Transcript
Speaker: Another thing a lot of people don't look at is increased liability, legal and public relations issues. I've seen this before too in the contracting world, especially on the more general contracting and building side.
Speaker: Someone is hired to do something, you have your big sign out front this project is these upcoming whatever, apartment buildings, whatever you're building, hire little big contractor, a lot of things fail, there's a lot of issues, and all of a sudden the job site or whatever gets known in a negative light.
Speaker: That's because you hired someone who didn't live up to the expectations that you say you expect.
Speaker: fros Welcome back to another edition of the Better Contractor. So today i want to talk about something that I think plagues a lot of contractors and that is low bidding. That is a race to the bottom. It is something that a lot of contractors do and is super detrimental to your cash flow, to your profitability.
Speaker: But by dealing with that, we also need to look a little bit at both parties. So you have a buyer and a seller. So this podcast is going to deal with both because to fix this issue, you have to look at it differently yourself as the entrepreneur, as the contractor, but you also have to look at it differently as the buyer. So this is going to be for both. If you're a contractor and you're working commercial or business accounts and you think this is a podcast that, and especially if you have a relationship with the buyer, this is something that you might share with them to kind of help them think about it differently and realize, hey, you're bidding this and you're bidding it honestly and you're bidding it accurately.
Speaker: And here's the reason why this is a little bit higher and to help them think a little bit differently about it. So guys, let's take a look at this. So let's first start with a look at the issues in these low bid scenarios.
Speaker: Like I said, we're going to look at contractor and buyer both. So we'll start with contractor. Number one, this is a profit killer. A low bid situation, like I said, is simply a race to the bottom.
Speaker: It is a reason why corners often get cut. It is also something that destroys your cash flow in your bottom line. And it does not allow you to improve, upgrade or get better.
Speaker: That is what keeps contractors stuck in this hole. So from the contractor perspective, in a nutshell, the low bid environment, it basically removes, you remove all your what if scenarios. You remove the this piece of equipment went down and you have this astronomical bill.
Speaker: Those things happen. And when you are constantly in this low bid environment, you're removing your ability to deal with those things as they come. So now of a sudden that unexpected $15,000 repair you ran that project so lean that you only have $10,000 in profit anyway. Now that $15,000 repair took you negative 5,000.
Speaker: You can't stomach that and do that for very long. Next, let's look at the issue for the buyer because we want them to understand this as well. It results in the contractor being unsaved, being rushed, cutting corners.
Speaker: Some people will argue that, oh, that's not how it should be. The fact the matter is when you run a project that lean and that tight, something has to give that is normally what gives with most contractors.
Speaker: Next, it has long-term cost increases and it doesn't actually cut your cost. So you may have a little bit of a cost cut the first year because you chose low bid, but over the course of time, that low bid will end up costing you more money than you save typically.
Speaker: We have seen that over and over with just being in the contracted business now for 18 years. More headaches and oversight. This is a big one that I've seen a lot where someone has chose a cheap contractor And then maybe it's a procurement team that has chosen this for someone else, you know, different department.
Speaker: The other department then has to use that person. They use them, but there's so many issues that that department, let's say has two, three, 400 hours themselves now dealing with these issues. Well, those three or 400 hours that they are now dealing with those issues are hours they don't get back, that they could have been doing something else. That has a cost and that cost needs to be factored into that low bid award.
Speaker: And oftentimes most procurement places do not look at that because it's overly simplified to look at only the cost on paper. another Another thing a of people don't look at is increased liability, legal and public relations issues. I've seen this before too in the contracting world, especially on the more general contracting and building side.
Speaker: Someone is hired to do something, you have your big sign out front of this project is these upcoming whatever apartment buildings, whatever you're building, hire a little bit of contractor, a lot of things fail, there's a lot of issues and all of a sudden the job site or whatever gets known in a negative light.
Speaker: That's because you hired someone who didn't live up to the expectations that you say you expect. Another one is detrimental to your company and corporate in your corporate values and objectives.
Speaker: So I view this as serious as hiring an employee. Most people um would not hire employee. an employee that didn't live up their core values to the objectives that the company says they want.
Speaker: So why is a contractor hired just because they're cheap? You know, if you look at like, let's say you're hiring an accountant. Well, you might be able to hire this brand new accountant to run your multiple million dollar firm.
Speaker: for maybe 30 bucks an hour, or you could hire an experienced one that's got, you know, years and years of experience for maybe it's $70 an hour. You're probably gonna hire the $70 an hour because you don't want mistakes made.
