Latest / The Mobilization Mindset / Episode 152 | Construction Bidding Mistakes That Kill Profit and Cash Flow

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Episode 152 | Construction Bidding Mistakes That Kill Profit and Cash Flow · The Mobilization Mindset

• 0:00
  SPEAKER_01: Do you ever see contractors actually bid on jobs with a GC they know really well before the scope is actually done?
• 0:05
  SPEAKER_00: There was a contractor one time, a hard bid on a school, and they didn't understand the schedule of values well.
• 0:12
  SPEAKER_00: They got stuck not even realizing there was like twice as many square feet because he didn't understand that there was a it was a two-story building.
• 0:20
  SPEAKER_00: He missed one floor of a giant school.
• 0:24
  SPEAKER_00: The GC didn't care, and it was bonded, and they got stuck.
• 0:27
  SPEAKER_00: The total loss, completely catastrophic, set them back two or three years.
• 0:31
  SPEAKER_01: It's it's almost like they didn't understand the full condition of their working body.
• 0:36
  SPEAKER_00: Correct.
• 0:36
  SPEAKER_00: There's a miss on the scope.
• 0:38
  SPEAKER_00: There was a reason once you bent backwards, they could see it, why it was the case, and they didn't clarify it all the way, and and it was moving too fast.
• 0:50
  SPEAKER_00: Welcome everybody to the next episode of the mobilization mindset.
• 0:54
  SPEAKER_00: My name is Scott Pieper, CEO and founder of Mobilization Funding.
• 0:58
  SPEAKER_00: And today, Drew and I are gonna be talking about the most common bidding mistakes we've seen made.
• 1:04
  SPEAKER_00: We're gonna go back from six, eight years ago.
• 1:09
  SPEAKER_00: We're gonna talk about ones we've just seen.
• 1:11
  SPEAKER_00: We're gonna talk about the questions customers ask us, other folks ask us, and you know, fun fact a lot of people utilize our just our cash flow on our website.
• 1:22
  SPEAKER_00: They're not even customers, but they submit lots of cash flows on our website, and we get to see how all of the ways they bid the project and how they intend to cash flow it, and then we work with those folks on the side, people who aren't even our customer.
• 1:34
  SPEAKER_00: On our website at mobilizationfunding.com, you can find that cash flow sheet yourself.
• 1:39
  SPEAKER_00: It's free to use.
• 1:40
  SPEAKER_00: You can also find the information on not only how to use the cash flow sheet, but anything we put out on our YouTube channel.
• 1:46
  SPEAKER_00: Drew, let's talk about the mistakes that we've seen and how we can help fix them when it comes to your bidding.
• 1:55
  SPEAKER_01: Yeah, I mean, you hit the first question on the nail on the head.
• 1:59
  SPEAKER_01: I mean, for the audience out there, the first thing I'm gonna say is outside of someone who works at a construction company, uh, Scott Pieper is probably probably has spoken to more construction CFOs and CEOs than anyone else in the entire planet.
• 2:16
  SPEAKER_00: I mean, that's funny you said.
• 2:18
  SPEAKER_00: I don't know.
• 2:19
  SPEAKER_00: That'd be interesting if that's true, but it might be like that.
• 2:21
  SPEAKER_01: You might have to guinness.
• 2:22
  SPEAKER_01: About cash flow, probably.
• 2:24
  SPEAKER_01: I mean, you've been doing this for 12, 15 years, right?
• 2:28
  SPEAKER_01: You've talked to this company's been in construction specifically for for that entire time.
• 2:34
  SPEAKER_01: Back in the day, you were the sales, the servicing, the underwriting, you were everything.
• 2:39
  SPEAKER_01: And then you fast forward to now.
• 2:41
  SPEAKER_01: I I think that could be a fact.
• 2:42
  SPEAKER_00: It might be.
• 2:43
  SPEAKER_01: Um, so with that being said, in all these years, you've talked a lot about bidding because a lot of our process involves talking about the bidding process.
