timely funds to maximize the discount opportunities. These discounts will then accrue to your customer who made the funds available.
Pre-Payment Options. As an added enticement to negotiate, offer your customer an early-pay or no-retention discount. Suggest if you are paid within 10 days of the completed work, you will offer a 1% to 5% discount for quick progress payments. Additionally, as you complete your scope of work, offer a discount of 2% to 5% to not withhold the 10% standard retention from your final invoice for early payment in full.
Negotiating a Contract Is a Privilege
Your customer has placed an extra level of trust in your ability to perform. The best way to develop trust is to have customer relationships based on several years of working together. The second best way to get a customer to negotiate with your company is to seek referrals from your good customers. Word of mouth and making loyal customer relationships a priority will ensure you will negotiate more contracts in the future.
George Hedley is the best-selling author of “Get Your Business to Work!” As a professional speaker and business coach, he helps entrepreneurs and business owners build profitable companies. Email email@example.com to request your free copy of “Everything Contractors Know About Making A Profit!” or signup for his e-newsletter. To hire him to speak , attend his Profit-Builder Circle academy or find out how he can help your company grow, call (800) 851.8553 or visit www.hardhatpresentations.com.