Beware of Low Bids
Work is picking up but like past economic recoveries, prices are slow to come back. Some prices are really low, some are just stupid low. I think we can all agree capitalism is good but allowing price to be the sole driving force in any industry tends to be problematic. For the construction industry, which requires skilled workers, it is nothing less than catastrophic.
Bidding or pricing goods and services below cost is really dumb. Why would someone even do that? Contractors who bid too low have various reasons to explain why. Some want to just keep employees employed; some make mistakes in job take-offs; others feel they can make it up with extras. Some feel they can make detail alterations to the plans or “value engineer” the project. Some are entering new regional markets and simply buy work. Others are entering new work arenas and unaware of the costly learning curve ahead. Then some are just bad business people and just don’t know what the real cost of doing business is.
How Low Can You Go?
History has shown us that most developers tend to be predictable; the low bid is just too tempting to pass up. If that happens to be a stupid low bid, it will certainly end in disaster. The question is just how long until the effects shows up. The stupid bid contractor will likely have one of the following occur:
- Go broke and not finish the project.
- Resort to cheating, by not paying payroll taxes, workers’ compensation insurance or resort to using an unqualified and often an illegal work force.
- Lower standards on quality and supervision, which in turn increases the likelihood of construction defects.
Developers selecting the stupid bid have justification to avoid all three outcomes. First, many delude themselves that these contractors just have lower overhead. That might explain a reasonable percentage below the others but not stupid bidding. Bids coming in at 50 percent below the next lowest bid are a stupid bid. I was a contractor and every so often, I made bidding mistakes. Bid too high and my bid was thrown out, too low and I became the lucky or unfortunate winner. I would routinely review an awarded bid. Rarely a serious mistake was made but it did happen and while I was embarrassed, I backed out. It is the contractor that knows he has beaten all the competition by 50 percent and doesn’t care that should concern everyone.
Contractor Goes Broke
Developers need not care about a contractor going broke, it is not his/her problem. Wrong. Rarely does any contractor go broke and not leave a path of destruction and devastation in their wake. Plus, they do not warn you they are going broke. You find out when it is too late. It always costs money to clean up the mess, more often than not; it costs more than the legitimate bid.
The owner should not care about a contractor who cheats, after all, it’s not his problem. Wrong. Contractors who cheat leave unpaid bills. Some of those bills can be transferred upwards with liens. State and Federal tax collectors have little sympathy for developers that select that stupid bid. Even some large savvy developers have been brought to their knees.
This is easy. The developer hires an expert to watch carefully and make sure the job is done right. Most developers are not experts in construction and what may look pretty may also still be defective. But the paid inspector will catch any flaws by the stupid bidder, right? Wrong.
I have been around many projects with hired “so-called” experts. Even if they know what to look for, they cannot be there and watch every move of every worker, and things get covered up. I have been a third-party inspector; I want no part of dealing with the stupid bidder on site. The habitual stupid bidder has it in his blood to lie and cover up. They also like to argue and find ways to put the noose around your neck. When I leave, I know they are up to no good.
Why do we continually lie to ourselves and believe that the bid 50 percent below all the other bids will provide the best value? Are all the other subcontractors just that greedy and insanely over-priced? Or is it more likely that this cheap contractor is either very desperate, made a serious mistake or has another plan to make up the loss.
In any of the cases, will you be the developer knowingly taking that stupid bid and compound a mistake? Beware bids that are “too good to be true.” These super low bids will ultimately hurt you—they always do. It may be quick or take a while but it will happen. Don’t get bitten.