• 2:53
  SPEAKER_01: How'd you bid the job, talk about your process, et cetera?
• 2:56
  SPEAKER_01: And then we see these guys come in here, get get a get a enter our loan program, and then we see what happened afterwards.
• 3:02
  SPEAKER_01: So, you, with your experience in being the Guinness Book World Record holder, like what are the common mistakes that these these folks are making in the bidding process?
• 3:12
  SPEAKER_01: Not in the job process, yeah, but like in the beginning, during the bidding process.
• 3:18
  SPEAKER_00: The they they fall into a couple of general buckets, so it's easy.
• 3:21
  SPEAKER_00: You can fit into the bucket a bunch of different ways, but the ones that we've talked about the most are first and foremost, not knowing your expenses or missing an expense.
• 3:31
  SPEAKER_01: Like, you know, it could be not reading the It's like the specifications, like when you when you actually get the bid from the GC, right?
• 3:39
  SPEAKER_00: Yeah, yeah.
• 3:40
  SPEAKER_00: So not reading the specs right.
• 3:41
  SPEAKER_00: Yeah, you you don't get the right plans, you get the wrong set of plans, you bid the wrong set of plans, some you didn't understand the plans, so you made an assumption and then you bid off that assumption.
• 3:51
  SPEAKER_00: And the the worst case scenario is you actually win the job and you're married to a bit uh a price that you can't perform at.
• 3:58
  SPEAKER_00: The second worst thing is you just didn't you didn't win the bid because you were too low or too high for some reason.
• 4:03
  SPEAKER_01: Do you ever see contractors actually bid on jobs with a GC they know really well before the scope's after or the bid or the scope is actually done?
• 4:13
  SPEAKER_00: I mean, I heard not often.
• 4:15
  SPEAKER_00: Not often.
• 4:16
  SPEAKER_00: Um that would be I mean, you could you there could be a whole section of it though, a phase that might have been done.
• 4:22
  SPEAKER_00: Yeah, and they you know they might have committed to a price, but it's be hard to be stuck to that price on a certain phase or section.
• 4:28
  SPEAKER_00: But here, I'll give you a good example.
• 4:30
  SPEAKER_00: There was a a contractor one time, hard bid on a school, and they didn't understand the schedule of values well.
• 4:37
  SPEAKER_00: Their estimator didn't ask, or if he asked, he asked the wrong person.
• 4:41
  SPEAKER_00: They got stuck not even realizing there was like twice as many square feet because he didn't understand that there was a it was a two-story building.
• 4:50
  SPEAKER_00: Example of one.
• 4:51
  SPEAKER_00: Oh, wow.
• 4:52
  SPEAKER_00: And because it was a pretty sizable project in multiple phases, that one phase he missed one whole one whole floor of a giant you know school.
• 5:04
  SPEAKER_00: Yeah that actually kind of got lost.
• 5:07
  SPEAKER_00: It was ri it was kind of a rip and bid, hard bid scenario.
• 5:10
  SPEAKER_00: They took the lowest bid, the GC didn't care, and it was bonded, and they got stuck and it cost them literally like they were probably 30% of the jobs.
• 5:21
  SPEAKER_00: So it's not it was a multiple million dollar job.
• 5:23
  SPEAKER_00: The total loss, completely catastrophic, set them back two or three years.
• 5:26
  SPEAKER_01: It's it's almost like they they didn't understand the full condition of their working environment.
• 5:32
  SPEAKER_01: Like they didn't understand exactly truly the scope of the project.
• 5:35
  SPEAKER_00: Correct.
• 5:35
  SPEAKER_00: It was a miss on the scope.
• 5:37
  SPEAKER_00: There was a reason once you bent backwards, they could see it, why it was the case, and they didn't clarify it all the way.
• 5:42
  SPEAKER_00: And and it was moving too fast, which gets me to one of the things like you've moved too fast, have the wrong people in the wrong place, don't create the right environment to ask the questions to make sure you understand the scope.
