Somewhere in Southern California, a general contractor requires 10-
percent bid bonds for a shot at some work. Subcontractors there have to get bonding companies to write notarized letters. The letters must state that if, for any reason, the subcontractor has the low bid but pulls out on bid day, the bonding company will pay 10 percent of that bid as a fee to the GC to secure the next highest bidder.
“I bid a job for $5.3 million,” says Dave DeHorn, chief estimator, Brady Company/Los Angeles, Inc., Anaheim, Calif. “They wanted a 10-percent bid bond, so my bonding company was on the hook for $530,000 if I was the low guy and pulled my bid.”
In reality, the bonding company was never on the hook. The winning bid came in at $4 million, and DeHorn was $1.3 million above it. The highly competitive scene made the Brady bid bond irrelevant. DeHorn left the bid process scratching his head.
“You see 10 bidders out there, and two or three are rock bottom,” DeHorn says. “How do they even get that low?”
Fierce competition
Bid bonds represent a growing trend in Brady Company’s market, according to DeHorn. But, price pressures have been in play for several years, especially since the construction market meltdown began in 2008/2009.
“Our margins were easily in the 18-percent to 22-percent range in good days,” DeHorn says. “Today, we’re at 7- to 10-percent margin.”
Subcontractors and industry observers contacted for this article report less emphasis on value and more on low price in today’s market. Whereas a drywall firm with skills and abilities superior to the competition once carried clout, that is rarely the case anymore. Many general contractors and construction managers instead hold the view, shared by owners, that it’s better to seek contracts with low-dollar bidders and to try to manage their performance once work begins.
“Before, a construction manager might be able to take a subcontractor who was 15 percent higher than the lowest competitor because of the quality of their work. That number today is maybe 5 percent,” says Mike Clancy, senior consultant, FMI Corporation.
Indeed, downward pressure on price is true of both public and private sector projects, sources say. Whereas once there may have been a difference between the public projects operating under strict procurement and low-cost guidelines and those of the more negotiable private sector work, today’s estimators unavoidably must factor in a market whose expectations center on price.
“There’s this belief that construction is on sale, and that there are bargains available,” says Clancy. “I don’t think people realize what they’re getting into with this focus on ‘first cost’ rather than a focus on ‘total lifecycle cost.’ It’s very short-sighted.”
John Rapaport, director of operations, Component Assembly Systems, Inc., Pelham, New York, echoes the concern over the low prices evident in today’s market. He says bids need to be the right price in order for owners to be happy.
“‘Low price’ has a taint of ‘we know there’s going to be change-orders,’” Rapaport says. “If somebody commits to a very low price, they’ve got to make up for it somehow. They do that later through, you know, obfuscation in their project management.”
Beyond “Low Price”
It’s hard to dispute that price pressures exist in today’s bid process. “Competition [in nonresidential building construction] is fierce with low price still the name of the game,” states “FMI’s Construction Outlook —1st Quarter 2012 Report.”
Even so, the story in drywall is about bidding a qualified price—a price the subcontractor can fulfill. Some jobs are low price by definition—the sealed bids later opened publicly require contractors to qualify for the bid pool largely on price. Other jobs carry specific bidding rules, such as Veterans Administration work. Still, other work is design-build (or as Rapaport likes to term it, “design-assist-build”), which carries some flexibility for negotiating with the GC or construction manager, whatever the delivery method.
The key determinant, Rapaport says, is knowing who carries the risk. Rapaport likes working with CMs at risk. They’re agents to the owner, which means Component Assembly Systems has a direct relationship with the owner. It also means that the company can come in early in the design-assist-build process.
“If you can meet a target price set for your specific trade, you’re seeing more flexibility to award contracts to people who are technically ready to do the modeling and the scheduling,” Rapaport says. “But, you have to meet a target price.”
Still, drywall and ceiling estimators don’t have as much time to put together bids as they once had. FMI’s Clancy says the timeframe for bidding has shrunk in recent years from six weeks on average to three to four weeks—that is, from first-look to submitting a price.
