« Looking In The Mirror | Main | Should Employees or Customers Come "First"? »

Construction Pricing Negotiation

Yesterday I had a long drive to a client site and picked up an audio book for the trip called "Often Wrong, Never In Doubt" by Donny Deutsch which focuses primarily about lessons he learned building an advertising agency in NY. In one chapter he discusses the pricing models for advertising which in construction terms is T&M or Cost+. The rates were based on a formula designed to cover salary costs plus an overhead allocation and mark-up for profit.

One of the trends in the advertising world was that some of the large clients like Phizer started coming into the agencies with auditors and "analyzing" these costs - checking to see how much actual salaries were, what rent on the building was, etc. They were trying to make sure the mark-ups were "fair!" While these audits may have looked for the things that were easy to measure such as costs and mark-up they did not take into account anything else that mattered. They were not comparing actual billable rates against competitors. They were not comparing actual work done for a certain amount of hours (productivity) against competetors. They were not comparing quality or results either. These auditors were simply looking at costs and making sure that the markup was as low as possible! Donny states that he doesn't know of any other industry that is subjected to this - well, here's one - CONSTRUCTION.

Almost every day in construction a project manager or estimator is asked for "backup" for their pricing by a customer or potential customer. This is especially bad when working on a T&M job or change order. Whether a customer has any construction experience or not for some reason many of them turn into these construction operations gurus when it comes time to review a proposal, bill or change order. They start asking all kinds of questions such as why does this take two people, this activity should have only taken X time, why does this guy have a company truck, why is your overhead so high, etc.

Many times their right to this information is in your contract and if it is you should be aware of it but also remember that as soon as you start negotiating pricing based on your costs you have already started down the wrong road. From the very first conversation you have with the customer you should be positioning for value - whether it is your speed, quality, ability to start ASAP, etc. Focus on what makes you different from your competitors. If you start talking about costs then the conversation has shifted and you are no longer a valuable service - now you are considered a commodity and like rice or grain will just be paid for in a similar manner.

One other thing to keep in mind - the customer only wants to talk to you about pricing based on your costs when things are going well. If things go bad and your costs go way up then they would prefer you stick to the lump-sum price. If you give in constantly when negotiating pricing when things are going well you will not have enough money left over to cover the risks when things will inevitably go wrong.

Posted by David on August 2, 2006 05:11 AM|Permalink

TrackBack

TrackBack URL for this entry:
http://www.dbrownonline.com/mt/mt-tb.cgi/99