Pricing a project without researching it properly could be costly
Some years ago we were staying at a Bed and Breakfast in the highlands of South Africa. It was winter and the day’s temperature was about 16 degrees Celsius (60F) and the nights dipped to -2 Celsius (30F). It wasn’t freezing but the air had a bite to it. It was late evening and we were having drinks in front of a cozy log fire when two tourists arrived (bird watchers) with their guide. They immediately gravitated to the fire to warm up.
The bird watching
The bird watchers were thinly clad in shorts and T-shirts and one had a sleeveless light jacket. They looked frozen. The local guide had a pullover and a thick jacket. We asked them why they were dressed for summer and where their sweatshirts were. Apparently they arrived in South Africa the day before from New York (where it was summer) and were collected at the airport by their birding guide to starting a 10-day bird trip through South Africa. They hadn’t packed anything warm as they were coming to Africa – apparently, they thought Africa was always warm!
Now Africa actually consists of about 50 countries and South Africa spans from about 20˚⁰South to 35⁰South and much of the interior has an altitude over 4,000 feet so in winter it can get fairly cold – although snow isn’t common.
Since these guys were on a bird-watching trip they weren’t staying in towns where warmer clothes could be purchased. We thought of them the next morning when we heard them leave at 5.30 am. When we had breakfast at 7 am the frost was still thick on the ground. Bird watching means you are outside much of the time walking the fields – it wouldn’t have been fun in summer clothes that morning.
So here’s an example of individuals who hadn’t done their basic research before leaving on vacation – and suffered for it. Of course, we hear many vacation disaster stories of tourists unable to travel because their passports had expired, they failed to get the required visas, overstayed their visas, or missed their flights because they hadn’t looked at their flight times properly.
All of this costs them money and time. They have to rearrange travel plans. Indeed, I have sometimes been amazed at the lack of travel knowledge and preparation of some tourists on my journeys. On a cruise to the Antarctic, a fellow passenger remarked she didn’t realize that all she would be seeing was ice!
In the same way, I’m often amazed at construction companies that fail to carry out basic research before submitting a price for a project. They seem to assume the project is the same as their last projects.
In February 2016, Samsung C&T revealed they had lost over $700 million on a $4 billion project in Australia. I think a large portion was due to poor pricing and not understanding the local conditions.
What construction homework should companies do when pricing a new project?
Understand the contract information supplied:
- Read and understand the contract. Are these conditions acceptable to your company?
- Ensure you understand the scope of work – what you have to construct and its location. Price the scope as you are asked to.
- Know what you have to supply and what the customer will supply.
- Ensure you are pricing in accordance with the supplied specifications.
Know your customer:
- Do they have the required funds?
- Are they known for treating their contractors well or do they pay late and become involved in contract and payment disputes?
- Can you deliver what they expect?
Visit the project site:
- Is there access?
- What does the terrain look like – is it flat or steeply sloping?
- Are there other contractors already working on the site or adjacent to the site which could impede your work?
- What are the ground conditions like? Rock could slow excavations down making the installation of utilities slow and expensive. Of course, ground conditions can vary even over short distances meaning that similar projects in close proximity could have very different foundation designs impacting both the project duration and the cost. When in doubt, don’t price the project without a soils report.
- What is the security situation? Some neighborhoods have more theft than others.
Understand the local conditions:
- Cities, counties, and states have different laws that might govern permit conditions and even building codes. You may need different licenses and registrations to operate in that region. In some cases, your company may not be able to obtain these, but even if you do get them there may be delays and additional costs.
- Understand the local tax which can vary between states and countries.
- Working in another country brings with it a host of potential problems which include; the lack of materials and skills, problems with importing and re-exporting your equipment, not understanding the tax system, lengthy red-tape, corruption, and even exporting your money out of the country. I’ve known contractors who haven’t been able to take their equipment out of the country even though they originally brought it in to construct the project. I’ve known others who couldn’t take their project profits out of the country. Many contractors have suffered huge financial losses when the currency they were being paid in devalued partway through the project. The horror stories of contractors working in foreign countries who didn’t do their construction homework properly and understand the local conditions are endless.
- Research the local weather conditions which could be significantly different from those you are used to.
- Understand the availability of resources. Materials, equipment, and people.
- Be aware of the local labor codes and wage rates.
- Understand the productivity of the local workers – these can vary significantly between different countries and I’ve known it to vary by a factor of five. Imagine pricing a project on assumed productivity and the actual productivity achieved is only 20% of what you allowed!
Many construction companies have lost big money because they failed to do adequate construction homework when pricing a project. Sometimes these companies have even gone bankrupt. Spending that extra time to understand the pricing documentation, know your customers, visit the project site and understand the local conditions will prevent you from making expensive mistakes. Even if you worked in an area before don’t assume the conditions haven’t changed. Even if you have worked for the same customer before don’t assume the contract conditions and specifications are the same. Spend time and do your research.