Volume 39,  Issue 11,  November 2004

Dear USG

How Low Can We Go?

Dear USG,

About a year and a half ago, I took part, rather reluctantly, in a Target reverse auction for two stores in New Jersey. I was reverse bidding on the glass and glazing package. We could reverse bid on either store or both: separately or together. 

The general contractor was a local firm, most noted for retail construction, with quite a bit of “big box” experience, and at least one Target store on its resume. We were invited to a pre-bid meeting where we met the other glass and glazing subcontractors who would be participating in the bid. A representative from Target’s construction division was present, and the procedure for the bid was explained to us. The scope for each store was defined 
precisely, and we left with plans and specs. 

It became apparent at the pre-bid meeting who would be the most aggressive in pursuing the project. We were required to have high-speed Internet access. The process would have us all meet by conference call via a website to run through a practice session. At the website, we would log in and go to a page where our bids would be posted anonymously. We were brought through the process by telephone along with the general contractor and a Target representative. 

I had designed a spreadsheet where I could adjust the margin on various elements of the work simultaneously, thereby allowing me to see exactly how low I could go. The metal and door packages were national account items, shops and fabrication by the manufacturer, and bid to us directly by U.S. Aluminum and Vistawall. We were furnishing brake metal, glass, some mirrors and some miscellaneous glass and glazing items. The margins were in the labor and general conditions, and Target knew exactly what the metal was worth, including the brake metal, as they have only three or four prototype stores. I couldn’t help but feel that this was nothing more than running work through the company merely to keep everyone busy. It wasn’t going to be one of those jobs where you have any “fluff” to fall back on should something sour along the way. 

The day of the bid, we logged on to the website where we would see the bidding action. A starting bid was established for each store individually, along with the package price for both stores. The bidding descended in factors of $2,000 for the individual stores and $3,000 for the two-store package. This meant that once a bid was posted, you had to lower your bid by $2,000 or $3,000 depending on which stores you wanted. For 
example, when a competitor bid $100,000 for a single store, he could expect to “re-bid” for $4,000 less than his previous bid should someone step in to bid under him at any time. 
The half-hour session started slowly, as expected. With about five minutes to go, the real action started. Within that time the prices fell fast. It became apparent, with a minute or two to go, that two of the four bidders had stepped out, leaving me and the “aggressive” contractor battling it out. I must confess, I goaded the “aggressive” guy to take $6,000 hits as much as I could. When I hit my bottom number, I bid one more time, just to zap the guy for another $6,000. He bit, and got the job. By my numbers, he was working for 
less than a 15-percent margin, hardly worth turning the lights on for. 

After the process, we each decided that we would not take part in being anyone’s stalking horse, and I told the general contractor not to include me in any more reverse auctions. This method of procurement encourages pricing that only justifies the owner or contractor in getting you to work for little or no margin so that they can build for next to nothing. 

I am reminded of what happened in the 1980s when construction management became the preferred technique for owners. As our material and labor costs became common knowledge, the owners and CMs chipped away at margins little by little until the costs that were hidden were no longer covered by margin. By this I mean the true cost of designing the job from the architects “vision,” the costs of coordination with the other subs necessary to perform our work, the painstaking estimate costs … whenever we tried to recover these costs by line item, we were rejected by CMs insisting these were in “overhead” even after they decimated our overhead. I believe the only way to stop this type of bidding (often touted as the way of the future) is to participate. But, I dream too much … there will always be the guy who thinks he can do it for less, and make money. Too bad.

Name Withheld Upon Request 
Hawthorne, N.J.
 


USG

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