The Beauty of Public RFPs….And Of Course The Ugly
Over the past six months, I have had the wonderful privilege (ahem) of bidding about 15 public Requests for Proposals. While I have
complained constantly about the process, I probably wouldn’t have any work at all at the moment if they were not available. As a brand new company there are very few private owners that would take a chance on an untested and unproven no-name. However, in the world of public bidding, while a municipality may not want to take a chance on an unproven no-name either, the law simply states – they have to.
I take that back, they don’t have to. What they do have to do is give the job to the lowest responsible bidder. Of course responsible is the key word there and they could make a contractor look irresponsible rather quickly if they wanted to (or if a few Benjamins were slipped into their pocket). But the reality is that there are tax dollars at stake and all information regarding bidders is one hundred percent public. So if a town wants to disqualify a low bid, they better have darn good reason to do it, or some villagers may get quite angry. If a low bidder is able to produce a bid bond as well as the necessary insurance requirements, I would think that it is a very difficult sell for a town to disqualify a bid. If they did, I wouldn’t be surprised if some rumblings began around town about councilmen with “greasy pockets”.
I used this system to my advantage by going after these public bids and bidding at rock bottom prices. And when I say rock bottom, I mean rock bottom. I looked high and low for the lowest sub numbers and then marked them up a meager 5% plus a few miscellaneous overhead costs. This is honestly the climate we are in right now. Which conveniently brings us to the ugly side of public bidding.
I have seen at least five bidders on these jobs and at most 14. With fourteen bidders, it is nearly impossible to get the job unless you grossly underestimate the cost. Once you start the job, don’t expect to get paid anytime soon. Payment applications have to go through a hierarchy of bureaucracy that rivals (gulp) the federal government. And trust me, you don’t even want to get me started on prevailing wages.
Prevailing wage is a way for unions to remain competitive on public projects. Every county in Pennsylvania publishes a rate for every trade and requires that you show certified payroll proving you paid your employees this rate. The paperwork required to get paid begins to turn into a novel. And if you screw up one line item or forget to include one worker’s timesheet? You better wait until next month. The process of getting paid moves slower than molasses in January.
Of course some contractors cheat on this and show one thing through payroll while they are in reality paying something much lower. I don’t know if this is even enforced, but I’m not going to find out. However, I will say that these cheaters are very difficult to beat. They can probably cut their labor costs in half producing bids that are consistently 25% lower than mine.
It’s a tough game, but as a new contractor, you have to take what you can get.
Great article and one whose sentiment is being shared by lots of people these days. A little while back I wrote an article entitled “What the Great Recession means for competitive bidding“. Consider yourself lucky: we’ve heard of projects having over 150 interested parties at the meetings and saw one RFP canceled when 167 letters of intent were submitted!
As the owner of the RFP Database, where over 500 RFPs are listed each week for services from accounting and architecture to web design and water reclamation, lots of people ask me for advice for how best to approach RFPs. Some articles I’ve written might be useful for you and your readers such as “Not all Requests for Proposals are worth a proposal“, “Developing your Go/No-Go decision tree“, and “5 quick tips to writing better proposals (RFP responses)” among others.
Good luck!
-David
You are right, John, it is a rough game. You didn’t mention the worst part, when a competitor is in such bad shape, they take the job way below costs just to get the cash flow (from early project over-billing) just to stay afloat. I guess they figure that maybe it will get better somehow before the project ends. And if they go into bankruptcy, what’s more liabilities matter?
I’d challenge you to network as much as you can stomach for new work. There are still private projects being built.
Ned Pelger
ConstructionKnowledge.net
John’s commentary goes to the heart of why our nation is ill-served by the construction industry. Because public authorities either do not know or do not care to know what the actual cost of a project should be they permit contractors to bid at or below cost. This authorizes extremely low bids that ensure the contractor will run out of money before the project is complete or that the contractor must fabricate claims in an effort to secure a profit or go bust.
In no other industry does the marketplace permit bidding that ensures no profit when one signs a contract. John will always face such “non-competitive’ bidding schemes and lose out to less qualified contractors who merely hope to get a contract for the right to make claims to stay alive. Sad for the industry and sadder for the public who lives with the fact that such games cost our national economy over $120 billion a year. See “Broken Buildings, Busted Budgets: How to Fix America’s Trillion Dollar Construction Industry” (Univ. of Chicago Press, 2007)
It always amuses me that we as contractors are always so sure that the low bidder has bid below his or her cost or “cheated” and we are convinced that there is no better way to build a project than the way we bid it. It has been proven to me again and again that this kind of thinking is often far from the truth as I have watched my competition build the projects on which I was defeated and occasionally learned that they in fact did have a better way. In fact, our own operations people have sometimes shown that there was a better way on projects on which we were successful as they have soundly beaten the bid margins through their own ingenuity and willingness to try a different way. Claims never prove to be a successful way to augment the bottom line and I do not believe that they are the intended salvation of most bidders.
It is unfortunate that times such as these cause many contractors to become irresponsibly optimistic when bidding a project and/or ignore the risks inherent to the services we provide. However this should not be a reason to condemn the whole public procurement process and shed a good process that admittedly may need some tweaks in order to keep up with the times. It would be a short memory that could discount the corruption and shenanigans that were once commonplace in the public procurement process and make changes that might allow for these practices to resurface.
This is a tough time to start in a tough business, but if it is any consolation to you I have recently faced competition of over 20 contractors, many of them new to the public work and simply trying to keep the doors open. These times force us to find a better way every day, challenging us to decide on a strategy and keep to it, hoping all the while that it is the right strategy. These are times of distant rewards that test our mettle but found our success.
I have been involved in public construction for 30 some years, the 5% strategy, is just a strategy, however it is certain suicide to take low sub contractor numbers when they are in error, ie lower than fair cost. We always call sub bidders whom appear to have made errors. The General contractor will be required to satisfy all of the sub contractors claims above and beyond the bid if the sub tier defaults. This includes remedy for defective work. I have seen many general contractors fail through the years. They typically under bid jobs. It has been my experience that it doesn’t take much to find your company outside of a bond-able entity. I have also seen public agencies reject bidders, so it does happen. Normally the bidder fails due to the inability to bond, which is a direct result of inadequate financial performance.
Part of the problem is that we, the public, assume that least cost is best. Given the Vitruvium construciton triangle of cost, function and quality, it seems to me that a better idea would be to award public contracts to the bidder closest to the average cost of the bids. This would defeat low-balling once and for all.
As a Project Manager with a public agency, I object to Barry’s claim that “…public authorities either do not know or do not care to know what the actual cost of a project…” Public agencies do cost estimating in house or with consultants in order to set budgets for projects. Typically our estimating is close to or higher than the lowest bid number. Because a contractor blows a bid or bids just to keep the doors open is outside of our control. These are the two reasons we usually see extremely low bids. When this occurs we will first talk to the contractor and make sure he/she did not blow the bid. If they did, which has happened, we will allow them the opportunity to withdraw their bid. If they choose to stick with their price we will start checking on them. If the contractor is new to us, we will do some background checking on them to see if there are any prevailing wage issues, lawsuits, etc. We will also do this for the bidders subcontractors. We will also check out references or do more research on past project performance. We will weigh all the information gathered and decide a course of action. We want the most qualified contractor for a project too.
I believe in the system we have. This is why I make sure contractors and subcontractors are submitting Certified Payroll, that waivers from subs and suppliers are correct, that a contractor carries the correct insurance, etc. If a contractor fails to do these things the next time they are low bidder they may not meet the requirements of “lowest qualified bidder”.