Suicide bidding – a warning for construction firms

Impact of COVID-19

Figures from the Office for National Statistics showing GDP fell 20.4% in the three months to June, the second consecutive quarter of declining growth.

The devastating impact COVID-19 has had on the construction industry, in particular, has been highlighted by two new reports, with a leading cost consultant warning of the return of cut-throat – or so-called “suicide” – bidding. Meanwhile, finance giant EY said 46% of contractors and materials firms listed on the London Stock Exchange issued profit warnings in the first half of this year.

As desperate contractors battle to plug the shortfall in their order books, there is a real and widespread risk that contractors will routinely price jobs at unsustainable levels. This should be a genuine concern for contractors at all levels of the supply chain, as well as clients, as this practice creates a ticking time bomb of potential contractual disputes further down the line.

The dangers of suicide bidding

“Suicide bidding” has the potential to lead to widespread insolvencies, meaning delays to projects and additional costs incurred where subcontractors, bound by unsustainably low prices, go out of business.

Understanding how contracts are structured is vital here. Most construction contracts have detailed and complex mechanisms that deal with price adjustments, and if used sensibly – and ideally, collaboratively – these structures should ensure that clients pay a fair market price for work properly executed.

A headline price that feels too high or low will fall outside the spectrum of what is considered ‘good value’. Therefore there is also a real onus on clients to recognise where bids are too low, and consider the potential legal fallout if things go awry.

The risk to clients of accepting low ball bids is that they become bound to a supplier that may well cut corners to scramble a project over the line just to stay afloat. The ongoing Grenfell inquiry demonstrates the devastating consequences of trying to value engineer contracts to the point where quality – and even human life – is compromised. The industry should be all too aware of the tragic – and avoidable – consequences this can have.

With this in mind, both parties must understand the basis on which bids are submitted. In what circumstances will the contractor be able to adjust prices, for example?

Good practice for clients

It’s good practice for clients to challenge assumptions at the earliest stage of the process to ensure they aren’t storing up problems further down the line. In practice, this means taking the earliest opportunity to understand where any risks may lie and working through that in partnership.

One way of doing this is to ensure you have a sensibly sized tender list – this affords you the time and resource to rigorously apply cool analysis to submitted tenders and thoroughly interrogate any assumptions made. It also gives you the space to enter into competitive dialogue and extract any necessary information from bidders to ensure the quote submitted represents a fair price for the work being commissioned.

For contractors, it’s important to remember that a bid is a part of a legal process that leads to a signed contract against which all parties will be bound. If you’re going in at a low price, it’s essential to qualify that.

If you’re not confident about how best to do that, seeking sound legal advice at the earliest stages will help.

While contractors need to get to grips with the contracting process and ensure they are using all available mechanisms to arrive at sustainable prices, clients need to look after their contractors. This means building long-term relationships with quality contractors and ensuring they are paid fair prices for their work.

The alternative – a price-driven race to the bottom – is bad for business all round.

This article was first published in Business Matters Magazine on 12 August. Read the article in full here.