Watch Out For Low Bid Outliers
In our Supply Chain Disruption Solution insight, I covered the myriad of reasons we are experiencing the Supply and Demand challenges that will likely persist into 2023. And the commercial roofing business is not immune to these challenges.
In addition to labor shortages that ultimately drive-up project costs, the construction industry overall has also been plagued by supply chain-related challenges that have led to a low inventory of construction materials. And when low supply meets the explosive demand the construction industry has seen in 2021 and into 2022, material costs increase dramatically and shipping lead times for those materials can be as long as six to eight months.
Another (unexpected and difficult to comprehend) result of this crisis is that some contractors are bidding on jobs at or below the current cost. In some cases, it appears these contractors are calculating estimates based on labor and material costs from their 2021 expenditures.
This strategy has a number of potential challenges - namely that the tight labor market does not show any signs of easing and the current supply chain challenges that are causing limited inventory may not clear until 2023. In addition to that, suppliers are increasingly requiring their customers to agree to the material delivery price upon ordering, and in some cases demanding partial or full payment for those materials well in advance of delivery.
This means that the contractor that wins projects because of their “low price” bid will likely be required to order the required materials for the project further in advance than usual and pay upfront when they place this order. In most cases, this almost guarantees that the low bidder will be paying more for those materials (and paying in advance) than they bid to complete the entire project. While customers may initially be pleased that they selected the lowest bid, it will not be long before the contractor who won this bid will be unable to meet project obligations (and hopefully not while they are in the middle of your project).
Do the clients deciding to award the low outlying bidder think the Surety coverage will take over and ensure that the job is complete if the bid is incorrect? This is never a desirable situation for a variety of reasons but even so, those clients should have a conversation with the listed Surety company and request verification in writing that they are actually providing Surety coverage on that specific project. And don’t be shy about mentioning during this conversation that their client is the low outlier on the bids for your project.
Remember the old adage: If something seems too good to be true, it probably is. And keep this in mind as you evaluate bids for upcoming commercial roof replacement projects. Especially if you have 3 or 4 bids and one is significantly less.