After a couple of decades in the business of project execution, I'm always amazed at how many costly decisions I've seen repeated time and time again in the projects I run across. I've spent almost as much of my career helping bail out troubled projects as I have following the traditional project execution path. While it's always rewarding to help folks out who face dire circumstances, it's much cheaper for owners and less stressful for everyone if we can set a project off on the right path from the get-go.
I'm always amazed at how many costly decisions I've seen repeated time and time again...
This blog is the first installment of a three-part series focused on discussing some of the most common mistakes we see project stakeholders make. We'll explore the motivations that drive decision-makers to repeat these mistakes, how those decisions almost always play out and the slightly different lens that should have been applied to the problem in the first place.
This post will focus on the temptation to jump on a low bid, whether it be for professional services or construction. Part two will explore the dangers of assuming any project is simply a copy of another one. The final installment will focus on the temptation to postpone as much engineering as possible until a financial commitment is made to move forward with a project. As the subsequent blogs are posted, we'll link them in this paragraph to make it easy to navigate between them.
So - you got a low bid. You want to make the award. I understand. Your budget is tight, and you need to save money; the bid is from a reputable firm, and they're good people. It may work out ok to go that route, but you need to consider several things before blindly deciding based on cost.
Going with the low bidder has potential consequences that may be easy to overlook during the energy and excitement of proposal reviews and bid tabulations. Many times, the low bidder is merely trying to get their foot in the door with the intent to make up the cost delta through change orders later during execution. Sometimes they are "buying" the first phase of work, assuming that they'll negotiate the follow-on phases and makeup anything they left on the table from the low first phase pricing.
More often than either of these scenarios is a situation that most people executing their first project never consider. They may not fully understand your project and what it takes to complete it. While some owners are quick to think this isn't their problem, it almost always is. A contractor won't cheerfully work at a loss, and often they literally can't afford to. I've seen companies go out of business in the middle of a project they underbid on. I've seen great relationships crumble as a contractor submitted change-order after change-order in a self-preservation attempt to keep themselves from going out of business. In all of these cases, the project schedule and budget suffered mightily.
The idea that you can jump on a low bid that was improperly prepared and hold someone's feet to the fire is almost always a trap. It would be best if you went into these situations focusing on making sure that scope is clearly communicated and bidders fully understand it and are pricing appropriately.
The idea that you can jump on a low bid that was improperly prepared and hold someone's feet to the fire is almost always a trap.
The first consideration is your bid list. One of the main focus areas when putting your bid list together is each firm's reputation. Indeed, each firm must be well qualified technically to execute the work required. But what is their reputation in the industry - not just what their website says? Take the time to use your network and extended network, if necessary, to get some first or even second-hand feedback on how each bidder approaches a project. Are they known in the industry as change order happy or a nickel-and-dimer? Do they have a recent history of projects with issues during startup? If so, they should probably not even be on your bid list.
The next item you need to determine, and something that should be considered throughout the proposal evaluation process, is the quality of the Request for Proposal (RFP) package that was used for bid solicitation. The best thing you as an owner or developer can do to get a complete proposal and avoid surprises is to have a well-developed project scope and RFP package. We'll talk about this point more in our second post in this series, where we explore the temptation to postpone the development of engineering, leading to a less developed project scope, and ultimately forcing firms to use their imagination when answering your RFP. Bidders will address the issue of an ill-defined scope in one of two ways. They may try to include money to cover unknowns which will drive the price up, but they are more likely to exclude anything that is not explicitly defined in your package, which will result in a lower, but incomplete bid. I can't tell you how many projects I've supported over the years that took this approach and were stuck with a cost gap they couldn't address in the middle of construction. Sometimes this leads to expensive change orders to try and descope a project after equipment and materials were ordered - in other cases, it led to stopping construction while owners searched for more financing. Some projects never recover.
Another clue as to the quality and comprehensive nature of a proposal is the amount of information provided by the bidder. Information about company history, size, clients served, safety and quality programs is necessary, but even more critical when it comes to lowering the risk to your project is execution planning. Is there a scope of services with each applicable craft or discipline represented? Does the scope include a list of deliverables by engineering discipline or work units by craft type that will be produced or installed along with the estimated quantity of each? Is there some level of written narrative that indicates an understanding of the project scope and what is being asked by the RFP? Is there at least a summary schedule or section describing an execution approach and timeline that makes sense? Does the proposal address any obvious missing scope items head-on? These are all tell-tale signs the bidder has done a thorough review of the RFP, that they understand what was provided and what needs to be done to ensure your project's success. When a proposal is well developed, the chances are good that the accompanying price can be counted on as well.
The final proposal component that needs to be carefully evaluated and understood during the review of any proposal are listed assumptions and exclusions. Many times, multiple items have been assumed out of or directly excluded from a proposal. Sometimes they are buried throughout the documentation, and sometimes they are addressed in specific sections at the end of the proposal. It's also common to read in the introduction of the proposal words that make it sound like everything is included, only to discover significant exclusions later in the package buried in the fine print. For example, I've seen "…full EPC turn-key package" in the proposal introduction only to find later exclusions like "Structural Work" or "Supply and Installation of Wiring."
After you have reviewed all proposals and gone through a round or two with the acceptable bidders asking questions, verifying assumptions, making clarifications, and requesting additional information - it's time to take a step back and look at the forest instead of the trees. Now that you're closer to an apples-to-apples comparison, you should begin to look at how the prices compare to each other. Are the prices all grouped together, say within 5-10% of each other? Is there one or more that are far higher or lower than all the others? Maybe there is a group of high bids, a group of low bids, and a group in the middle. When you understand where each bid is compared to the other bidders and combine that information with each corresponding proposal's level of completeness, it will provide valuable insight into offers that it may be best to avoid.
For example, if you prequalified five bidders and all of them turned in a quality proposal (or you got them to that point through the evaluation phase), it's a good indication you provided a well-scoped, quality RFP. Now let's say one of the bidders is 50% higher than the next closest, there are three bidders grouped together (3-5% apart or so) below the high bidder, and finally, there is one bidder that is 30%+ below the middle group of three. Your focus should be on the tight group in the middle, right? It seems obvious, but all too often, I've seen project stakeholders put blinders on and focus on the low bid only even though something was missing - either scope or deliverables or both.
It's essential to take your time with the proposal evaluation and resist the urge to select a low bid immediately just because you think you will save money. Suppose the qualified bidders' prices don't meet your financials. In that case, it usually makes more sense to address the project scope to see if there are "nice to have" items you can remove from the scope - rather than setting yourself up for disaster by selecting a low bidder and assuming you can "make it work."
Hiring an engineer or contractor based purely on a bid price in response to an RFP that doesn't include significant engineering has universally led to disaster in my experience.
I want to close this post by saying that we always help our clients find the best value in a bid process. Occasionally, the best value is the lowest bid; however, more often than not, it's a well-qualified bidder who has done their homework and provided a complete scope with a comprehensive execution plan for a price right in the middle of the pack. If you read this blog post and only take one thing away, let it be this - hiring an engineer or contractor based purely on a bid price in response to an RFP that doesn't include significant engineering has universally led to disaster in my experience. Take a bigger picture approach to what will save you money and find a group with project execution experience to help you evaluate the quality of your RFP and the bids you receive if you're a developer or operations expert. It'll pay for itself many times over.
Check back soon for the second installment in this series focused on the temptation to postpone as much engineering as possible until a financial commitment is made to move forward with a project. If this post didn't convince you how important early engineering and project scope definition are, the next post will offer industry data on project failures related to this common mistake.