December 1, 2012 by David Bowcott
Suicide bid season is upon us. This cyclical phenomenon is typically seen when the pipeline of construction projects in the economy start to drop off by a significant level. It is a regional occurrence so far, but even the most prosperous footprints of Canada are beginning to question the future supply of construction projects.
So what is the suicide bid? Well, it’s when the number of bidders going after jobs dramatically increases, and several of the players are bidding at margin levels very close to zero per cent. The idea is that the bidder will gain cash flow from the job, and further hopes there will be opportunity throughout the job to secure a change order that restores profit on the job.
This strategy is often indigenous to the design-bid-build sector, where there can be limited prequalification of bidders by the owner of the project and the high-pressure lump-sum bidding process is used.
Don’t believe me? I recently thumbed through the regional commercial journal that displays the bidders list for jobs in Ontario and there was one job where 39 contractors took out the bid documents. Close to 24 of these ended up bidding the job. This is a good indication that the supply of construction projects is dropping. Several contractors have large overheads to cover (overhead they built up over the very long period of strong growth) and are focused on securing cash flow to pay this overhead, rather than lose it to a competitor.
If this trend continues, contractors will be forced to make some tough decisions. The most obvious, being how to reduce overhead costs. Before making any drastic changes, consider some of the following strategies:
Operational efficiency – Documentation requirements are on the rise with owner RFPs and contracts. This has likely placed a significant strain on your staff. Are there any opportunities within your firm to handle such documentation more efficiently? Procedures, best practices, use of information technology, such as FTP sites or project management software, etc. Investigate whether your firm can more efficiently manage workloads and improve its efficiencies during the bid phase and after a contract is awarded.
Salary reductions – We’ve all been programmed to believe our salary should always go up. The more experience we have the more we should get paid. Over the past several years, several industries have had to adjust their expectations on salary levels based on globalization pressures (ie., the auto industry). Perhaps adjusting your team’s expectations in this regard will ensure you keep your top players during difficult times. Further, any owner of a business realizes their salary needs to be adjusted if the revenue isn’t there, so consider giving your key employees an interest in your company and convert them from employee to owner. They will likely understand the value in that change.
Proactive business development – The design-bid-build marketplace has effectively become a commodity business, especially if owners are not pre-qualifying the capabilities of potential bidders. This is reinforced by the example referenced above where there were 24 bidders on a single job. Given that the design-bid-build segment of the construction marketplace is getting more competitive, it might be time to get more proactive in your sourcing of new project opportunities. Several owners are desperately seeking project delivery methods that ensure greater certainty. A solid understanding of these delivery models and a plan to engage these desperate owners might create better, more profitable opportunities than those offered by the design-bid-build marketplace. More and more owners are using project delivery models that prioritize certainty of asset delivery and operations above cost of asset development (they are arriving at the same conclusion car buyers came to in the last half of the 20th century—cheap price today, doesn’t mean cheap price over the life of the asset). Consider developing a plan to build relationships with forward thinking owners and engage them on project delivery models like CM at risk, integrated project delivery, and design-build-finance-operate-maintain models. These models have shown to create greater certainty in asset development and asset operations.
Hopefully the suicide bid season doesn’t stick around too long and the global economic outlook improves. If it does not, the above ideas may prove helpful to your company. Even if the potential for a downturn disappears, some of these strategies could leave your company in a stronger position.
David Bowcott is senior vice-president, national director of large/strategic accounts, AON Reed Stenhouse Inc.
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