Speaker: For some reason that is applied differently across the board from a corporate perspective. And it shouldn't be because you get what you pay for. So another one, last one for that front is rework.
Speaker: So like in our line of work, for example, At LanterCorp, that would mean you pay us to go do a job, you come back after you've paid us and whatever went on, because our projects span over multiple miles as do a lot of pipeline projects.
Speaker: and you find a bunch of issues. Well, you've already paid the contractor and they've moved on, but now you gotta to pay someone else to go back and fix stuff. Or the next time the bid comes up for bid, you find these areas that were skipped. Well, now if part of your new ah RFP, your new ah RFQ is to go in and fix those issues.
Speaker: So that ends up costing you more and more money. It costs you legal dollars and also causes contractor turnover issues, which are as legit is as much of an issue as employee turnover.
Speaker: So, How do we fix it? So again, let's go back to the contractor first. You guys got to stop marketing and selling yourselves as low bid only.
Speaker: You've played into the trap, you've played into it, and you've not demanded anything different. You've not marketed yourself differently. You've not sold yourself differently. You have believed that the only way you can beat your fellow contractor is to underbid them.
Speaker: and that's not the case, not for all customers. There will be some, and there will always be some there that way. You just don't want those. Next, you need to start doing the work the right way. No cutting corners, pay your guys well, do safe work, quality work, attention to detail, follow through and price it from there. So you're pricing your actual work. I see so many contractors not do this.
Speaker: And that's why the industry has a bad name. It's I think for two reasons. You don't think you can price yourself accurately, so you never do. So you cut corners constantly. And because you cut those corners constantly, the industry as a whole contracting has this image in its head that, you know, I'm going to get screwed by my contractor.
Speaker: We have to stop that on our end as contractors and actually do the work the way we say we are going to do it and do it right and then price it accordingly. So it's the kind of that crappy contractor mindset that buyers often have thinking that, Hey, I'm going to hire this guy. He's probably not going to show up. He's going to have a bunch of different people on this project, whatever we got to prove them wrong.
Speaker: And then next with contractors, you gotta stop doing business with those cheap buyers. Do your work the right way and go after the buyers that will want that. There will always be a room For the bottom feeders, let those people have those and don't even chase those type of clientele.
Speaker: Most likely you live in a market. If you do your work the right way and you get known for that, meaning you market yourselves that way, you put it on social media, you get the reviews, you do all that stuff.
Speaker: Eventually you will get known as a contractor. People call to do things right. And you will get out of that low bid model. And I can speak personally of this because I'm a contractor and also someone who hires contractors.
Speaker: I don't go with low bid. I cannot think of the last time I have because I know that will end up with headaches. The only time and this would just be like a lawn service thing at the house.
Speaker: Years and years and years ago, I hired one who was the cheaper contractor and they weren't cheapest. There was someone below them, but it was cheaper. It was headache after headache after headache. And I had to call another contractor into fixed retaining walls and other issues of that contractor cause.
Speaker: That is a small example. You can take it on a big scale for big contracts, but guys, you gotta stop that. Next, buyers and procurement. So we're gonna talk to you guys next. You gotta stop the broken policy of awarding on price alone.
Speaker: actually pre-qualified contractors with due diligence on their core values and see what their work actually looks like in the field. You need to stop relying on generic ratings or checking boxes. We all know that doesn't work. And I can think of an example. There's a company that we work with a lot in our industry that gives you a generic safety score. I'm going to say it's generic because really you're answering all the questions yourself.
Speaker: you're going in and you're checking these boxes and I know contractors who do that and it is not completely honest you get a generic score that is how simple the procurement policy is for pre-qualification meaning that I trust this program enough to say hey this contractor is an A or a B and therefore now I can hire them that is too simple and the reason I say that is it doesn't actually look at anything actually in the field so That one is specific to safety.
Speaker: Does that contractor, are they going out are they auditing their crews in the field? Are their crews doing any of the stuff that their safety program says they're doing, doing it actually in the field? Is there a culture of safety there?
Speaker: Do their employees think, hey, this is kind of silly or stupid, so we're not going to do this from a quality front? Do they even do quality audits? Does your team even do quality audits? I can't think of how many times we have done a, you know multiple six figure job and never had anyone show up on site from the customer to actually look at the project we're doing.
Speaker: So from a quality perspective, and the reason that comes back to bite later, We don't do this, obviously. We do quality and safety audits. But for the ones that don't and the customers that don't, they're going to come back to that project and bid that project out again in three years if it's on a maintenance schedule like that.
