Construction project bid negotiations – Don’t make a mistake

A word of warning – don’t secure your next construction project at any cost Over the last 2 weeks I’ve discussed post-bid communications and meetings. These are communications and meetings the client has with the contractor to discuss the bid or price the contractor submitted for the client’s construction project. During these discussions the client may try to persuade contractors to: 1. reduce their price 2. accept changed scope or contract conditions at no extra cost 3. change conditions or exclusions the contractor included in their bid 4. shorten the project schedule In the heat of the moment Unfortunately some contractors can become obsessed with being awarded a contract. They’ve gone through the process of preparing the tender, and now the client is asking questions and calling them in for meetings. The negotiations are proceeding well and the contractor can almost smell the success of being awarded the project, but, the client is still requesting a reduction in the tender price or refusing to accept some of the contractor’s qualifications. In the heat of the moment it’s easy to give in to the client, provide a reduced price and accept a contract which excludes some, or all, of your qualifications. At times, this is done by senior management who don’t fully understand the project or their team’s concerns, only wanting to return to the office to say they’ve been awarded a new project thanks to their timely intervention. I know some contractors are willing to concede almost anything during these tender negotiations to be awarded the project. Sometimes, they even believe they’ll be able to find a way during the course of the project to get out of their commitments, or to recover the money they gave away. This often leads to projects that go wrong, lose money and give the contractor a bad reputation. What you can do The contractor needs to review their tender to assess if the client’s requests can be accommodated. I’m not saying the tender price is immovable, and nor am I saying the qualifications are cast in stone. However, it’s important to do a reality check, work out the minimum price and profit that makes the project worthwhile, and consider the cost and risk of removing the problematic qualifications. After all, I assume the original tender price and schedule was arrived at using logic and careful calculation, and the qualifications were inserted for a reason – why then should any of this change? Sometimes during these negotiations there may be more clarity or understanding of the perceived risks on the project. This understanding may result in the contractor downgrading the risk and possibly reducing the cost of construction. It may be possible to accommodate some of the client’s requests by coming up with innovative alternatives which could mean proposing alternative materials, different construction methods, earlier access dates to start the work, more equitable risk shearing or more attractive payment procedures. These may off-set the discounts offered or allow for an earlier completion date. This is all part of the negotiating process and it’s important to try and understand the client’s final position. Obviously if the contractor has a good relationship with one of the client’s team it’s often possible to gain inside information as to what the client’s real concerns are. Clients generally don’t like to hear the word ‘no’. But if the contractor can be partly accommodating, or provide reasons for why they can’t do something they can make the ‘no’ appear more palatable. Sometimes however contractors have to say ‘no’, as giving in to all of the client’s demands could make the project unprofitable, or result in the contractor not achieving what they have committed to deliver, which will impact their reputation. Don’t make rash unconsidered decisions Sometimes clients pressurise contractors in a meeting to make an immediate decision about something which will affect the outcome of the negotiations. In this case, I suggest the contractor requests a break to confer with colleagues and work through the consequences of the decisions, or preferably, requests twenty-four hours to provide an answer. However, it’s important to respond as soon as possible otherwise the client may lose interest and approach another contractor. In some cases it’s necessary to go back to suppliers and subcontractors and ask them to re-assess their quotes to see how they can accommodate the client’s requests. Don’t make decisions on the assumption that your subcontractors and suppliers can adapt their prices to suit. Conclusion Whatever happens with the negotiations, don’t make rushed and stupid decisions simply to be awarded the project – decisions which may be regretted later. Always ensure you have considered all the impacts agreeing to the client’s requests will have on the project, your company as well as your suppliers and subcontractors. Confirm all your answers in writing, ensuring they can’t be misinterpreted and that they refer back to your original bid submission. Also, ensure all copies of letters and calculations relating to these negotiations are placed in the tender file as well as any new information the client may have issued relating to their requests. Other articles by the author In construction it’s important to know your clients – it could save you Should you submit a bid with a price less than the project will cost you? Improve cash flow – implement these strategies when pricing your next project. (Written by Paul Netscher the author of the acclaimed books ‘Successful Construction Project Management: The Practical Guide’ and ‘Building a Successful Construction Company: The Practical Guide’. Both books are available in paperback and e-book from Amazon and other retail outlets. This article is adapted from information included in these books.)