The price is not right

It’s simple economics: An upturn in business activity leads to stronger demand and to increased prices. But this doesn’t seem to apply to construction consultants. 

At Pellings we are seeing the practice of low margin and unrealistic bidding continue in London and the South-east housing sectors where we operate, and I understand it is still widespread across many different parts of the market.

Recurring low bids seem to contradict basic supply-and-demand economics. The construction sector is recovering. And, in addition to this, as we all know, the construction industry has a shortage of skilled people. So it is confusing to see some consultancies still bidding for work at levels that must be near nil-profit.

Why is it happening? Perhaps the most prominent reason is that clients are still encouraging low-margin bidding. This particularly applies to publicly funded clients who remain under significant pressure to find savings, while other private clients have simply become accustomed to low prices.

Many client tenders place 70% of importance on our price for delivering a project, and only 30% on quality. Clearly this is the client indicating that cost remains by far the overriding factor, and naturally leads to consultancies saying: “If we’re going to win this one, we need to be right down there on price.”

Consultancies clearly do not feel confident enough to raise prices, or say no to clients demanding work on low margins. This wouldn’t happen in a truly strong market

In my view, this indicates that there is probably a lower level of confidence in the market than some perceive. Firms aren’t yet being selective about the work they take on, with their primary concern still being to fill their order book. Despite rising costs, consultancies clearly do not feel confident enough to raise prices, or say no to clients demanding work on low margins. This wouldn’t happen in a truly strong market.

I suspect the strategy within some consultancies is to win work now, with a view to pushing prices up later once the project has begun. But clearly this is not great for client relationships, and gives the impression that we are disorganised and unable to plan our work.  

A slightly more positive reason for continued unrealistic bidding could be that mergers and acquisitions are again back on the construction industry’s agenda. It is plausible that management teams are winning as much work as possible, regardless of the fee, to inflate their turnover and prime their business for a sale. Many company boards and shareholders have been waiting for an exit opportunity, and now looks like a good time to do it.

In addition, the recovery is likely to be increasing low-margin bidding through stronger competition. Renewed confidence is giving companies the courage to enter new sectors for the first time, and they naturally bid low to gain a foothold in their new market. We are seeing this from large publicly quoted companies entering the residential sector, as well as start-ups that have sprung up during the recovery.

So it seems a number of forces are combining to encourage unrealistic bidding. But the practice is unsustainable - whether you are a new or well-established business.

Firstly, consultancies working for low margins are not motivated. They are more focused on winning the next job than the current one, which is no good to anybody. A good and more experienced team will manage these risks effectively with a strong procurement strategy, lowering the chances of extremely costly mistakes.   

Perhaps the biggest risk of low bidding is that consultancies charging very low prices are going to find themselves in deep trouble. A strengthening recovery will see their employees jumping ship to obtain higher salaries elsewhere, leaving them unable to deliver the product.

Professional organisations such as the RICS must start addressing the issue. Chartered surveyors through their code of conduct are required to provide a high standard of service, but some practices cannot possibly be delivering one for the prices they charge. The RICS should be tougher on monitoring its members’ level of service, and punish those below par. This would flush out the lower-quality players.

Client industry organisations such as the Chartered Institute of Housing should also remind members not to focus on price alone. Procurement strategies should be reviewed regularly, and more incentive-based fees should be introduced where consultants benefit from positive contributions and genuine value savings.

Also, more must be done to educate politicians with control over public sector clients. At a recent bidders day I attended for a London borough framework the 70% price to 30% quality issue on tender briefs was raised from the floor. The borough’s procurement team responded by saying they recognised the issue but couldn’t convince their superiors to change their view. We must persuade politicians that this strategy is costing them more money, not saving it.

But above all, the solution lies with consultants. We must realise that low bidding is unsustainable and of detriment to everybody in construction, and not shy away from explaining our services and prices to clients.

Richard Claxton is chairman of consultant Pellings