The 10 Pitfalls of Competitive Bid — Part 2

In part one of The 10 Pitfalls of Competitive Bid, we discovered that regarding the competitive bid (CB) process, the following is true:

The rules of the game are made up as we go along.
The people administering the rules of CB can often be less than suited to do so.
Contractors can range in quality from Einstein to Earnest Goes to Hollywood.
The documents that CB proposals are based upon are often incomplete, incoherent, and unreliable.
All players in a CB arrangement are arch-enemies before the first shovel of dirt is turned over.

Wow! At least it could not get any worse, right? Well, you may want to hold onto that thought:

Pitfall 6. Time for a Change (Order)

Now that we, as a society, have gone out of our way to create a wholly dysfunctional building construction environment by using CB, does it come as any surprise that change orders exist? Mercenary by definition, CB has reliably ensured that a fixed, detrimental wedge now exists between all construction team players— players whose true goal should have been to work together as a team to foster a successful and mutually beneficial business transaction (the construction project). This knowledge alone should be enough to cause any sane building client to run screaming away from CB, but they do not. Instead, the average, everyday building customer (who is just as culpable as the contractor and designer in this whole mess) remains transfixed on the bottom line, enticed by the quickest/immediate buck and indoctrinated into a business and commercial construction environment that values low cost over long-term quality and value.

So the inevitable dance begins. The awarded contractor who, contrary to popular belief, is no dummy has kept a running mental inventory of all the mistakes, omissions, and ambiguous information in the plans and specifications and as the ground-breaking nears is now locked and loaded with substantial change-order ammo. The project starts, the anticipated snags manifest themselves in the field, and the ink begins to flow. Keep in mind now that the contractor does not actually have to do anything to cause these missteps to occur. He only needs to sit back and watch it play out. And, boy, does it play out—design and scope misses so glaringly stark and obvious that not even the heavily-loaded language in the general requirements (the “responsible for complete system” clauses that attempt to hang the contractor with cost, whether or not the work is actually shown in the bid documents) can save the A/E. The first RFP (Request for Proposal) is issued … and another, and another.

Add these to the changes resulting from the client changing his mind (which happens every time) and before long the contractor is earning more from change order profits than from the original base contract. Yes, I know what you are thinking. At some predictable given point in time, doesn’t the client (perhaps with some goading from the A/E who is trying to defend his turf) grow frustrated enough to push back?

Yes, but here’s what happens:

Tense emails get exchanged. Tempers get exercised.
Special meetings get held. Tables get pounded, fingers get pointed. Everyone vehemently stands their hallowed ground, but deep down everyone realizes they are dealing with flawed arguments and an imperfect system.
Everyone eventually grows weary of fighting and weak from the stress. The debacle limps and staggers to an unsatisfying finale for all involved.
None of the parties speak to each other for six months to a year.
Time happens, and memories soften. Animosity dissipates, and a new project comes out for bid. The former antagonists realize they need each other and the whole thing starts all over again.

Pitfall 7. Project Schedules Are Longer with Competitive Bid

This one is a little more straightforward, and only requires a little logic and simple math to understand. A severe disadvantage of CB (when compared to alternate award methods such as design/build or negotiated work) is that the process is rigidly compartmentalized. Each segment making up the CB concept-design-bid-award-build-closeout process must completely play out in chronological order before the next step can begin. Because of this, the owner and building team are unable to take advantage of fast-tracking (where the construction overlaps the design process with the goal of accelerating the overall building schedule) and all the cost-savings that come with it such as shorter interim construction financing, less downtime for the client’s business operations and better control over general requirement costs (for all parties) that always increase when a construction schedules grows prolonged.

Pitfall 8. The Client Ends Up Being the Biggest Loser

I do not know about you, but I love what I do. I am proud of my occupation, proud of the skill I have obtained over the years, and proud that providence saw fit to land me in a position where I can offer needed expertise to those who seek out my service. I am also the type of person who likes to have a clear conscious when I go to sleep at night. This is exactly why it can sometimes be a struggle to know the things that I know about our industry and still—daily—promise my customers contentment and satisfaction as they enter, what may be for them, the largest single business transaction of their lives. I have moments where it does not settle well in my soul. I have even been in client meetings (perhaps to discuss a disputed change order) where I have found myself rooting for the client as I simultaneously make my case for the extra cost.