• 5:51
  SPEAKER_00: That's one of the most common.
• 5:53
  SPEAKER_00: I think one of the other buckets it falls into is you're bidding it to win it.
• 5:57
  SPEAKER_01: Well, yeah.
• 5:58
  SPEAKER_01: I mean, that's yeah, so then you all you're ultimately competing on price.
• 6:01
  SPEAKER_00: Right.
• 6:01
  SPEAKER_00: And so what does bid it to win it mean?
• 6:03
  SPEAKER_00: It means you're thinking of what price do I need to be at, regardless of what your expenses are.
• 6:09
  SPEAKER_01: Yeah.
• 6:10
  SPEAKER_00: And so then you just start compressing your margin, compressing your margin, and you're what you're doing at that point in time is yes, you may win, but just because the price point, and I think this is an important point, a lot of contractors, especially earlier in their phases or earlier in new job scopes, like whether that's size of job or whether it's um just getting started, but a lot of times it's just jumping into a new size.
• 6:35
  SPEAKER_00: They'll bid it to win it, and what they don't understand or take appreciation to is they're compressing their margin and they assume that the price it's going to take to win it, everybody in that world is operating at the same margin as they are.
• 6:51
  SPEAKER_00: So what just your expenses in a business and the cost for you to do it is uh isn't the same as everyone else.
• 6:59
  SPEAKER_00: You drew as a 10-year in business, 10 years in business doing the same exact specialty as I am, and I'm only five years in business.
• 7:06
  SPEAKER_00: Maybe you have better reports, maybe you have better costs, maybe you've owned your equipment, maybe your labor pool is coming from a different place, it's more efficient.
• 7:13
  SPEAKER_00: You might be able to do the job at the same price as me, but be making seven or eight percentage points more of margin than I am.
• 7:20
  SPEAKER_00: And in addition to that, what happens is as I start to bid to win it at your level, I'm compressing my margin even further to a point where now I can't even operate that job from a cash flow perspective.
• 7:32
  SPEAKER_00: And I've added so much risk to me actually doing that job that I actually have put so much risk across the entire company that it's not worth it for me to do that job anymore.
• 7:41
  SPEAKER_00: But I get too hyper-focused on winning it and winning it, or that customer I want to win it for, and I forget all those other things and I get hurt.
• 7:49
  SPEAKER_01: Have you worked have you talked to any contractors in the past that, you know, folks have been around forever?
• 7:55
  SPEAKER_01: You know, they've done tons of projects in the past.
• 7:58
  SPEAKER_01: And then the way they bid projects is they go out on site or they or they look at the specifications, they kind of eyeball it versus get down to the nitty-gritty of actually measuring square footage, you know, linear feet, whatever, whatever it might be, to actually get to a true cost.
• 8:12
  SPEAKER_01: You ever experienced that?
• 8:14
  SPEAKER_00: Yeah, but that's really a phase I would say is for newer, I won't want to say younger, I just made newer contractors in in the game of construction.
• 8:26
  SPEAKER_00: You'd be you'd be pretty foolish.
• 8:27
  SPEAKER_00: You're not gonna be around long doing that on bigger jobs and bigger jobs.
• 8:32
  SPEAKER_00: Um there are some folks out there that have been around a long time in certain scopes of work, they can go in and they can look at a job, but they've walked it.
• 8:42
  SPEAKER_00: You know, they can look at a job and they can they can get pretty close.
• 8:45
  SPEAKER_00: There's some people with real talent there, but that is a very risky strategy, and I don't really see a lot of people doing that.
• 8:51
  SPEAKER_01: And so in the I've been with you for a year and a half here at mobilization funding, and I've talked to I don't have the the record uh of talking to as many contractors, but I've talked to a hell of a lot of contractors over the last year and a half.
• 9:02
  SPEAKER_01: You've talked to a lot.
• 9:03
  SPEAKER_01: Yeah.
