Common Bidding Mistakes

Have you ever met a potential client, walked the property and submitted an estimate that you knew was actually going to result in a non-profitable job? Probably not. But the odds are pretty good that you have submitted estimates that you thought were going to result in a profitable job and ended up costing you money instead.

In fact, most landscape companies have had their share of bad jobs throughout the years, and these jobs are generally the result of honest mistakes. As long as the company takes the time afterward to identify the mistakes that were made and ensure they aren’t repeated, the problem is generally solved.

The real problems occur when contractors don’t realize they are making bidding mistakes. All these companies know is that each year ends with less money in the bank than expected. These companies are heading down the road to ruin.

Businesses usually become dysfunctional for one of two reasons:

1. There is a serious (perhaps even fatal) flaw in the estimating system regarding:

• General and Administrative (G&A) overhead recovery
• Estimating and tracking equipment use
• Estimating and handling field labor

2. Personal pride interferes with implementing sound business principles and practices daily.

SEVEN SCENARIOS. The following seven scenarios illustrate the most common mistakes contractors make. I have labeled them as follows:

• "Iron Man" Mike
• The Sugar Daddy High
• Too Much Caffeine (or Testosterone)
• The Vampire Syndrome
• Ego-mania
• Looking for "Foxes" in All of the Wrong Places...
• In God We Trust (All Others Use Purchase Orders)

1. "Iron Man" Mike (Mike is not his real name).
There was a construction company that intended to employ enough field labor for approximately 50,000 field-labor hours for the year. Total equipment costs were estimated at about $450,000 for the year. Indirect G&A overhead was estimated at another $300,000.

For bidding purposes, direct costs (material, labor, labor burden and subcontractors) were included in the bid at cost. Equipment costs were combined with G&A overhead and added to the bid at $15 per estimated field-labor hour ($450,000 equipment costs plus $300,000 G&A overhead, both divided by the 50,000 projected field-labor hours).

There was one fatal flaw in the process –equipment costs were not bid based on what would be needed for the job. All equipment costs were averaged and bid at the same rate for all jobs regardless of how much equipment was required for each particular job. Jobs requiring nothing more than pickup trucks and wheelbarrows were billed the same ($15 per hour) as projects needing skid-steers, trenchers and backhoes.

Too many contractors estimate jobs this way. The consequences are subtle and eventually can be disastrous. Labor-intensive jobs requiring only pickup trucks and wheelbarrows are estimated far too high with inflated equipment costs. Subsequently, you do not get these jobs in a competitive market because your price is too high.

Equipment-intensive jobs charge too little for equipment costs. Because the bids are underpriced, you get these jobs. And you keep getting them. The result is that you are using all of your equipment but you are charging your customers for only a fraction of its actual cost.

Two things need to happen in order to correct this scenario:

• Equipment bid into every job should be bid the same as you would bid labor. Equipment should be included in bids only as the job requires it. Actual use, in hours, should be multiplied by a predetermined cost per hour.
• Equipment usage must be monitored through job costing on a job-by-job basis. This will ensure that equipment costs bid into specific jobs are compared to actual equipment costs.

2. The Sugar Daddy High.
A commercial landscape and irrigation contractor and a large homebuilder developed a close relationship. The homebuilder provided the landscape and irrigation contractor with more than $1 million of work annually.

This contractor was the envy of other contractors in his market. The pricing of the work was reasonable. The builder paid the contractor within 10 days of being invoiced. Yet, the contractor managed to go broke. Why? For a couple of reasons:

• There were no internal controls.

  Jobs were bid accurately and competitively, but they were not job cosseted. Effective planning and quality control wasn’t used in the field. Crews were not directed properly and the client’s problems were not addressed quickly and effectively. As a result, jobs dragged on as crews did not develop a sense of urgency to complete them.

  The company kept digging itself into a larger hole as it scrambled to "rob Peter" – bill new work – to "pay Paul" – pay off bills for jobs completed six to 12 months ago.




• The landscape and irrigation firm became a captive subcontractor.

  The consequences were inevitable. Eventually, the contractor relinquished control of his company to the builder.

  The builder began dictating schedules and precluded the landscaper from working for other clients. The home builder began to ask the contractor to do a few free "favors" (i.e. landscape his home, his secretary’s home, etc.). The homebuilder also did not expect to be charged for legitimate extras.

  When the economy in that area went into recession and the home builder had no work to give to the landscaper, the landscaper, who had not pursued other work, had no other clients to turn to. His cash flow stopped but past-due payables and payroll taxes did not. Because of his entrenched bad habits, he was unable to turn his business around.

My point is this: Do not get intoxicated on a "sugar daddy high." The question is not whether or not you will lose your sugar daddy but when.

