Overcoming the Winner’s Curse

Winner’s curse is defined as bidding low enough to win, but regretting the results. Winner’s curse assumes the bidder (general contractors in this case) makes below normal or negative profits upon award of the work. This dilemma has plagued the construction industry for generations. I write this article to offer some contributing factors to why winner’s curse occurs, but more importantly to provide insight into how the construction industry can work to avoid it.

The Cheap Fix

Winner’s curse gives general contractors a bad name. Regrettably, history has shown general contractors attempt to overcome winner’s curse by one of three methods: (1) bid withdrawal in public and private domains, (2) pushing the risk to the subcontractor by squeezing their pricing or making alternate arrangements, or (3) recovery through inflated change orders. These approaches effectively compromise trust, honk off everyone in the supply chain, or worse, cause a company to have an irrecoverable economic failure. Sometimes we are our own worst enemy.

Risk vs. Reward

Watching the last 30 minutes of a competitive bid event in a general contractor’s (GC) office is much like watching a bustling craps table in a casino (minus the cocktails, incessant dings of slot machines, and blinking lights). Bidding is intense and sometimes a risky gamble.

For example: As contractors work diligently to capture every bid in the marketplace, inevitably a few subcontractors supply a bid that is an outlier on the low-end minutes before the bid is due (sometimes 6 or 7 figures low). The subcontractor may be unknown to the general contractor, so it leads to a flurry of activity to qualify the subcontractor’s bid; the decision to take the bid often leads to a win or loss when a pursuit is decided by price only. If it is clear the subcontractor missed the scope or lacks regard for the project requirements, it is warranted to contact the subcontractor as quickly as possible and qualify their scope, or ask them to pull their pricing from the market so it does not unduly favor the GCs who accept the bid.

The risk to accept a poor bid may lead to many sleepless nights and financial loss. As much as GCs work to avert this dilemma, this is not a simple solution in a highly competitive market.

Feast or Famine

General contractors never sleep. Their workload is always being burned off in a matter of months unless they are privy to long-term service contracts, or a sole-source competitive advantage (rare for sure). Hence, the GC’s workforce availability is volatile. It stands to reason that a contractor with little backlog and surplus staff may be more aggressive in a pursuit than a contractor with a full backlog and fully utilized staff. This iterative dance plays out in every construction company, and it often predicts how aggressively a firm pursues work (i.e. accepts risk). Even during busy times such as these, it is important to be a rational human being in pursuit of competitively bid opportunities.

Supply Chain Pressure

• Owners (clients) often are not aware of the dynamics within a competitive bid process. Those who are aware tend to empathize a bit more with the GC by providing more opportunity for discussion and clarification. This often leads to addendums and, on occasion, pushing back the bid date. Public owners have the greatest challenge because statutes dictate their process. Private owners have more autonomy, but speed-to-market mandates imperfect results due to compressed timeframes and limited resources.
• Architects are challenged to do more than ever with fewer resources. Therefore, they are placed in a precarious position to produce drawings with less time to conduct quality control. Absence of quality control warrants GCs and their subs to do a better job of review and clarification in lieu of opening the drawings a few days before bid where the opportunity to provide feedback is squandered.
• Subcontractors have limited ability to do more than react to what is drawn and described in the spec book. Thus, subs struggle to get supplier pricing, quantity take-offs, and labor productivity quantified, let alone scrub the drawings for more clarity and missing information.

A Better Way

There are countless approaches to improve the age-old rip and read bid process in construction. However, all of us have a role in making it better. Here are a few thoughts:

Owners

1. Establish dialogue with GC’s to understand how stressed the market is for competitive sub and material pricing. It may influence your decisions in establishing bid dates depending on how much work is bidding within a specific window – less pressure promotes better pricing and bid coverage.
2. Be accessible and help the GC clearly understand your design, timelines, and goals for construction. If GC’s reach out and do not receive feedback on questions, we guess and it usually results in costing the client more money.
3. Provide your architect with adequate resources. Insight from the user group, facilities team, and execs about your objectives enables the architect to provide a design that reflects your vision for the project. Better clarity permits a complete bid set and fewer loose ends, addenda, and post-bid value engineering/constructability analysis.

Architects

1. Challenge GC’s to offer input where appropriate. If there are design challenges, assemblies, or unresolved constructability issues, bring it to the attention of the GC to explore options prior to issuing the bid.
2. Clarify the bid form to include what is important in measuring the GC pricing. GC’s like to compete as long as it is an even playing field. A clear bid form with specific expectations for how you evaluate pricing makes it easier to level the bids and provide a fair comparison.
3. Where possible, establish realistic timelines for issuing request for bids and timely response on RFI’s. Clarifications received in the waning days of a bid make it difficult for GCs and subs to react to late changes in scope and materials. Late changes may contribute to lots of confusion and added contingency because service providers are unclear about what to include in the bid.

Subcontractors

1. Provide a complete scope of work with your price proposal. Sending a cover sheet that says, “I got everything,” does not make a GC feel confident about your bid. If you have it, please reflect it in the scope so the GC can ensure a complete bid for your trade.
2. Be timely on supplying a bid. Bidding your work is intense and costly, so be diligent in getting the bid in with plenty of time for GCs to review and hopefully write you into the sub-analysis sheet. If the number comes in post-bid, it was a lost cause.
3. You are the subject matter expert on your trade. GCs often do not understand the challenges associated with an assembly, building material, or constructability issue. Helping the GC gain better understanding likely results in better bid and chance of award.

General Contractors

1. Provide a backup option for subs who do not price up everything the way you scoped the bid package. Some subs do not offer everything requested, so have a backup plan for the mason who doesn’t do a type of stone work or custom feature, as an example.
2. Know when to fold ‘em. Decision makers are prudent to define limits and clearly understand what level of risk is acceptable. Sometimes a nice job just was not meant to be, and it is better to discover this before phoning in the final bid.
3. Assume charitably that the architect and owner have done their best to provide adequate detail and don’t do “The Cheap Fix” outlined above.

About Shiel Sexton – Shiel Sexton “Builds for People Who Expect More” and is a Top 400 Contractor as named by Engineering News-Record. Shiel Sexton is 100% employee-owned.

References:

Dyer, D., & Kagel, J. H. (1996). Bidding in common value auctions: How the commercial construction industry corrects for the winner’s curse. Management Science, 42(10).