Contractors are violating one of the basic tenants of business. They are bidding work without any profit added to their bids. Not only that, they are bidding projects without fully recouping their costs of doing business. This is nothing new, just more prevalent and in larger sums.
On a recent assignment we prepared the independent estimate for the owner to use to evaluate prices on the bids. This estimate included the materials, equipment, and labor to perform the work. It included the indirect costs associated with the work – supervision, mobilization, utilities, etc. It also included profit. We provided the estimate, along with backup to the client. We advised the client that with current conditions the bids could be the amount we estimated less the cost of the construction equipment and overheads. When the bids came in, the two low bidders were at our estimated amount minus the construction equipment, overheads and profit. These two were bidding the project for the only cost of labor and material! A third bidder was reasonably close to our estimate and fourth bidder about twenty percent higher.
When a situation arises where the low bidders are bidding work below cost like this, it poses major risks to others involved with the project. The bonding company is now at risk for a default, as is the owner with a deadline for completion. The material and equipment vendors should start being concerned about being paid. The same can be said for any subcontractors and the employees. When equipment breaks down or wears out, there is no money for replacement parts or equipment.
The two low bidders have one thing in common with our estimate. They had to have a detailed estimate in order to know how much to eliminate from their bid. Unfortunately they are bad businessmen by making decisions to take work below a cost that may cost them their companies. They are also screwing up the market for the contractors putting in responsible bids – as I have written about on prior occasions.
Oh By The Way…When the owner has a detailed estimate and can make determinations such as this, they can judge their own exposure to the risk of a contractor failure. This way they have the knowledge of a potential problem.