• 9:03
  SPEAKER_01: And um the one thing that really sticks out to me is how hard labor is to account for, and and how hard to plan for that labor, especially when you have multiple projects at one time.
• 9:17
  SPEAKER_01: When you consider bidding on project A, but you have four or five other projects and you have a finite number of people on your team or subs that you actually use, how can labor creep kind of affect what you bid versus what it actually costs?
• 9:30
  SPEAKER_00: I mean, look, labor, labor is everything on your profit, but there's not, there's not one single thing that can impact your ability to either be profitable or not profitable on a job as much as labor is.
• 9:42
  SPEAKER_00: And managing your labor, managing the cost of labor, managing your cost to budget of labor is a critical, critical function to your ultimate success.
• 9:52
  SPEAKER_00: To answer your question even more directly than that, when you have labor creep, right, which means it's it's creeping up on its budget, it's getting over budget.
• 10:02
  SPEAKER_00: How you manage that, there's a lot of things you need to look at.
• 10:05
  SPEAKER_01: And by the way, that means like that goes from making money theoretically to really not making money.
• 10:09
  SPEAKER_00: Correct.
• 10:10
  SPEAKER_00: Yeah.
• 10:11
  SPEAKER_00: And what where it happens, where it happens is one, you make the assumption that all of your labor is the same.
• 10:16
  SPEAKER_00: Okay.
• 10:17
  SPEAKER_00: Some crews are better than others.
• 10:19
  SPEAKER_00: Some project managers are going to be more efficient and better schedulers and manage the schedule better.
• 10:24
  SPEAKER_00: So you can't look at every labor crew as an equal in in how they perform work.
• 10:30
  SPEAKER_00: And then one might say, well, how do you know that how do you know one's better than the other?
• 10:33
  SPEAKER_00: Well, that gets down to a whole nother podcast topic we could talk about.
• 10:36
  SPEAKER_01: Get out in the field.
• 10:37
  SPEAKER_01: Watch them.
• 10:37
  SPEAKER_00: Yeah, which is how do you, what, which metrics do you use and how what are you tracking to?
• 10:41
  SPEAKER_00: But at the end of the day, you've you have to realize that.
• 10:43
  SPEAKER_00: If you send your best project manager and your best crews, they're gonna do a better, more efficient job and you're gonna stick to your budget better.
• 10:50
  SPEAKER_00: If you send your worst project manager with your worst crews, they're gonna do the opposite.
• 10:55
  SPEAKER_00: That's just human nature.
• 10:56
  SPEAKER_00: It doesn't mean someone's better or worse, just means someone might need more training, might need more education.
• 11:00
  SPEAKER_00: It means you that those are the that's the part of the workforce you've got to pour into.
• 11:04
  SPEAKER_00: So I think that's the biggest issue that you can see in and how you can make that mistake where all of a sudden labor starts to creep.
• 11:10
  SPEAKER_00: The other, the other way labor creeps is you're not paying attention to um the efficiency of the job.
• 11:16
  SPEAKER_00: And it might not be your fault.
• 11:17
  SPEAKER_00: It might be other trades are in the way, it might be there are other delays, it might be there's a delay, but now you don't you have this labor force that's here and you can't let them go, but you don't have another job to send them to either.
• 11:31
  SPEAKER_00: And so you end up with like the most expensive uh land land office maintenance crew because you have them all just doing something around the warehouse.
• 11:39
  SPEAKER_00: And so the last thing I would say about that piece is you have to make sure you have things inside your contract that when those happen, because those are very construction-related items, that you have a way to put a change order in for them.
• 11:51
  SPEAKER_00: And that's like imp schedule impact.
• 11:53
  SPEAKER_00: There's ways that you can build that into your contract to allow your general contractor, prime contractor, to bill that to another sub or to bill that to the job owner if it's depending on what the impact is and what reason.
• 12:05
  SPEAKER_01: So I look at uh you brought up a really good point and it leads me to another question.