Speaker: And they're going to realize contractor potentially did not do the scope of work right, which now means there's a new scope of work for a new project three years later. Now you're going to pay for the mistakes the first time. But my point with that is the procurement policy needs to be more robust than just a simple pre-qualification paperwork of boxes and ratings and simple ah A, Bs and Cs type of grades. And you need to actually see who you're working with.
Speaker: What do they do in the field? Get the references. Actually get to know that contractor. Pretend you're hiring an employee. Does that employee, is it someone you want to hire? Do they actually believe your core values?
Speaker: Do they actually live up to the main things that your company wants to achieve? Are they someone that represents you out in the field? So for us at LandoCorp, we're out in the field with landowners all the time. So the pipelines go through different parcels of land, means different landowner.
Speaker: they want to have good relationships with those landowners. If they hire a contractor that doesn't maintain those, I'm not who they think poorly of. They eventually think poorly of the pipeline company.
Speaker: That type of stuff matters. And that's why you should be choosing contractors based upon all those different things, not just a generic score. Next, realize that when you choose low bid, that corners are probably going to get cut.
Speaker: Again, I'm not saying that's what we do at Lander Corp, but you have to know, just like when you're buying a car, if I go to a Lexus dealer, for example, I do not expect my Toyota, by the way, Lexus, Toyota, all the same brand.
Speaker: Toyota is the more basic model. Lexus is the premium. But I do not go to Toyota expecting it to be optioned like my Lexus. So when you choose low bid and you say, I care about safety, I care about quality, I care about all these things.
Speaker: But then also I want you to be the absolute lowest bid in all regards. I'm sorry, when that's the case, you are not putting your money where your mouth's at. You're saying these things care. I care about these things and they're important to me. But at the end of the day you're not actually doing that because you're choosing the cheap contractor.
Speaker: Now, you seem to know that choosing low bid has hidden costs. So again, I'm talking safety, I'm talking quality, I'm talking liability, legal, PR, rework, increased bids later that will drive up costs. You know, maybe it's two or three years from now, but you're driving up costs over the long term.
Speaker: And the reason I say those are kind of like a ah hidden cost is is because nobody tracks them. I've never had a company that we've worked for that has actually tracked, hey, contractor A, we chose them and they had these two incidents that caused my safety team a hundred hours.
Speaker: That's probably a low number. They also had quality issues, which meant my team had to go out and I pretend to be the the pipeline company mean in this regard. My team had to go out and now do spot checks to make sure they perform the scope of work. That was another 100 hours.
Speaker: Next, we found these five spots that need to be, you know, have work done to them or they didn't do incomplete. So going to that in the next ah RFP. Maybe that added $50,000 to the next RFP.
Speaker: So now I have 200 more hours on my team's shoulders to to handle this contractor plus rework in the future. Those are hidden costs that have to be factored in when you're doing low bid.
Speaker: Next, you need to lean on your other divisions and overall core values when purchasing. I do not see that a lot. For whatever reason, procurement kind of tends to run in its own bubble. It's making decisions primarily on price with a little bit of pre-qualification from the contractors contractors. a vendor setup, but a lot of that is based again, it's based upon a score and that score is overly generic and not in depth.
Speaker: So they're relying on that alone when in actuality is a much, much bigger picture needs to be taken into account. But the reason that's important is those other divisions should have a say. Your safety team needs to have a say that, hey, this contractor actually meets our core objectives.
Speaker: Your team in the field needs to say, you know what, that contractor, we like them. They work well with us in the field. They communicate to us. They let us know what they're doing, where they're at. Every time we've showed up, their guys are working. They're doing it safe.
Speaker: Um, for example, going to try to think of another one, uh, operations. So they have these objectives that, Hey, we need to finish this project. Maybe in 12 weeks time, this contractor actually has the people, manpower and equipment to be able to actually do that.
Speaker: So guys, you hire. people, employees with all these things in mind, but you don't hire contractors in the same way. You get what you pay for and the supplies everywhere in life.
Speaker: Next, I want you to rethink what expensive really means. And again, know all of these actual costs. I've seen so many times, earlier we talked about rework and that is probably the main place that this comes into play.
Speaker: I think of multiple times where we've been invited to bid. And I can actually think of a recent example where a ah different contractor had safety issues. We actually bid this project with them the first time.
Speaker: They had safety issues, there was an incident. We then were called back in with more specialty equipment because we have it to do the job the way we would have done it the first time.
Speaker: And that cost the customer a lot of time, cost our safety team a lot time, our operations team a lot of time. Those were all costs that made the first bid actually more expensive than having went with someone else the very first time.
