Some contractors price any and every construction project without really putting thought into the project, the client, or whether they are able to submit a competitive price. I feel sorry for their estimators who work long hours, often working on several proposals at one time, and all too frequently with little success. Simply pushing out one construction proposal after the other!
However there are huge risks with this approach, and aside from the wasted effort, there’s a real danger the company is awarded a project that could ultimately destroy them.
What to ask before pricing a construction project
So before pricing a project, decide whether your company wants the project or not. There may be certain projects that you really want, in which case put extra effort into preparing the estimate and presenting your tender or quotation. But there are other projects that should be avoided.
1. Will we get paid
A few clients are notorious for not paying their contractors. Do you really want to be working for free? Other clients may be experiencing financial stress and it would be devastating to your company if they went into bankruptcy partway through the project leaving your invoices unpaid and an unfinished project. Do background research on your prospective clients.
2. Do we want to work for this client
Some clients are notoriously difficult to work for. They may be disorganized, employ a weak design team, continuously change their minds, be litigious, refuse to pay for legitimate change orders, pay milestones late, deduct money for bad reasons, demand excessive paperwork or continuously interfere with the contractor’s operations. All of this costs contractors money and frustrates their employees.
I’ve known contractors refuse to work for some clients or add a premium to their price to compensate for additional costs and frustrations they know they’ll experience with the client. But, do you really need the stress and distractions of being involved with this client, and can you afford to be distracted from your other projects?
3. Do we want to construct the project
Some projects are easier than others. A few can be particularly demanding to require an inordinate amount of supervision and management time. Occasionally projects involve difficult working conditions such as working around existing services and infrastructure, or face environmental or other delays, even public protests. Will the efforts of dealing with these problems be worth it?
At times we can’t be picky and have to take on these projects, or maybe there are other benefits that outweigh the disadvantages. But often there are more appropriate projects that you could be focusing on.
4. Do we have the knowledge, and experience to construct the project
Unfortunately, I’ve seen contractors win a project and then run around looking for appropriate staff. Some projects are easy if you have the experience, but can be difficult for those who don’t have the knowledge. A contractor who usually builds roads will have difficulties taking on a building project and a building contractor may not have the experience to construct a road. Of course, a savvy client wouldn’t award a project to a contractor they felt didn’t have the right experience for the project.
5. Will we have the resources available to do the work
You don’t want to be awarded a project and then be scrambling around trying to find a project team, literally hiring people off the street. I’ve had projects fail due to this. Having the wrong project team can mean the project is executed poorly impacting the company’s reputation and even resulting in the project losing money. It may impact other projects as management becomes stretched.
Resources also include equipment. Some projects require expensive items of equipment which the company may not be able to afford, or maybe the equipment isn’t available or there are long lead times to procure the equipment which will delay the project.
6. What are the project risks and are they acceptable
Sometime back a good client of ours asked us to undertake a low-value project which involved excavating and removing buried electrical cables in the middle of a gas refining plant. The operation was going to be difficult and dangerous. The risks of something going wrong were high and the results could have been catastrophic. A serious incident would have made the news, disrupted the owner’s production, tarnished our reputation and even injured or killed people.
The profits from such a small project certainly didn’t warrant the risks. We declined to price the project. The client insisted, so we priced the project ensuring we made adequate allowance for supervision and training, took out suitable insurance, mitigated risks and transferred some risk to the owner. We added additional profits to compensate for the remaining risk. The risks on some projects could destroy a company should they play out badly. Understand the risks. If they can’t be adequately mitigated then don’t price the project.
7. Do we have the knowledge and experience to price the project
Some projects may be in a region where you haven’t worked before. Various states and countries have different rules and regulations, differing taxes, wage rates, safety regulations, and environmental laws. Compliance with these could add thousands of dollars to the project price. Importing materials and equipment in another country can be a costly and tedious process. Worker certification and requirements could be onerous adding additional costs and causing delays.
Furthermore constructing facilities for different owners can cause complications – constructing an office building in oil and gas plants is a different ball game than building one in the city. Different forms of construction require different skills and knowledge. Many years ago a construction company priced a sand pump station in the ocean. An estimator without sufficient experience guessed how they would build the cofferdam in the ocean. Without experience, they didn’t allow for the constant waves, storms and tidal action.
The project was awarded to them and cost the contractor double the contract price and took twice as long as planned. You can ask experts to help, or even joint venture with a company with the experience and knowledge. Alternatively don’t guess, don’t price a construction project.
8. Will our price be competitive
We didn’t price a construction project where we knew we wouldn’t be competitive. Not only would it have been a waste of effort but a high price could put the client off asking us to price another project in the future. Always understand your opposition for the project – are they more desperate for the project than you, maybe they’re working on another project close by which could give them the competitive advantage of being able to share resources.
Some companies are just good at doing certain projects or have a good working relationship with the client. Understand your limitations and if you know your price won’t be competitive just decline to price the project with a polite letter to the client.
9. Is there sufficient time to price a construction project properly
Clients often expect contractors to perform miracles and price a project in a ridiculously short period of time. In other cases, you only become aware of the RFP after the other contractors. If the period is too short to price the project you end up guessing some prices, you make errors in the rush and don’t spend sufficient time preparing a good tender submission.
A poorly completed proposal is a poor reflection on your company. An error made in haste could cost the company severely if you are awarded the project. Ask for more time to price the project or respectfully decline to price it.
10. Will the project go-ahead
We were often asked to price projects which we knew wouldn’t happen. The client didn’t have sufficient funding, they didn’t have the relevant permits and probably wouldn’t receive them in the near future, or they were just on a fishing trip to test the feasibility of the project. If it is a loyal client, or if your estimators have the time, then, by all means, go ahead and price a construction project knowing you are merely doing the client a favor with little expectation that the project will go forward.
Bear in mind though you will also waste supplier’s and subcontractor’s time asking for prices and they won’t appreciate their time being wasted on too many of these “budgetary exercises”.
Construction companies have been destroyed because they worked for the wrong client, a client that didn’t pay, a project which became embroiled in a legal nightmare, one that hit the news headlines for the wrong reasons or one where things that could have been anticipated went wrong.
Contractors may blame this on bad luck, but I’m certain that many of these events could have been foreseen when the project was priced, and a prudent contractor would have asked the questions above and the answers would have meant they didn’t bother pricing the project. Their efforts could have been better-spent pricing projects they really wanted, projects for good clients and projects where money could be made.
So why not set a system in place where projects are reviewed before a decision is made to proceed with preparing and submitting a proposal. Time spent on this action will definitely reduce your company’s risks and improve the lives of your estimating team.