Construction Monkey

Construction Monkey Blog

If you are bidding work out there, you are going to be a price taker and not a price setter.  In fact throughout the construction industry whether it is bidding, negotiated, time and material, or any other means of procurement you are a price taker and not a price setter.  What do I mean by price taker?  Someone where their price is dictated by others whereas price setters dictate the price of their good or service.

In competitive markets, the sellers are price takers and not setters.  The government is the best example of a price setter as they can dictate the tax rate, but that is even not pure as different states and countries are in competition for businesses.

Most of the sales consultants you could bring into your business would state that you need to dictate the price to your customers and tell them that it is well worth it.  I don't want to take away from that strategy because there are obvious advantages you may have than your competition which could dictate a higher price; however in this competitive market that dog doesn't hunt too often.

The rules of a free capital market dictate that the market is the price setter and that the vendors are the price takers.  Think about why you charge $40/hr or $60/hr or whatever your service rate is.  Why do you charge that?  If it was up to you entirely, wouldn't that be $10,000/hr?  If it was up to the employee they would agree and then they would ask for $9,000/hr in compensation.  The market doesn't work that way as we are aware.  So how did we pick our price?  The market!  Everyone else in the market was charging $50-$60/hr for the work and you felt that the quality and commitment was near the upper end so you charge $60/hr.  This price also dictates the compensation for the workers, their tools, vehicles, benefits, etc.

On bid jobs, it works the same way.  Can you put a 15% contingency on costs to ensure that you don't lose money?  Maybe in 1999, but I am betting not today.  Why?  The market once again.  The market dictates the costs of projects the same way it does on service rates.  The way you price materials, equipment, contingency, labor, productivity, general conditions, and fee are all dictated by the market.  It cannot work any other way in a free market system.  Don't get me wrong, you can price it however you wish as you are of free will, but to win the work in a competitive environment you must adjust to the market.

So what do you do?  I remember a consultant who tallied up all of the costs of the company and then came in and said, this is what you have to charge to make money.  Even in the face of a falling economy he was steadfast in his belief that we could dictate and set the price.  The company went through some very bad years as that thought tried to play itself out, but you can't beat the market.  So my first recommendation is to reduce costs wherever possible.  If the market dictates that the projects are only worth $100,000 and it costs you $110,000 to build them then you must cut costs or go out of business.  Look at all of the costs that have minimal impact on your core business and figure out better ways to perform those tasks.

Figure out the price.  In the service hourly rate example it is easy to call around or look at advertisements to figure out the "going" rate.  The market has set those prices and you should figure out those rates so you can establish your price.  On project estimating, it is more difficult since every job is unique, but you need to figure out what the set price is.  If you do not, you will not be able to establish your price to win the job.  Keep good records of types of projects bid, the competition, and the winning number.  If you take an analytical look at the numbers, the market will begin to make more sense to you and you can pick jobs to become a winner on them.

The rules of a free market system are not always easy to understand, but they are static and if you can understand them and analyze them you can set-up your company to win more work.  If you know where the set price is specific work, then you can start to elevate your price from there and sell you customer on the advantage of your company to the market clearing price.

Good luck out there, and go win some work!

About the Author

Craig Pierce

Craig Pierce has been working in the construction industry for the past 25 years helping subcontractors master their trade. Currently he is President of Atalanta Enterprises which provides consulting services to contractors And software solutions through