Four problems with underbidding
Sometimes you need a project. Whether your shop needs a quick bit of cash to make it through the month or you have some downtime and feel like you could fit in another job, getting that extra gig can make all the difference to your business. And in a free market system, we encourage businesses in highly competitive industries like construction contracting to outbid one another, offering the best price for the best work.
And the way the market is, sometimes you win jobs, and sometimes you lose them. But you need to play the game in such a way that you respect your competition and yourself. There are, in short, rules to the game.
Underbidding – going way below market to snatch business away from another company – is extremely disruptive to the industry and damaging to the market as a whole. Sure, you may “win the contract,” but you lose everywhere else. Your revenue goes down, but your expenses stay the same. You cut corners, reduce quality, and could end up destroying your reputation and that of your business as a whole.
When a bidding war turns into businesses desperately undercutting one another, the damage can extend far beyond the job in question.
Here’s how underbidding causes problems for your construction company.
1. You hurt your bottom line.
The most immediate consequence is that you can destroy your bottom line to such an extent that you’re skating on the thinnest of margins. Profit is dependent on being able to get as much as you can while spending as little as you can, and while competitive pricing takes your costs into account, underbidding focuses on getting the job no matter what. This hurts your revenue – and your ability to meet your obligations. That can cause long-term damage to your shop, limiting your ability to scale to meet future challenges or accept larger, more profitable work.
2. You hurt your reputation
Imagine trying to get everything done that needs to happen on a massively underbid project. Imagine the corners you’ll have to cut, the labor you’ll have to accept as “fine,” the quality you’ll have to sacrifice. “Cheap” is a dirty word for a reason. “Cheap” means poor quality, insubstantial, and fragile. It means doing work that isn’t even worth doing.
And that’s the thing. Doing bad work doesn’t help you one bit. It’s one thing if you’re winning jobs on price because you have some magical new process that honestly makes it that cheap, but if you aren’t, you’re going to make up for that loss by cutting expenses and building a reputation for doing shoddy work in the process.
And you don’t necessarily want the reputation of “the cheapest game in town.” Because it will throw up red flags to almost any potential client – and certainly for the clients you want.
3. You limit future jobs
These first two factors feed into this one: imagine if you’re both well-known as the cheapest contractor in your area and you have razor-thin margins that don’t let you scale your business. You will be stuck in that rut, unable to build your business into something more profitable. What may have started as a strategy to keep your shop afloat during lean times or as a quick way to start bringing in cash eventually becomes a trap you can’t easily escape.
4. You damage the industry
If you do manage to start snagging all the gigs in your area with your lower price point, you will end up encouraging your competition to do the same. This will deflate your industry as a whole as the market resets to a new equilibrium. This makes it harder for everyone to work, drives down wages, and encourages your team to start looking into other lines of work. The loss of resources makes it harder to work, which can begin driving shops out of business. And then, the next thing you know, the whole market segment has fallen apart.
And while that’s a worst-case scenario, deflation is an extremely dangerous process to risk embarking upon just to undercut some competition in a bidding war. Working to keep prices stable by bidding competitively and accepting the occasional loss can mean preserving your market in the future.
The key to winning is about more than price; it’s about value. People don’t always want the lowest price; they want the best product for the lowest price. By developing unique ways to stand out, you can win contracts by being the best – not by being the cheapest.
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