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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.
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 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.
|Last Updated on Thursday, 31 December 2009 12:10|