Just Been Under-Bid — What are the Lessons to Learn?

      The "other guy" may be installing, err, inferior work. But that doesn't mean you shouldn't take a close look at ways to cut your own costs. December 2, 2006

Question
I had an opportunity to bid on a spec house that is 6500 sqft. I would be doing the kitchen, 5 baths, a walk-in pantry, butler's pantry, laundry/craft room, and bar. That was the first part of my estimate and doesn't scratch the surface of what there really is, such as a wine cellar, theatre, huge library/office, game room, etc. For this portion, I bid a little over 100,000. The kitchen alone was 40,000. Everything was bid as stain grade, dovetail drawers, etc. All high quality stuff.

Someone else bid the job at 69,000. He bid the job based off of the size of house. He never saw drawings or anything. What is he bidding on? I did drawings for each room and based my pricing on that. (I did not print them out or let the developer take them.) The developer says he's worked with the guy before, so he has faith in his pricing. Can anyone put perspective on this? I don't know how he can bid that low and stay in business. It's going to be a 4 million dollar home and have less than 100,000 worth of cabinets?

Forum Responses
(Business Forum)
From contributor X:
It all depends on quality. The job site could be in California, and the products could be made totally in Nebraska and shipped there, for that kind of money. Having a contract and getting the work subbed out to others, then doing only the installation, can be very lucrative. Having others build the doors, drawers, boxes – what's left? Guy does not need a cabinet shop when he can get others to build to his specification. Got a big truck?



From contributor S:
If the developer has worked with the other guy before and has faith in his pricing, obviously whatever formula they are using works, or someone is incredibly stupid. Maybe he is planning on making up some of the difference on other portions of the job he may get without a bid. Since you didn't give the developer your plans, maybe the other guy has plans you don't know about, also. Different bids is what the horse race is all about, anyway. You appear to have a formula in the back of your head, too... "It's going to be a 4 million dollar home and have less than 100,000 worth of cabinets?"


From contributor T:
Is it possible the contractor is trying to work you? This sounds exactly like one in my area.


From contributor H:
You don't know if you were bidding apples for apples, so don't feel bad about losing the bid. The contractor has used this other shop before and knows what he will get for his money. My feeling is he was just using your bid to see if the other guy was still being honest and treating him well.


From contributor G:
Apples to oranges. For 69K, let it go. Being a spec, could turn into a big headache. Kind of sounds you were already counting the new tools you were going to buy.


From contributor B:
I've been surprised at the (poor) quality of cabinetry and finish work in many new and supposedly high-end homes... Especially spec homes. Contractors build the things and all the trim comes straight out of Home Depot, and the cabinets are Kraft Maid. Big filler strips, fat caulking joints, you know the deal. Most consumers, and the people who buy these homes, frankly aren't that sophisticated in their tastes or appreciation of craftsmanship. They're buying square footage, an address in the "right" development, 5 car garage, whatever.

I would guess the other bidder's price is just right at $69k for the product that he/she is going to provide. The contractor would be unwise to spend an additional $30k on cabinetry if his customers aren't going to care about the difference in cabinets.



From contributor W:
You cannot feel bad about what the contractor is doing. Let him build a McMansion with junk cabinets. There are a lot of them waiting for an uneducated customer. I have been where you are many times. Let it go. If he comes back wanting to talk about a cheaper price, don't start shaving margins. Ask him what areas he thinks are wasted money. The two different quotes are just that. They are totally unrelated to each other except by his desired budget figure.


From contributor J:
You know that if your competition underbids huge jobs like that, then soon they won't be competition anymore. Also, this creates an opportunity for an "if only" customer. An "if only" is some of your best advertising. They really don't cost you much, because you can always find other work, and they get into their head that every single thing they don't like about their job would have been perfect if only... So my advice to you is to keep working on the contractor and push it until you get an answer. You might even take the contractor to lunch and to see some of your better work.

One other thought - maybe the guy has already bid on a similar spec home and is building cabinets in an area with much lower overhead than you.



From contributor I:
There is also the possibility that the other guy's costs are substantially less than yours. I say this because we have been driving our production costs down significantly from what they were just two years ago. Projects that used to take two weeks are now being produced in one long week. In some cases, the finished quality has improved, and in some cases, we have cut back on the quality (because it only mattered to us, it did not matter to the customer).

An analogy I've been working with lately has to do with the sandwich shop next door. I'm sure that, given a choice, their customers would prefer to use cloth napkins... but only if it was free. If you tried to charge another 50¢ for this upgrade, the customers would pick paper napkins, and be equally happy.

We used to offer a similar upgrade, but it had to do with drawer boxes. We assumed that since lumber drawer boxes were obviously nicer, the customers ought to prefer them. Our focus seemed to be educating them about what they ought to want instead of giving them what they did want. As it turns out, they are just as happy with pre-finished appleply and side mount Accuride slides. As a consequence, dovetail drawer boxes are not on the menu anymore. We now use a castle pocket drill and give them "threaded steel dowels" instead. For the more discerning, we point out that these steel dowels are not only threaded, but they come in a US10B oil rubbed finish!

As we promote it, a drawer is a drawer. They all do the same job and they all look the same when they are closed. The place we prefer to put your money is where it matters... and that is where you can see it or use it. While we don't offer dovetail drawers, we do put a Formica floor under every sink, because that's got some real benefit. We also have a killer pullout garbage can. We market it right next to the very best one Rev-a-Shelf sells. (The kind you have to take to the carwash to clean.) Ours is made of Formica and travels on a 500lb side mount Accuride. This pullout has fenders to protect the slide from coffee grounds, and you can clean it.

