Negotiating Your Route To Success
Dreams can come true. For contractors, the ultimate dream is for a customer to say, “The job is yours, we will settle on a price later.” We have many contractors in all trades, as well as general contractors, construction managers, architects and engineers, who do not have to compete in our hard bid market. They enjoy the hard-earned privilege of negotiating every project!
The most critical part of that privilege is you cannot negotiate with anyone unless they need or want you! In our business, they only need to negotiate with you for one of two reasons:
1. You are GOOD. You have the proud and trustworthy image of maintaining a safe site and producing quality work on schedule.
2. You are CHEAP. You may not be the contractor they would like to work with, but they cannot match your prices.
Hopefully you enjoy that good reputation and keep score on all of your employees' repeats and referrals. Good customer relations is vital to retain that ongoing relationship.
Many customers want a company with experience doing their specific type of construction. This is a case where “bigger is better.” The bigger you are, the more project experience you can present. It's especially pertinent with hospitals, schools, churches, factories, water and sewage treatment plants, etc. You should maintain a written history of your company's projects, and also utilize the previous experience of your foremen and management team. This will get your foot in the door.
With a public opening of a hard bid project, you should list all of your cost-saving value engineering. Any questions or exceptions to your bid should always be listed as extras, rather than deducts. This keeps your base bid as low as possible and opens the door to negotiation. This is important with alternates and addenda. Naturally this same strategy would apply to private bid openings as well.
Do not confuse negotiation with “auction bidding” or “shopping and chopping” bids. Unless you have an apparent mistake in your bid, you should justify your numbers and merely ask, “What can you eliminate from our scope of work to compensate for whatever you are asking us to cut?” This opens the door for you to offer your bargaining options:
1. Top of this list are your value engineering cost savers, which already incorporate your overhead and profit.
2. Use of their forklift and crane for material handling.
3. Excavation, tamping and backfill of trenches.
4. Layout of partitions for rough-ins.
5. Cutting and patching as needed.
6. Painting of exposed pipe and equipment.
7. Flex-time access for work hours.
8. Limit your job mobilizations.
9. Clean up.
10. Eliminate one-year maintenance requirements.
11. Revise payment language to include reimbursement for pre-fab and stored materials.
12. Insert late payment penalty clause and eliminate retention.
13. Establish ground rules for extra work and change orders.
14. Insert an arbitration clause, name the arbitrators, and establish a time limit to settle or forfeit the claim.
15. Ask for “or equal” substitutions on specified brand name items.
This list can go on, but it gives you an idea of what you can negotiate. Fortunately you already know what each item would cost you, but usually they do not know. Many of these items are much cheaper for them because they are organized to perform them. The very same situation is true in reverse for you to take on some of their work scope that is normally performed by your trade.
Negotiating Extra WorkYour next major negotiating opportunity comes with change orders and extra work orders. As most of you already know, more contractor/client relations are destroyed by disagreement over extra work than any other reason. As I mentioned earlier, these ground rules should always be negotiated and included in your contract language.
Your best bet, when it is feasible, is to submit a bid and negotiate your change orders before the work is started. Be sure to include payment on the monthly draw when that work is performed.
When there are unknown specifics, you should request a signed work order to proceed on a labor and materials basis that we call “cost plus.” Your mark up for overhead and profit should already be in your negotiated ground rules.
It is imperative that you log daily cost records that are reviewed and signed by the customer's representative daily or a minimum of once each week. This eliminates nasty disagreements involving “convenient memory” about what actually occurred.
A large percentage of change orders could have been avoided when your estimator bid the project. Mistakes, errors of omission, compliance with local codes, etc., should have been caught and remedied with R.F.I.s Many extras are also resolved by “horse trading” or exchanging this work for some other work. Here again, you need documentation to assure the bargaining is fair to both parties.
My advice to all my clients is to “think about the next job” when you are negotiating change orders. Above all else, try to keep the attorneys out of your deal!
Those of you who are signatory to a union agreement realize that you cannot negotiate with any individual who is covered by that collective bargaining agreement. You or your associates must negotiate with elected union officials who bargain for the entire membership.
Unfortunately most open shop contractors do not take advantage of their opportunity to negotiate privately with each individual employee. They should establish different wages, benefits, fringes, use of company vehicles, work hours, etc., to satisfy each employee's needs, effort and ability. Again, these agreements should be documented, monitored and renegotiated as necessary.
Another close business relationship that requires constant negotiation is with your supply house. With mutual trust, this relationship can save contractors mega-bucks on jobsite labor costs and materials. This coordination and cooperation starts with the bidding process and continues until the last item is installed or returned for credit. Your supplier can furnish a detailed material take-off, offer value engineering and recommend “as equal” substitutions of available stock items. This is critical on long-delay deliveries to meet tight schedules.
Your supply house also can coordinate vendor training and task certification for installing, maintaining and replacing all of the products they sell. They can provide early morning and late evening access for their steady customers.
To maintain this valuable contractor-supplier relationship, these items should be negotiated:
1. Price, discount, credit and interest rates.
2. Replacement of damaged goods.
3. Restocking of returned materials.
These negotiations should take place and be documented before a purchase order is issued for a sizeable project. Here again, bigger is better - it means more clout with your bargaining position.
Negotiating your route to success does not apply only to your business. We need to negotiate with our family members, as well as with sales people we deal with in our personal lives.
As you know, the divorce rate in the United States is horrible. Two people who willingly selected each other fall apart and settle in court for all kinds of reasons that might have been resolved with sincere negotiation. Generally some compromise by both parties might have resulted in reconciliation and settlement, although some marriages are just not salvageable.
We should also negotiate any misunderstanding or disagreement with our children. We cannot always agree with what they want to do or think is proper, but they certainly do no agree with everything we feel is right for them. We have some major issues that we, as parents, must teach, explain and enforce. However, compromising on some minor issues will help maintain a workable relationship.
Always keep in mind, whether in the home or in business, you can negotiate only with someone who needs you. Be that person or company they need!