Low-Bid Bottom-Feeder Blues

      but this discussion of commercial bidding, corner-cutting, and cut-throat competition is worth a look anyway. November 11, 2005

Question
I just submitted a bid for a church daycare/school, 32 classrooms and 4 other rooms of similar size with tops and installation. Job is to spec with laminated cabinets and balanced (laminated back) doors. Materials are $20K +/-.

I'm at $63K plus installation. Okay, that may be high, but double? There were no less than 10 bidders with 4 in the high $20's. I bid with my trusty Cabinetware, reviewed all my costs for labor, materials and overhead, added profit, and got a number that looked good. I massaged it a bit from my gut and submitted it. High $20's Ė does anybody have a clue what's going on?

I just finished a conversation with a friend of mine in the machinery business. He said things are slower because of all the new forms of competition (internet, auctions, etc) and a lack of customer loyalty. He also says he has talked to a number of shops where the owners are fed up with competition with the one horse garage operations. We need the work to stay in business but can't afford to give it away to meet these insane prices that some are throwing out there. Does anyone have any good ideas? All comments are appreciated.

Forum Responses
(Business and Management Forum)
From contributor J:
I have two thoughts:
1) Labor costs - if some of the shops are using people who do not have valid work documents, they often pay less than minimum wage, let alone the going rate

2) Change orders. I'm guessing these guys think they will get the money back out of change orders.

Ask whoever is making the decisions if you can look at some of the proposals (at least the proposal that won). And follow the job closely to see how many changes there are, if they fire the suppliers, etc.



From contributor C:
Around here, those without "proper documentation" are commanding pretty much the same price as everyone else. My guess is the low bidders are after-change orders. I've seen contracts written so loosely that you could put a change order in for the entire job.


From contributor T:
Perhaps they are neither kidding nor stupid, but desperate. They, like you, may need the work to stay in business as well. But their costs may be much lower than yours, and so can bid accordingly.

If you have absolutely no work, and truly need a job, how low will you go? How low can you go? Do you have highly paid personnel with benefits, machinery payments, high rent? The list goes on.

You don't need an experienced craftsman to assemble laminate boxes. What you need most are assemblers and laminators. Your competition may well have low paid semi-skilled labor that can hustle laminated cabinets out the door for a cost that would seem impossible to you. I've seen operations where guys with a table saw, router, belt sander, and roller for contact cement bang out boxes all day long. I choose not to work that way.

I must take minor offense to the one horse garage. While I work alone out of my garage, I have tax ID numbers, insurances, and all the licenses. I pay the taxes, have the proper zoning permits, file the sales taxes; in fact, probably the only difference between my one man shop and a "legit" one man shop that rents commercial space is that I don't pay rent. That helps to lower costs if I really need to win a job bid.

Self-evaluation of your processes and expenses can help you determine how low you can bid. Sometimes you have to do work with a tight margin until better paying work comes along. If the margin is too tight, perhaps Tom has the best suggestion of all.



From contributor G:
To the original questioner: Is this your normal niche? School work is very competitive. Are you figuring the material to be pre-laminated or are you laminating it yourself? I can buy pre-laminated less expenseive than I can buy the material for. The guys doing schools (I'm guessing) are paying less than $2.00 a square foot for pre-laminated. For melamine they are paying maybe .60 a square foot?

How many boxes are we talking about? The average small shop can process a box in about an hour. On a job like this stack cutting is a distinct advantage. I'm guessing they can get the labor down a bunch with stack cutting and a fast edgebander and ptp.

I'm guessing, maybe someone doing this sort of work will chime in. With 4 bids in the same neighborhood it may be a case of having the machinery and systems in place to be competitive with this sort of work. I've seen guys bid these kind of jobs at $100 a lineal foot (uppers, lowers and counters) and heard them say they make money at it.



From the original questioner:
Everyone's input is quite valid and all point well taken. I have a slider, edgebander and machining center. I pay $1,100 for rent on a 3600 square foot shop and am insured out the wazoo including comp and vehicle liability. I have one employee that is married and deserves a decent wage. If someone is running really lean on cost, overhead and labor, I say great, but why leave the money on the table that could put you into a real shop and pay your help a decent living? I would love to find a laminator at $2.00 per foot. I'm in the same town as Wilsonart and had to pay $1.58 for the stuff from a dealer in Austin plus $10.00 to pick it up at the factory.

We all have different cost basis and are quite capable of managing them to our advantage. Could I have bid less? Yes Ė probably below $45K, not even and why? There is more to this than making minimum wage. Who, among any of you, would stay in business with a 60% material component? One job - maybe. Bad habits form too easily and are hard to break. This is about good business.



From contributor L:
I think the truth is closer to what Contributor G said about certain competitors low balling their bids to keep many competitors out of the picture. If your materials cost alone is close to where others are putting their entire bid, then either your suppliers are gouging you or something stinks. School jobs are a matter of public record. If the bidding is closed and the job has been awarded, then you shouldn't have any problem in finding out the particulars. I gave up on bidding schools around here because of the politics involved and the mindset mentioned above. There is plenty of other work out there that is very profitable.


From contributor H:
To the original questioner: I'd like to comment on your friendís equipment business as I just ordered a lathe this week. I tried to buy it locally, unfortunately the best price I could get was 15% over what I could get it over the net, and some were almost 40% higher. I tried to get any of the dealers I talked to to come even close to the price I got off the net. The best I could get after haggling was still 15% over what I paid. This is money coming out of my pocket and I really tried to get anyone close.