This pullout used to take a full day to build. We are now down to around three hours. The goal is to cut that cost in half again. Our agenda is to provide the very best quality available and to become the lowest cost producer for that quality. Lowering costs just involves eliminating steps and simplifying the ones that remain. These steps are part of a continuum that begins with the customer and ends when the bookkeeper gives you a one-page synopsis (with a $100 bill pinned to it). This is a long and meandering journey and there's a lot of places to cut fat along the way.

Look at how much meandering there is for a single product family. Most of the things we build have about 12 to 20 discrete procedures. Each of these procedures has 2 to 4 sub-plots you have to pay attention to. Some of these nuances can be eliminated at the point of sale. An example of this is mineral stains in maple plywood. If you ask the customer if they would be willing to accept some less-than-perfect plywood, they're going to find another cabinetmaker. If you instead put a drawer on display that is filled with kitchen stuff, then ask them how important mineral stains are... you will get the answer you want. If you can find a way to explain how that rusty looking stain probably had something to do with a meteor a couple of million years ago, you can probably get the price you want.

Assume those dozen procedures take 60 minutes to accomplish. If you are spending $20 an hour on a guy, it's going to cost you $20 to get the job done. If there actually are a dozen steps involved, it does not take a big leap of faith to assume that you can probably eliminate at least one or two of those steps. There are probably a couple of those steps that can be done quicker with a small tweak in technology… If you simplify these steps, it is probably not unrealistic to assume that a $15 an hour guy could probably be as successful as a $20 an hour guy.

If you can move something from 60 minutes to 45 minutes and can do it with a $15 an hour guy instead of a $20 an hour guy… your costs go from $20 to $11.20. The goal is to drive down costs, not wages. You don't make money by keeping wages low. You make money by shipping product. If you can finish a kitchen quicker, you can get another kitchen done that month, or quarter, or year.



From contributor A:
Boy, sixty thousand... Some of the stick builders around here would do that job for less than twenty. We have found that builders won't pay a decent price unless you have already sold the homeowner on quality work. Around here, they build what we call facade cabinets, no backs, no bulkheads, little bracing for the countertops, no dado for the drawers (stapled on), and outsource drawers and fronts. Going rate for a trim carpenter to trim and build some junk cabinets is three to four dollars per square foot (of the home). Trim, built-ins, and install shop made cabinets run around two bucks a foot. We do get quite a few new homes, but only because we sell the quality, not the price.


From contributor N:
Tons of great advice in this thread! Don't beat yourself up. Build the quality level of work you want and market it to the right market for you. Remember it is the quality of the customer, not the quantity, that matters.


From the original questioner:
Thanks. I saw some work the other guy has done and you're right. It's craptackular. I don't understand how people can get away with building like that. But they do. I wasn't beating myself up over it. At first I was upset, but the longer I waited, the more I got over it. I didn't even offer to bid on the rest of it until he told me what the other guy was going to charge. Good thing, too, because it would have taken forever.

Contributor T, good thoughts. I'm going to think long and hard about how we can work on our production. It's just so hard with 2 or 3 guys and such a small shop to know where to begin. There's times when we are so busy we have to stop production because we have no more room. As good as that sounds, it really hurts business, because I need to turn work away from customers who need stuff done soon. And that loses referrals. I'm working on that one, too. Bigger shop? Deliver unfinished and finish onsite? Something has got to be done.



From contributor K:
The only thing I would add, and this is for everybody, is that a reduction in work-time practices (i.e. - getting the job done faster), should not mean that you reduce what you charge for your work. The fact that you and your company would realize more profit from better procedures, etc., is a good thing. Profit is a good thing. It's one of the reasons we work so hard, and trade time away from our families to do so, no matter how much we like the art aspect of woodworking.

If you want to focus on mass marketing and reduce your prices as part of marketing strategy, in order to capture more market share, because you were able to cut costs (whether product or procedure related), that's one thing. But if you are a custom shop with limited output, that's another altogether. Don't dumb down custom work... Separate yourself, target your demographic, and most of all, charge for it... You're professionals; be compensated as such.



From contributor I:
The first thing to do to increase your shop space is to decrease your batch size. Reducing the amount of work in process at any given time will do more than just enhance the square footage. You will find that project management becomes much easier.

Think of this like a game of soccer. When there is just you and one other guy, it is real obvious who to kick it to. When you are building one cabinet complete before it leaves the bench, it's real obvious what should happen next. You will not have to suck up brain power managing crazy ways of remembering what has been done and what still remains.

When you are only building four drawers at a time, you only have to generate this much math. If you sequence the production of these drawers in a way so that they are not completed until there is a cabinet ready to receive them, you will already have a place to stick them. If you don't have to give up precious floor space to store canyons of (not yet needed) drawer boxes, you will have another place to stick a chop saw closer to where you need it.

It's not hard to imagine: A kitchen with 30 cabinets will overwhelm you, but you've got resources to spare if you are building just one bathroom vanity. Figure out how to make that 30 cabinet kitchen turn into 10 bathroom vanities.

It doesn't cost any money. You don't have to buy any equipment. You just have to lower your batch size.



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