“The bigger issue,” Clancy says, “is that more design is having to be done by the contractors. That slows things down.”
In other words, pricing a 100-percent contract document-set is far less difficult than pricing a conceptual or schematic drawing. As owners have tried to save money across the entire construction process, Clancy says, they’ve “leaned heavily on the design community and squeezed those fees and capabilities.”
“It’s a vicious cycle,” he adds. “Owners spend less on design. The designs are less complete and thorough, which means the contractors are guessing more in the bid process. That leads to more demands and to more change-orders and RFIs [during production].”
Another trend: More subcontractors are willing to bid on less of the work. Whereas Brady Company generally bids on the complete wall systems of a project, DeHorn says other firms have retreated to taking on only one or two categories of work.
“Some competitors only do fireproofing. Some only do metal studs and drywall,” DeHorn says. “Someone bidding just the metal studs and drywall—maybe a residential contractor now in the market—isn’t worried about the plaster on the outside. He only needs two weeks to bid the job. I might need a month.”
Ideas, Suggestions
What can drywall firms do? Here are a few steps, gleaned from interviews, that may help firms to improve their bid process:
Find out who’s bidding. Likely, you can’t compete against every drywall bidder, especially those focused on bidding low in exchange for more contracts. So it may be prudent to use your resources elsewhere. But how can you find out who’s bidding a job? Some public works projects have mandatory job walks, and many post the names and companies of those who have signed up for the walk on an FTP site.
Go with technology. The Internet and estimating software now make it possible to download plans electronically. This eliminates the need to order rolls of drawings, which usually involves a wait of a few days. Instead, an estimator can begin work on the same day he access the documents.
There is also value in setting up integrated systems between the accounting, estimating and management departments. Doing so can help estimators operate with firmer guidelines, improve their bid success rates and aid communication within the firm.
“I just worked with a company in New York that redefined all of its baseline production rates for labor,” says Dave Chapman, vice president and senior sales consultant, Advanced Estimating Systems, an estimating software provider. “They don’t have to hand over their wallet to the estimator and say, ‘Now be nice to us with the production rates.’ They can predefine their baseline rates in the software and adjust them based on whether they want to be more aggressive or add more profit to a job.”
Keep up with building codes. Not everyone has their arms around the new energy codes, including the design community, says Brent Allen, vice president, Compass Construction, Dublin, Ohio. “We’re starting to see the changes with the insulation moving outboard, and so we’re having to learn how to estimate new things.” Still, being up-to-date is a service for GCs and CMs, and can be a point of distinction for a firm.
Profit on materials. Generally, a subcontractor garners profit on materials provided for a job, even when prices fluctuate. “The manufacturers for years were just losing money, and we all told them they should go on a boat trip, have lunch with each other and talk about raising their prices,” DeHorn says. “I think they finally did that. It’s nice to get a bit more profit out of the material side.”
Stay focused. You can only bid so many projects, so aim to raise your hit ratio. “It’s targeting work that’s within your so-called wheel house. The key is to get enough jobs that fit within your portfolio of work—hotels, stadiums, etc.,” Rapaport says. “We have a bonding line that allows us to do a job worth $50 million. There are fewer bidders at that level. You just want to put yourself in position to get those jobs.”
Always Improving
Fundamentally, a bid is part of an auction process. In today’s market, many owners, GCs and CMs favor low bidders exclusively. In other cases, and hopefully more as the economy improves, the drywall estimators’ bid helps the contractors and owners to establish their budgets. That, in turn, improves the odds of a firm winning a job. In other words, strong relationships still provide opportunities.
“We bid in 10 states. It’s not easy to manage. You have different conditions in terms of project flow and manpower,” Rapaport says. “We’re always improving our estimating. We’re always looking at the numbers. Did we have too many hours here or too few? What were the assemblies like? If we don’t do that, we’re just another guy with a truck.”
Mark L. Johnson is an industry writer and marketing communications consultant. You can reach him on Twitter via @markjohnsoncomm.