From contributor R:
I will assume this job was bid exactly to spec. It is possible the specs were so poorly written that there will be a goldmine of change orders. Unless these types of jobs are designed build, the strategy is to bid it as plans and specs. Maybe the specs donít include doors or even installation.


From contributor P:
To the original questioner: I feel for you. We run into the same thing that we just try to make a living and there are guys out there that will be low ballers and then be out of business in another two years and then another takes their place. Itís something cabinet shops have to deal with.

For those garage shops I would love to own the building that I am in and have my house right next to it, but zoning won't go for that. The problem is that there are woodworkers that are very good but stink at business. They have the insurance, etc, but like Contributor T above - and Iím not singling you out Ė he is not paying himself rent from his business so his overhead can be lower so he can charge less. Well youíre giving the customer your rent money that you could collect from your business. That could be in your pocket not your customersí.

I also blame zoning boards in certain areas of the country that will let people have there shops on residential property. Another reason for garage shops are the high cost of industrial rents, taxes etc. They are going through the roof here in the Midwest. Thatís what we have found that works to sell your company. Show why using you will make a difference from all the others. A good marketing plan would help also to make you look better.



From contributor T:
No offense taken. You make a valid point, and I have often wondered about the rent factor. I have viewed it as an expense I did not have, and so did not figure for it in my shop rate. I get a decent shop rate ($60) for my work, which is through designers and architects, and while I am not getting rich, I am not hurting, either. I made that point in the interest of a place where expenses were reduced so that one could lower one's margin only if one was desperate and needed to in order to get work. I view it much like having machinery that is paid for. Does your shop rate figure in ongoing machinery payments, even if it is paid for? Yes, eventually it will need to be replaced, but do you charge for that in all your bids? Profit is profit, but can you account for the eventual replacement of machinery?

I've done this work for a long time, but have only been in business for myself about 3-1/2 years. I pose the question not because I want to be right, but because I want to understand what others do about expenses that are not ongoing but eventual, and how they affect shop rates.

As for the zoning, for the time being the county is letting me do it. Even though my shop is well insulated I am obsessed about the noise level, and have spent a fair amount of time outside with the machinery running, to see if the noise can be heard at the property line, which is one of the determining factors in the home based business zoning permit where I live. As long no one complains and they let me do it, I can't see paying rent I don't have to pay. But perhaps as you say, I should pay the rent to myself.

It is unfortunate that some institutional cabinetwork is contracted for in such an unscrupulous and cutthroat manner. I worked for shops that would bid these jobs, and seeing the ridiculously low winning bid numbers on these jobs helped shape the direction of the type of work that I would pursue when I started my own business.



From contributor M:
I am in the Dallas/Fort Worth area, and things are very competitive here. The $100/lf that someone mentioned here is common. And I know of one shop that charges $60/lf for residential cabinets, and he is making money hand-over-fist. They did 850 homes last year. And they just nail their boxes together - no glue, no screws. And then there is the shop that is cut-throat. At last count he has 3 CNC routers. When business is slow, he will call a builder and bid a job at cost, just so that he can pay his bills and keep work out of our hands. I am not complaining, just stating reality. This is the playing field in which I work.

When you say that you have a guy who is married and needs a decent wage, then that tells me that you are one of the good guys. You care about people and I assume that you care about the quality of your work. I am sorry to say, that not everybody out there is not like me and you. This is part of our playing field.

There is also the issue of costs of materials. I have been fortunate with some of my suppliers. Some of them are stand-up guys who are concerned about me and my business. They know what they need, and give me the best break that they can.

I'll get to my point with just one more story. Recently I bid a job for 300 displays. Let me tell you, this is a big job for me and my helper. The buyer came back and told me that we would have to do much better. So I went and beat up on my suppliers. I told them that if we did not get the price right, no one would be getting any money from this deal. I cut out one supplier and saved $1,800 and I went to another supplier and saved over $5,000. The other guys tightened their belts and we got the number where it needed to be. And I did not need to change my costs to make these.

The moral here, you might want to start pushing your suppliers a little harder. You are not paying anything close to what the big boys are. They may very well be able to turn a project where you cannot even buy the materials. I have some great sales reps but some of them just don't care about my business or my family. They just want to maintain their margins and feed their account. It's a mutual thing here. I'll buy from you if you can help me be competitive. Otherwise I am out of business and you are looking for another contact.

In this case, there are some things that you can change, some things you cannot. You can't change how others bid, so move your focus to what you can change. What type of work you pursue, your construction methods, and the relationship with your suppliers.



From contributor J:
I build a simple 32 mm system box and slab door with laminate faces. I have the right equipment and processes developed over the course of 30 plus years. I am in a black hole for suppliers and have to pay accordingly for materials. The referenced project was well within my scope of work and systems.

The problem is that the GC's are bottom line first and the lame brains that bid the job below cost cannot be on spec and deliver for the prices bid. Somewhere, in the process, there are compromises made to the spec and/or price.

I have learned over the years that while others can hammer away at both to get where they want to be, I have always drawn the contractor or architect that will do neither, so I choose to be legit from the beginning and give a standup bid for the work.



The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor A:
We all need to buy materials and pay employees and if one says that those numbers are becoming similar amongst competitors then the only remaining variable should be overhead and profit. It sounds simple but as a trainer of estimating software I quickly learned that the majority of millwork shops donít understand what it costs to produce their own product.

Instead, the only number they relate to is what their product can be sold for in the marketplace. So without any solid cost basis many estimators will not know how much if any at all money is being made on their bid. Even if they hope to make up for it on change orders they still donít know where they stand.



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