Getting Your Trade Contracting Business of the Low-Bid Treadmill

Getting Your Trade Contracting Business Off the Low-Bid Treadmill

By / James Careless

Many trade contracting businesses arestuck on the ‘low-bid treadmill’. Theymake their living fighting for contractswhere only the lowest bidder wins.

The result for the winner is a skinny profit margin—if it exists at all—that keeps their firm in a chronic state of financial crisis— one where expansion, decent wages, and a nice income seem like impossible dreams.

Fortunately, it is possible to revive your trade contracting business’ prospects and get it off the low-bid treadmill. With the right moves, you can advance onto higher margin projects that will pay you better while relieving your firm’s financial stress.

The Low-Bid Treadmill Trap: How It Gets Sprung

As an experienced contractor business coach, George Hedley spends his time advising contractors on ways to make their businesses more profitable. He is the person who coined the phrase low-bid treadmill—a term he applies to contractors who live and die by low-bid contracts. Hedley says contractors only have themselves to blame for being snared in this trap.

“A company ends up on the low-bid treadmill when they hope and wait for potential customers or general contractors to phone them and say, ‘bid my work’,” Hedley says. “These companies don’t do anything pro-active to find new jobs or customers themselves. They spend zero time and money on marketing their companies to potential new clients, and they don’t improve themselves to access better job opportunities and higher-paying markets. They go for whatever gets offered to them.”

By becoming reliant on low-bid jobs, these contractors turn themselves into easily-replaceable commodities. From a general contractor standpoint, the main thing that differentiates one low-bid qualified subcontractor from another is how low they’ll go on the price. Almost everything else is interchangeable.

To say the least, it can be demoralizing to be a low-bid contractor. There never seems to be enough money, and the pressure is always on to find the next paying job. Wages have to kept down to stay within low-bid contracts, depressing the tradespeople who stay with the firm and motivating the better ones to move to higher-paying jobs whenever they can.

In such a situation, it is not surprising for any contractor to go downhill. To revive their business, they have to take steps to leave the treadmill. Hoping someone will call with a highermargin contract is simply unrealistic.

Getting Off The Treadmill

The first step to getting off the low-bid treadmill is accepting that a change must be made. Specifically, business cannot be all about low price, says Ronald Coleman, a contracting business consultant and solutions provider. “Instead, to command higher prices from general contractors you need to stand out in one or more of four areas to make it worth their while.”

According to Coleman, these four areas are completing jobs on time, staying within the job’s budget, doing all work to the contractor’s standards (not higher/not lower), and maintaining the customer’s goodwill to get future work.

“You likely won’t hit all four of these outcomes but as you get better at it and get a reputation for meeting or getting close to these four outcomes you will raise the bar and get included in more invitation-only bids,” he says. “Doing that and improving your firm’s certifications and skills to compete for highly demanding and more exclusive jobs will certainly take you to the next level. It will also likely give you a better chance at doing design-build work, and that’s where the money is.”

In addition to these points, it is important for trade contractors to become specialists in well-paying, highly-skilled areas of construction. At least, this is important to contractors that wish to win higher-margin contracts and better pay.

“There are lots of trade contractors who build schools, but not many who build hospitals because hospital projects have higher, more demanding standards and specifications,” Hedley says. “This is why general contractors who build hospitals seek out the small group of trade contractors who have the necessary skills and expertise to do the work, rather than looking for the lowest bidder.”

Such specialized trade contractors get to charge more, raising their margins and leaving the low-bid treadmill.

Even for trade contractors who don’t specialize, there is yet another way to get off the treadmill, and that is by investing in marketing and personal relationships with clients.

“When you spend money on quality marketing materials and take the time to take your general contractor clients to lunch and hockey games, it pays off: people think of you first at contract time,” says Hedley. “In the same vein, looking for work when times are slow can lead your firm to better jobs with higher margins, rather than waiting for the phone to ring with low-bid requests.”

If there is a moral to this tale, it is that contractors have the choice of staying on the low-bid treadmill, or doing the work necessary to get off it, making more money and reviving their businesses in the process. The work involves:

• improving the overall quality of your firm;

• figuring out what makes it unique and selling that difference;

• upgrading skills and capabilities to go after more exclusive, higher-paying jobs; and

• getting serious about marketing your services to potential customers, including building and maintaining personal relationships with them.

“You can get off the low-bid treadmill,” Hedley says. “Or not. It’s all up to you.” •

James Careless is a freelance writer with credits at numerous B2B publications. His work has also been published by the Globe & Mail, Toronto Star, and National Post. Careless is also a long-time contributor to CBC Radio, and a podcast producer in Ottawa, Canada.

Best Value Contracting: An Industry Revolution

According to the National Bureau of Economic Research, the United States has had 33 recessions, which tended to occur about every five years, between 1854 and 2018. The entire construction industry reels in leaner times since global economics, materials pricing, and labor supply become fluid and unpredictable. The sheet metal industry is particularly vulnerable since steel and aluminum tariffs are in flux, leading to supply chain disruptions, increased inflation, higher interest rates, and other economic implications.

SMACNA’s Testing and Research Institute received a grant to sponsor a study through the University of Arizona (ASU) that evaluated performance-based procurement, now referred to as Performance Based Information System (PBIS), designed to develop an alternative to the low-bid system.

The study compared union with non-union contractors, evaluating those with 10 or more references by 35 criteria to develop performance ratings. Of those 35, SMACNA contractors scored higher on 34, or 97%, including the following top 10: skill of craftsmen, quality of finished product, housekeeping, coordination, minimization of punch list, update of schedule, customer satisfaction, technical knowledge, minimization of lost time, and ability to install performing systems.

The study determined the areas HVAC contractors could stand to improve were largely to do with customer-focused services—improving change order response, minimizing time lost on problem resolution, and timeliness in updating reports, in particular. These areas were evaluated as training opportunities, and service types contractors could improve to provide better value to owners.

Most importantly, owners indicated they are interested in reducing risk by hiring high-performance contractors and they are willing to pay more for better performance. According to the study’s findings, the success of a PBIS for the procurement of construction services relies on an educated and committed owner and an objective implementation of the system.

It’s time for owners to think value, not price. Dean T. Kashiwagi, director of the Performance Based Studies Research Group at ASU’s Del E. Webb School of Construction, devised the Performance Information Procurement System (PIPS), which turns the low-cost bidding system upside down, weighing value and skill factors among contractors to determine best value contractors.

Using PIPS, higher skilled firms have a competitive advantage because scoring well requires trained, experienced people who can minimize risks they do not control and address problems before the project begins.

The first step in the bid process is submitting pastperformance information on team components including contractors, individuals, and supervisors. Next, contractors submit a bid identifying, prioritizing, and minimizing project risks that would negatively affect the budget or timeline, or cause change orders. They also propose a timeline, including milestones, and propose value-added options.

In the final phase, contractors are short-listed and interviewed to establish their knowledge of the project and potential risks. Scores from these areas help rank contractors according to best value, and a successful contractor enters the pre-award period during which he or she provides a detailed schedule, coordinates requirements with the client and team, works out conflicts, and supplies quality control and assessment procedures.

Based on these details, the owner awards a guaranteed maximum price or fixed-price contract, making performance and weekly reports critical components that will be evaluated at project completion.

Kashiwagi says best value contracting is nothing short of revolutionary thinking. “Best value practices, such as those used in PIPS, allow contractors to differentiate themselves,” he says. “They can compete and be the best.” Learn more at bestvaluefoundation.com. •