• 12:09
  SPEAKER_01: So you have kind of a cadence of the project, and all all products have a projects have sort of, I mean, a lot of projects have similar cadences or or rhythms, and some projects have very different rhythms that coupled with the terms and conditions in your contract with your GC, those present a variety of other types of risks.
• 12:28
  SPEAKER_01: How should you factor in your contract risk, meaning the contract between you and your general contractor and the rhythm of the project and the risk associated with that, because certain ones pose higher ones than others, into your bidding?
• 12:42
  SPEAKER_01: Like, should you have a reserve and then put that in your bid?
• 12:45
  SPEAKER_01: Should you have some liquidity set aside for if something goes a little bit south, right?
• 12:51
  SPEAKER_01: Should you uh put that in your bid?
• 12:53
  SPEAKER_00: Yeah.
• 12:53
  SPEAKER_00: Yeah.
• 12:54
  SPEAKER_00: And what you're talking about is what's often referred to as contingency.
• 12:57
  SPEAKER_00: And a lot of people throw contingency in the scope of work, but they're treating it as profit.
• 13:03
  SPEAKER_00: But a lot of that really is sometimes actually contingency that you need in there to manage the risk you just outlined.
• 13:10
  SPEAKER_00: And and exactly the other example is how many times have you performed for this GC?
• 13:15
  SPEAKER_00: Which project manager is running this G?
• 13:17
  SPEAKER_00: Which project manager of the GC is running it?
• 13:20
  SPEAKER_00: Are they able to effectively do this work quickly and efficiently?
• 13:24
  SPEAKER_00: Are you familiar with the site?
• 13:25
  SPEAKER_00: Is the site far from you?
• 13:27
  SPEAKER_00: Is the site close to you?
• 13:28
  SPEAKER_00: Is it a well-prepared site?
• 13:30
  SPEAKER_00: Is your crew going to be parking 13 miles away and having to take a bus in?
• 13:35
  SPEAKER_00: Are they gonna be, you know, all of these things go into the into the factors into how efficient you could be and which general contractor are you working for and the type of project that decides how efficient you can be that you need to build in.
• 13:47
  SPEAKER_00: Really, what the the crux of that is is your ability to assess the risk you're taking when you execute that contract, meaning you sign it.
• 13:58
  SPEAKER_00: And the terms you build into that need to marry up to your assessment of the risk of the project and the GC or prime contractor that are operating in it.
• 14:08
  SPEAKER_00: And you gotta build yourself some of that room.
• 14:10
  SPEAKER_00: So easy math, new contractor, site you're not familiar with, you need to have more margin in that job.
• 14:18
  SPEAKER_00: Now, contrary to typical wisdoms, like I've been trying to earn, I've been trying to earn that customer's business.
• 14:24
  SPEAKER_00: I'm gonna give them a lower price, like get my foot in the door.
• 14:27
  SPEAKER_00: But you're actually, you are, but you're getting yourself a huge, getting your foot in the door with a massive risk, too.
• 14:32
  SPEAKER_00: Is that really worth it?
• 14:33
  SPEAKER_01: Yeah.
• 14:33
  SPEAKER_01: I know we only have a few more minutes, but the last thing I kind of want to touch on is the bidding process.
• 14:38
  SPEAKER_01: And and you know Scott Kemplin really well.
• 14:39
  SPEAKER_01: We I've listened to this, but like he did a podcast uh a couple weeks ago that really stuck with me.
• 14:44
  SPEAKER_01: And invol it's like striking that right balance between involving too many people in the bidding process and not involving anybody in the bidding process except the owner or maybe, you know, a VP of some sort.
• 14:56
  SPEAKER_01: So it's connecting that estimate, having a strong estimating group or a strong estimator on staff, right?
• 15:02
  SPEAKER_01: To identify the true cost and then coupling that sort of expertise with the field expertise.
• 15:09
  SPEAKER_01: Like what is reality?
• 15:10
  SPEAKER_01: Connecting office to reality out in the field and then putting both of those together in the bidding process.
