January 2010

My Perspective

Stupid Prices

By Mark Fowler

The worst thing about a deep recession may be the inevitable stupid pricing that follows. By stupid prices, I mean bidding or pricing goods and services that are below a company’s cost. The second worst thing about a deep recession is below-cost pricing drives the entire market price down and it takes two to three times as long for them to return to a reasonable level. A lasting recession ingrains these stupid low prices, because as one low-ball price king goes out of business—and they do—there is always another willing victim to take his or her place. This leaves a construction market with no profit margins, encouraging subcontractors into tax evasion, violating labor laws, over-looking quality and increasing construction defects. It has happened before and seems re-occurring, usually with a few minor twists.

Consider the last deep recession of the late-’70s and what happened within the construction industry. The leaky-building crisis. But how and why did this happen?

A look back

In the early-1970s, a predominant number of construction workers in this country went through a formal apprenticeship program. Flashing and installation practices for exteriors were simple, basic and universal. As a result, most buildings did not leak. By the mid-’80s, most construction labor had not been through any apprenticeship training and was reliant on what the field was teaching them, right or wrong. Combined with the stupid prices of the early-1980s, this resulted in poor field practices and became widely accepted as the industry standard. The result was a rash of leaky buildings across the country that dominated the 1990s.

I believe in capitalism but allowing price to be the sole driving force in any industry is always problematic. History has shown us that building owners and developers tend to be predictable; they take the lowest bid.

The subcontractor who bids below legitimate labor and material costs will have one or more of three outcomes:

• Go broke and not finish the project;

• Resort to cheating by not paying payroll taxes, workers’ compensation insurance; using unqualified and often an illegal work force;
  

• Do such a bad job that construction defects are imminent.
  

I have dealt with general contractors and developers during stupid pricing times. The owners always have the answers for all three of the possible outcomes from super cheap bids. One might think, “These contractors just have lower overhead”; that would explain a reasonable percentage below the others, but not 50 percent. Some contractors just make a bidding mistake: too high and they are thrown out, too low and they are the lucky (unfortunate) winner. What happens on the mistake bid is the contractor realizes his error and then backs out. It is the super low bid that the contractor knows he has beaten the competition by 50 percent that should concern everyone. Building owners, general contractors, municipalities or institutions may think they just got lucky and saved a bundle with the super low bid. Let’s review the three outcomes again:

1. Contractor Goes Broke: The owner should not care about a contractor going broke.

Wrong: rarely does any contractor go broke and not leave a path of destruction and devastation in his wake. It costs money to clean up the mess, sometimes more than the median price bid.

2. Contractor Cheats: The owner should not care about a contractor who cheats. After all, it’s not his problem.

Wrong: contractors who cheat leave unpaid bills, as well as the destruction. People want to get paid and they will reach above to get it. Building owners and general contractors may be shocked it may not protect them.

3. Construction Defects: The owner will watch him carefully and make sure the job looks good. Building owners are not experts in construction and what looks good may still be defective. They think with the money that is saved, they can just hire an expert to watch the super cheap contractor.

Wrong: I have been around many of these types of projects with “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 would suggest building owners, general contractors and architects be extremely cautious of prices that are “too good to be true.” Building owners, municipalities and institutions would be advised to receive the bids, find the median price and select the most qualified contractor that is no lower than 15 percent to 20 percent below that median price.

Why do we believe the bid that is 50 percent below all the median bids will provide the best value? Are all the other subcontractors just that greedy and insanely over-priced, even in these tough times? Or is it more likely that the super cheap contractor is either very desperate or made a serious mistake? In either case, the question to the owner is: Will you knowingly take that stupid price and compound the mistake?

Editor’s Note: This article first appeared in Walls and Ceilings Magazine in October 2009.

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