Speaker: It actually made it more expensive. So next, you need to rethink how you buy and if it meets the big picture and and your core objectives. I would challenge you guys to choose partnerships. It still allows for you guys to get the but the best price, but that partnership basically puts where the contractor has more meat in the game.
Speaker: Meaning that they now know, hey, i if I don't mess up and I meet on my KPI, so establish KPIs. A lot of companies don't even do that. Establish KPIs with your contractors and let them know that if you continue to do a good job, we're in this together.
Speaker: then that contractor has full desire and ability and you're paying them enough, but they want to maintain that relationship. The relationship becomes what they're trying to attain and and actually be able to do all these different things. When it's low bid only, to be honest, most contractors know if it's low bid only, they know that you're only going to do business with them for one year.
Speaker: And there's a chance they bail on you before that year's over. They really don't care about all of your core values and objectives. when there's a partnership, which is how we like to operate at Lanta Corp as much as possible and how a lot of our contracts are. a lot of our contracts we've been doing business with for over a decade.
Speaker: But my point with that is when it's a partnership, both people have skin in the game, you're still monitoring your contractor, but you're making sure that all your core values and objectives are actually met.
Speaker: Last one I had on that is focus on saving money by choosing contractors to perform the work with best practices in mind. So for us and our line of work and take this, you know, if you're a contractor and you do building services or something else, but what we look at is We know the customer ultimately and wants to save money. That is a given.
Speaker: So what we want to look at with this one is how can Lander Corp. So this one's actually a little bit for the buyer and also the contractor. But what we want to look at there is I know my customer wants to save a little bit of money. So what does that look like? How can i then save them money? So I can save money by my buy my best practices. So for us, what that means is we're going to go in and we're going to build other stuff into our scope of work.
Speaker: We're going to build stuff into that that provides the customer value that other contractors are not doing. And by doing so, we actually have a program called Smart Row. That's something we have in-house, but that's what this is designed around. So basically, when we come in there, if the customer just says, hey, we want these miles cleared,
Speaker: We can then go in there and say, well, we're going to do that. But if we also do this, this is actually going to lower your cost long term. That's the kind of stuff where if you want to save the customer money and you can, that's how you should do it is by making your best practices so much better that you've leaned up things. You've made things more efficient.
Speaker: You've went out there and you've made the process better. You've got better equipment, less downtime. Those are the type of best practices that will eventually end up lowering costs long term. And that's where your cost savings actually should be. It's there. Not in low bid in this moment today only.
Speaker: So kind of a summary, guys, a lot of these things come down to educating. They come down to fixing a broken system. But more than anything anything, it comes down to doing it differently. You get what you pay for in life. And the reality is that is the best way to save costs is by performing the work in the best way possible.
Speaker: Saving money long term, not short term. Your headaches go down. Your time in legal goes down. Your rework time goes down. the people who work for you, whether that's in the field or whatever, their time goes down because babysitting that contractor.
Speaker: So contractors, I want to encourage you to stop competing only on price, actually get out there and do the work the right way, market it, sell it, but do it that way.
Speaker: And then buyers, procurement, I want you to think of it different and think, hey, this is a partnership. I want this person to meet all these different objectives, not just price alone. And I know that deep down, if it is price that I am only looking at, that what's going to happen is it's going to fail.
Speaker: I'm going to fail my safety team. going to fail my quality team. I'm going to fail my field team. And that is not who we are about. We want to actually perform this work the best way possible.
Speaker: So guys, if you enjoyed this podcast, I want to invite you to share it with others. Thank you about how you can implement this in your company. If you have a buyer who you have a relationship with and can share this with them to kind of help them think through how to maybe do this differently on their front as well and look at the big picture, please do so. Otherwise, as always, we've got our private Facebook group.
Speaker: I want to invite you guys to join that one. That is something I think if you're not in it yet, I think you'll provide value. But i need you guys to be engaged. Those of you who are in it and you're not engaged, please do so.
Speaker: It's an excellent opportunity. I think there's around 2000 people in there still. That's an excellent opportunity for you guys to learn from each other, ask the questions. Again, like I've always said in another podcast, if there's 2000 contractors in a room,
Speaker: Do you really think if you're dealing with something right now that someone in that 2000 has probably dealt with it before and and actually walked through it? The answer is probably yes. And if so, they can probably help you and save you some time, money, and stress.
Speaker: Ask the questions. On the flip side, if you're the contractor that can help someone answer a question, jump in there and do so. you guys have some helpful tips, share them. ah My whole goal with that, the podcast, all of this is just like this topic today is to elevate the industry and help it be done better. So guys, appreciate you listening. Love you. See you next time.
