A peer-reviewed study recently demonstrated the value to be gained by opening up bidding. The simple expansion in the number of bidders from three to five can yield as much as an 11.6% drop in the low bid.
Competitive Bidding has Evolved
You don’t need to spend more in terms of time and resources going through the process of bidding than you’ll save in getting a lower proposal. You do need to have good processes in place to run an efficient bidding process, but that process should only need to be created once.
You need a few basic things in place to start building a strong competitive bidding process: A shared directory of up-to-date vendor contact information; a standardized bid template; a centralized way for everyone on the team to access the most up-to-date documents from any device; a clear scope of work; and, access to your Department of Buildings permit information.
If you’re manually leveling bids, it’s no surprise that your team is disincentivized to invite multiple bidders. With an automated bid leveling tool, you will align your cost-savings goals with the limited amount of time that your team has to manage the process. The software does the administrative work, freeing your team to spent their time on critical business challenges.
The real estate industry is built on relationships. You probably assume the service providers you’ve worked with for years are the best for your projects, and you may very well be right. Familiarity with process, company culture, and mutual expectations are strong factors in favor of maintaining a go-to team.
Competitive bidding on your projects is a critical part of optimizing project and portfolio returns. It’s ok to pay more for vendors that you know will deliver a quality product, but you have to know exactly how much more it is. Competition yields these insights.
Additionally, multiple bids reduce costs and mitigate risk. According to a study published in Journal of Construction Engineering and Management, competitive bidding leads to an 8% reduction in the “bid low price.” This cost reduction increases as the number of participating bidders increases.
Before you decide to skip competitive bidding and give your new project to a ‘go-to’ vendor, ask yourself these five questions:
1. Is Your Organization Evolving with the Industry?
Technology is changing every facet of the way that people do their jobs. Real estate has been slow to adapt, but the curve is quickly pointing up – industry leaders are leveraging technology to drive transparency, efficiency, and higher project returns.
If you are sticking with vendors based on past relationships, are you falling behind the innovation curve? Are there newer ways to manage your projects? Are there more efficient ways to get quality work done at better prices?
Your vendors should be as diligent at modernizing and making their shops more efficient as you are. Whether your ‘go-to’ vendor is still faxing in change orders or resisting modern construction practices, the cost of inefficiency is added to your bill.
2. Do You Know the Opportunity Costs of not Putting Work Out to Bid?
Competitive bids reveal the cost of sticking with a preferred vendor for a known level of work. Over time, you can work with preferred vendors to manage their costs based on fair market value – if you establish your baseline.
3. Does Your ‘Go-To’ Vendor Competitively Bid out Their Material Costs?
If they assume they’re already getting the best deal or don’t see a reason to negotiate with suppliers, you might be missing out on trade discounts.
4. Are They Becoming Complacent?
Does your ‘go-to’ vendor assume they will always get your business and get to charge the price they want? Even if you continue to work with the same team, getting comp bids will give you confidence that you’re getting the best rates and it may help you negotiate a better price when you’re not.
5. How Dependent is Your ‘Go-To’ Vendor on you for Business?
Do you know how much of your business comprises his total business? It might seem beneficial to be your vendors’ primary source of work, but you’re putting yourself at risk. As a general rule, your vendors should derive no more than 20% of their income from any one customer.