• 15:16
  SPEAKER_01: Talk a little bit about that.
• 15:18
  SPEAKER_00: Yeah, so if you you one, you're right.
• 15:20
  SPEAKER_00: You want to have a very strong estimator, and Scott's gets this as well or better than anyone.
• 15:26
  SPEAKER_00: You want to have a great estimator, and their main job they need to be great at is assessing and outlining the actual costs to do the job.
• 15:36
  SPEAKER_00: Part of that is going to be labor, and part of that labor cost is gonna have to do with scheduling and time and how long it will take.
• 15:44
  SPEAKER_00: And they need to have a good relationship with the project manager and whoever's gonna be working that job to understand things they may not know that from the site.
• 15:53
  SPEAKER_00: Now, one way to mitigate that is if you have really good reporting from your project managers and the estimator at their disposal can see at any given time which project manager, which type of site, how are their efficiency reports, blah, blah.
• 16:05
  SPEAKER_00: They don't necessarily need to have a conversation.
• 16:07
  SPEAKER_00: They can look at the data and make the decision.
• 16:11
  SPEAKER_00: But to the last thing I would say is once your estimator figures out the costs, I think it's leadership's job to make sure that they put the right margin on that job based off of the overall risk of which groups am I planning on using?
• 16:26
  SPEAKER_00: Is this customer strategy one I want?
• 16:29
  SPEAKER_00: Uh, what kind of risk are we taking?
• 16:31
  SPEAKER_00: What other things do we have going on in the business?
• 16:33
  SPEAKER_00: You know, and is this part of a bigger strategy, smaller strategy?
• 16:36
  SPEAKER_00: You don't want to put all that on your estimator who may not have awareness to all the things that you do.
• 16:41
  SPEAKER_00: Yeah.
• 16:41
  SPEAKER_00: But if your estimator gives you what the cost is and their best idea of the work schedule and the way it's going to work, and then you can layer in the margin that you want to take, which is really your what you want to be paid for the risk you're taking, that's a very effective way to bid a project.
• 16:57
  SPEAKER_01: Yeah.
• 16:57
  SPEAKER_01: And I think people don't need to forget, and this is not to talk about any further, but don't forget overhead allocation.
• 17:03
  SPEAKER_01: I mean, you you can get hose from overhead allocation as well.
• 17:06
  SPEAKER_01: So um, Scott, those are really all the questions I had for you.
• 17:09
  SPEAKER_01: I mean, you've talked to more folks than than I have or anybody that I know in the construction field.
• 17:14
  SPEAKER_01: So uh this has been educational.
• 17:16
  SPEAKER_01: I hope our our friends out there and our viewers uh find it useful as well.
• 17:19
  SPEAKER_00: Yeah, me too.
• 17:20
  SPEAKER_00: I hope high level, know you're taking a lot of risk when you do a job.
• 17:25
  SPEAKER_00: Get paid for that risk.
• 17:27
  SPEAKER_00: Make sure your costs are really accurate, be careful just bidding to win with price.
• 17:33
  SPEAKER_00: And the rest of it is outline the best you can and and get the work done and get great reports and keep winning.
• 17:40
  SPEAKER_01: That's it.
• 17:41
  SPEAKER_01: You heard it.
• 17:42
  SPEAKER_00: All right, folks.
• 17:43
  SPEAKER_00: More information, you can find we reference Scott Kimplin.
• 17:47
  SPEAKER_00: You can find him on LinkedIn.
• 17:48
  SPEAKER_00: His name is Scott Kimplin, K-I-M-P-L-A-N-D with FMI.
• 17:53
  SPEAKER_00: You can also find him on our podcast if you go to our YouTube channel at mobilization funding.
• 18:00
  SPEAKER_00: And you can also find him on our website, mobilizationfunding.com, along with every one of our other podcasts, our cash flow tool, directions on how to use it, and lots of other information.
• 18:09
  SPEAKER_00: Till next time, everyone, have a great week and may God bless you.