Why would any serious construction-related business owner want to be the lowest bidder on a project? In my opinion, there are only three situations where being the lowest bid works out for the business owner:
- You’re able to build the job for a lower cost than any other contractor
- You have little or no overhead, or
- You don’t care about making a profit.
Can you build jobs at a lower cost than other contractors?
In my experience, only if you’re willing to cut corners. For example, you can use cheaper materials. You can understate allowances or leave items out of the contract so the owner doesn’t realize the higher price until the job has started. You can pay employees below average, or pay under the table to avoid payroll taxes. You can save money by not pulling permits or ignore inspections to rush the job.
All these options will show up in the finished product and upset your clients, or cause you legal and/or tax problems when they’re discovered. After you’ve burned enough clients with your low-cost, corner-cutting jobs, you’ll be out of business.
Can you have lower overhead than another contractor?
There are many things that a construction-related business owner can do to reduce their overhead expenses, but in today’s market most construction-related business owners have already taken those steps. If you want to stay in business some overhead expenses can’t be eliminated, like advertising, phones, fuel for vehicles, etc. Some overhead expenses shouldn’t be eliminated if you want to operate legally, like licenses and insurance. You can pretend you don’t have overhead, but bills for overhead items will still show up in the mail.
Several years ago, a forum I was hosting had a wise sage who insisted his business had only 3% overhead. It was part of his advertising; he built jobs on cost plus so he was able to provide the best price because his clients wouldn’t have to pay the “excessive overhead” of other contractors. I asked for a copy of his profit and loss statement and he sent it; it was all smoke and mirrors. He’d listed many overhead items as job costs. When I correctly categorized expenses, his overhead was at least 18.5%. Playing with numbers is a dangerous game to play, especially with cost plus contracts, and it doesn’t change reality.
Can your business survive without a profit?
Yes, until a job comes along that causes a few more problems than expected. Without a financial cushion, one troublesome job can put you out of business and deep in debt.
Reality
The truth is that given any set of plans, whether a kitchen or bath remodel, an addition, a new home, or even just a new furnace or water heater, most contractors can build the job. If they follow the same plans and price the same selections, the job cost will be roughly the same regardless of who builds it. That’s reality. And, generally, prices will be in the same range unless someone is working at being the lowest bid.
So, you have two choices. You can hope the prospective client buys from you because your price is the lowest. Or you can learn how to present yourself, your company, and the job you intend to do so that you become the company prospective clients want to work with.
They can hire a contractor who builds the job on schedule, or one who stretches it out because they’re disorganized. They can hire a contractor whose employees keep the job site clean, or they can live in a dusty, messy project until it’s finished. The same job might or might not get built, but the process and experience will be different, and the difference will be noticeable.
I call it becoming the Contractor of Choice, we cover it in our book Profitable Sales. When you become the Contractor of Choice, prospective clients can see the difference between the job you’ll do and the job your competitors will do. They’ll understand that there is more to choosing a contractor than the price of the job.
If you don’t know how to present yourself on a sales call, it’s not too late to learn. You don’t want to make the sale because you’re the lowest bidder. Read Profitable Sales, A Contractor’s Guide and watch our sales training class. Make all your sales profitable.
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.
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