It is an odd feeling, and in retrospect, it likely felt that way because deep down I knew something was not right; something was not fair. Yes, I have read all the business books: “business is business and profit is what keeps the doors open.” We have all drunk the cool-aid, but each of us is also instilled with a basic moral alarm clock early in life that alerts us when we begin to wander off the trail of innate human decency. I am embarrassed to confess that there have been times in my past business dealings (although perfectly allowable and justified from a business standpoint) where I could hear this siren resonating in my head, and I did not like it. Maybe it is idealistic (and a bit sappy), but in the end, I do want my clients to be happy. It is the world I want to live in. This is why it can sometimes be difficult to represent my product (construction) to a prospective CB customer when I know in my heart that the person shaking my hand is going to:

Spend more money
Devote more time and energy
Suffer more stress and anxiety
Receive a less-quality product

than they otherwise would had they used an alternate project delivery method (see 10).

Pitfall 9. CB is No Bargain for the Contractor, Either

Despite what many people believe, we (builders) have little competitive advantage over one another when it comes to cost. With minor exceptions, we all purchase the same building materials, pay the same labor rates (whether it be through prevailing wage or simple market competition) and expend similar proportionate amounts for office overhead and equipment. There are no secret tricks, no warehouses filled with deep-discount materials, and no mystical technical knowledge that materially distinguishes one builder from another.

Given this parity, the difference between winning and losing a project out for bid often has less to do with the direct costs that make up the project itself, and far more to do with intangible and indirect considerations such as workload, cash flow, job continuity or sometimes just plain attraction to a particular project; for example, it may be one of your company’s long-term goals to add more medical work to your portfolio, so you go after the latest hospital renovation a little harder than you normally would. There can be a wide assortment of motivations for being both aggressive or conservative on any particular bid.

However, here’s the hitch when it comes to CB. Due to the level of competition, the tendency for unknowns and the likelihood that the project will suffer a more adversarial atmosphere due to CB, a company’s normal and acceptable level of aggressiveness is used up within the process. Competitive bid is risk enough all by itself. There’s no room for creativity, and there’s no way any sensible contractor is going to add additional peril to an already perilous exercise. So, the competitors are forced into a status quo situation where one company has virtually no advantage over the other. Moreover, businesses who lack competitive advantage do not last very long in any market.

Pitfall 10. There ARE Alternatives to Competitive Bid

I would be performing a disservice to the reader if I were to spend this entire time rallying against CB without offering up an alternative in the end. Well, we are in luck, because there are other methods — proven, solid methods — utilized all over the world that replace blind competitive bid with notable success. For clarity, I am going to break these down into two categories:

Award methods falling outside traditional CB framework (i.e., negotiated, design-build)
Award methods falling inside traditional CB framework (i.e., bid/cost averaging)

Outside: Negotiated and Design-build

Let’s start with delivery methods you have likely already heard of: negotiated, partnering, and design-build construction agreements. The process varies depending on the players and project type, but in general, these types of arrangements share similar attributes:

The client works directly with the building contractor from start to finish, including the design and budgeting phases.
If the builder doesn’t already have in-house architectural/design services (most don’t), an outside design firm can be brought in to round out the team.
The relationship can branch into several different contract structures including cost-plus percentage (or fixed-fee), guaranteed maximum price (GMP), straight lump-sum, or any combination and variation of these or other parameters to which the parties agree.

There is greater teamwork and comradery, and compromise, among the construction team. The working atmosphere is less adversarial.

Input is gathered from all sources during the critical design/budgeting phase. With everyone on board throughout, the chance for cost/schedule over-run after construction begins is greatly reduced.
There is mutual trust. Even the contractor’s books are available to the owner as both a gesture of good faith and as an added level of project control.

Not bad, huh? The owner can feel content that he/she has struck a fair deal, and the contractor and designer (whose percentages rise and fall according to the direct costs for the project) know that they will at least make their anticipated fee (with less risk of something going wrong).

