It’s not unusual to find a contractor who sells by deliberately underpricing or underbidding jobs and making up the difference with change work orders. Lowball pricing makes them look good, and the home or building owner doesn’t realize that the low price they were promised will go up once the job gets started.
The practice isn’t ethical and it’s also not new. My grandfather talked about it happening when he was in business from 1915 to 1932. Same song, different verse.
Some contractors deliberately leave items out of the original quote or providing lowball allowance amounts. Others aren’t purposely dishonest, they do it because they don’t know how to price their work. I’ll guess that was the situation behind a question posted last week on one of our articles asking whether a contractor is entitled to a change work order for more money because he’s losing money.
A few years back a coaching client told me about his experience of being underbid on a remodeling job. My client’s quote was roughly $220,000 and the other quote was about $175,000, over 20% lower. The other company only built new homes, and this was their first remodeling project.
Home and building owners don’t always realize what they’re getting into when they take the lowest bid so it’s your job to warn them.
You can predict where the shaving or low-balling will occur. The other contractor might not include paint or other necessary finishes in their pricing. They might quote low quality kitchen cabinets, appliances, and countertops. Other areas where a contractor can go cheap and then recommend upgrades once the contract is signed include plumbing and light fixtures, roofing, windows, flooring, etc. You get the idea.
These items are often in the contract as allowance amounts with an unreasonably low amount. We address allowances in this article and will also be talking about them next week in our one-hour Business Building discussion.
When you meet to talk about your proposal, make darned sure you point out these items and what the price differences can be between your quote and a much lower quote. If you do a good job of presenting your case, without trashing your competition, it will be easy for your potential client to understand why price isn’t the way to pick a contractor. I am very quick to tell home and building owners that they get exactly what they deserve when they choose a contractor based on price. You should tell them the exact same thing and don’t be shy about it.
They might think that all construction is the same, so a new home builder is the same as a remodeler. You know that a new home builder who doesn’t have experience in remodeling might have underbid the job because they don’t realize the extra work involved when working in an occupied home, or that sub quotes are usually higher for remodeling.
Some contractors will tell a potential client that their price is lower because they operate on very low overhead and are willing to make a little less profit on their job. Sometimes that’s a lie they tell because their plan is to increase that low price with change work orders. Other times it’s not a lie; some contractors believe it to be true because they don’t know how to price their work and haven’t lost enough money yet.
Your potential client needs to know that the price of their job will be dictated by the design of the job and the selections they make. Reputable contractors have similar overhead expenses, and if they aren’t pricing their jobs to cover all their expenses and make a profit, they won’t be around for long, which means they might not be able to finish the job or handle problems in the future. Talking through this, by the way, is in Profitable Sales, A Contractor’s Guide.
Will all your potential clients understand that when they choose the lowest priced contractor, that low price might not include everything? Will they understand that today’s low price will probably match your price by the time the job is completed, and they won’t get the quality and value they claim they want on their project? No, not all of them. But if price is more important to them than getting their job done right by a reputable contractor, you don’t want the job anyway.
If they’re smart, they’ll listen. It takes a time and effort on your part to explain the difference between your quote and the lowball price, but it’s worth doing, both for you and for your client.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
RELATED ARTICLES:
- Can You Be Both Competitive and Profitable?
- When Your Client Sets the Price
- Pricing Too Low
- Calculating Your Markup
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