3. Too Much Caffeine (or Testosterone).
A few years ago, a hard-charging contractor in the Southwest was feeling pretty good about having a year that saw $1.5 million in gross sales with a net profit of better than 10 percent. He decided to "put the pedal to the metal," so to speak, and grow even more.

He decided he needed a full-time estimator, so he hired one with very little experience. During the next 12 months, sales increased to $2.5 million. Unfortunately, his bottom line went from a 10 percent net profit to a 10 percent loss even with the increased sales.

What went wrong?

• Bids were not reviewed. The new, unproven estimator was allowed to bid work without the owner or someone else reviewing his work. This cost the company about $150,000.
• Field communication and audit trails were not in place. People in the field made decisions and changed the product without proper approval or documentation from inspectors or the owner. One retaining wall had to be replaced at a cost of more than $50,000.
• Proven systems and office staff were not in place before growth occurred. This company could just about handle the pace of $1.5 million in gross annual sales. There were problems (the flow of paperwork became congested, job costing was late or not done at all, change orders were not adequately documented, etc.), but these problems were not insurmountable.

Unfortunately, the owner did not try to resolve these problems in his systems before he decided to increase sales. Management was soon overwhelmed, and the company never recovered.

Simply put, the owner did not manage either himself or his company. He thought he could run his company on adrenaline, of which he had plenty.

The moral of the story is: "You take care of the systems and the systems will take care of you." If you don’t, they won’t.

4. The Vampire Syndrome.
It would be so easy if all you had to do was to put systems and procedures in place and then watch business take off. There is, however, one added ingredient: people.

Some people, if given the chance, could destroy a McDonald’s. They would change the menu, eliminate the hamburgers or fire the help. They would find or invent some way to make the operation fail. Show them a hundred times how to do something right and they would change it and do it wrong. They have to do it their way.

Vampires are like that. They love to live in the dark. If you show them the light of day, they immediately run back into the dark and back to their habitual coffins. A coffin is simply a rut with ends installed.

I’m convinced that some contractors are so ego-driven that they deceive themselves. They live in a "coffin" of sorts. The very thought of implementing sound procedures and systems makes them run for cover. No amount of coaching can draw them out of their cavernous lifestyles, and, unlike bats, they cannot see in the dark.

5. Ego-mania.
A rather large landscape contractor self-destructed. At its height, this firm employed upwards of 500 people. In a well-publicized merger, the company almost doubled in size overnight. This company showed up in markets everywhere.

In their own eyes, top management could do no wrong. Marketing, advertising and obtaining market share became paramount. Size went to their heads. They began to believe all the hype about them. Three years later, the company disintegrated. Why?

Image and marketing became the company's focal point. But the systems necessary to direct and control the company daily were not in place, nor were they developed. Estimating was not well developed. Job costing reports for specific jobs and crucial financial reports were never available. Some employees went for almost a year without knowing for whom they worked or to whom they should report.

In essence, top management did not understand that tried-and-proven systems, combined with bureaucrats and a bureaucracy forced to focus on supporting field operations, is the heart of any good landscape operation.

Forget image and marketing that image if you do not have good systems. Without the proper systems, you will only dig a deeper hole in which to bury yourself.

6. Looking for "Foxes" in all the Wrong Places.
A $4 million landscape construction and services company spent almost four years trying to get an accounting and job-costing system into place. The company went through a couple of software programs and as many controllers and bookkeepers.

It just could not get the system together. The delay cost hundreds of thousands of dollars, most noticeably in the field. The estimator could produce good bids, so that was not the problem. Unfortunately, the field was incapable of bringing in a job on budget or on schedule.

Everyone knew there was a problem, but no one would listen to or implement solutions. Everyone avoided the real problem. Activity, not results, became the focus.

Field production turned into a "Three Stooges" scene because there was not a well-thought out game plan. Operations never improved because there was no job costing to identify specific problems. Labor-hour budgets were not clearly spelled out to field personnel, nor was there any timely, accurate feedback to management or field crews – no scoreboard.

Because of all the confusion and lack of controls, the field superintendent took advantage of the situation, putting fictitious people on the field payroll to the tune of about $50,000.

7. In God We Trust (All Others Use Purchase Orders).
A landscape contractor was grossing approximately $500,000 to 600,000 a year in the residential and commercial installation market.

Purchase orders – the paper trail identifying who was ordering what for which particular job – were not used. Nor was a system for job costing in place to compare bid-to-actual material costs. Invoices from suppliers were paid without documentation. Blind faith replaced the control that a system of purchase orders would have provided.

Of course, abuse was almost inevitable. Employees ran materials for side jobs through the company and embezzled approximately $40,000. Had purchase orders been used properly, this problem would have been prevented. The temptation was just too much for employees.