Is there any down-side? Well, not so much to the process itself but more in having the opportunity to use the process. You see, as we stated earlier, trust is not handed to you. It is earned. Arrangements like those above require trust. If you are a new building contractor in a new market with little reputation or resume, you are almost certainly going to have a tough time (for the first few years) finding building clients who will place enough trust in your abilities to enter into arrangements like those above. This situation does not mean you do not have the ability, mind you. It simply means that your company is not yet established enough for the client to feel comfortable risking considerable finances and faith. However, take heart, this privilege does come in time, assuming you use that time delivering reliable, honest, dedicated and quality service to your customers.

Inside: Bid Cost Averaging and Other CB Variations

Now for a few award methods that you likely are less familiar with, particularly if you are from the United States. Most of these are variations of the CB method that have been or are currently being used in countries all around the world. Most of these will fall into the family of CB but include a few twists and turns—and most notably don’t rely on the single criteria of low-cost when handing out awards. The most popular of these alternative methods appears to be:

Average Bid Method (ABM)

This award system is used in many locales within the European Union, South America, and Asia. It works like this: instead of awarding to the lowest bid, this time the winning proposal is the one which is closest to the average of all the proposals submitted. Here’s an example. A letting has been held, and there were five bid proposals. The results were:

Contractor A’s bid: $ 465,000

Contractor B’s bid: $ 516,000

Contractor C’s bid: $ 503,500

Contractor D’s bid: $ 432,800

Contractor E’s bid: $ 492,600

With conventional CB, there’s little drama: Contractor D’s lowest price of $432,500 would likely be awarded the work. With ABM, all five numbers are added up and divided by 5 (the number of bidders in this case) to find the average value of the group. In this case, that average is $481,980. Now at this point, the methods may vary slightly (depending on where you are in the world), but they all revolve around a similar theme. The first ABM variation awards the project to whichever number is the closest (high or low) to the average number. In our example, this would be Contractor E at $492,600 (net difference $10,620). A similar but different method awards to the bidder who is closest — but under — the average number. In our case, this would be Contractor A at $465,000.

Sometimes these ABM processes are straightforward and direct without many stipulations. Other times (and places) there can be additional factors that go into award. One example is the “weighted-factor contractor scoring system” (or similar name) where the bidding contractors are previously assigned “points” based on selected criteria such as experience, reputation, technical merit, after-sale service and financial stability. These points are used to establish a modifier/multiplier that is assigned to the bidder. This modifier is then applied to the final award numbers to increase/decrease a particular contractor’s chance for award.

The equations used for this purpose can range from straightforward to extremely complex — some almost absurdly so. In fact, if you ever have a moment, search out some of these award formulas online. Even if you are not deep into the subject, it still makes for a fascinating read. Some achieve a level of almost unfathomable sophistication more akin to fractal algorithms than simple equations. Of course, the problem with anything when it becomes inaccessible and complex is that the more complex something is, the fewer people there are who understand what is going on. This inaccessibility can quickly create a fertile environment for short-cuts and corruption by those chosen to administer the process.

Closing

There are other award methods as well. In Reverse Auction, companies openly bid against one another in real time for a project. Some systems disqualify bidders (often to waylay potential corruption or collusion) from, for example, receiving two bids in a row — 3 out of 5 within a given period. In the end, the variety of award methods is limited only by the imagination and creativity of those making the rules.

However, regardless of makeup, one thing all these methods have in common is that they do not take the easy way out. The minds behind these alternative methods realized that the conventional low competitive bid process was fatally flawed and had the commitment to search out new and better ways. Competitive bid is simple but deeply flawed, and turning a blind eye to something you know is wrong is just being lazy. At some point, we in the construction community were lulled into utilizing the lowest common denominator of construction project award methods. Even though we are painfully aware of its shortcomings, the system stays in place, and we tag along for the ride — too complacent, too apathetic, and too caught up in our day-to-day travails to launch a collective and formidable response. That is not how it should be! We are contractors. When something is broke, we fix it. It is what we do — and we can fix this with the right amount of effort. I am in. How about you?