Project Playbook: The Science of Bidding

Whether it is the allure of finding buried treasure deep in the dark recesses of a storage locker or the feverish psychology of a bidding war, America has found a new reality television phenomenon. “Auction Hunters,” “Storage Wars” and “American Pickers” tap into viewers’ desire to get rich. The success of these programs has impacted the number of bidders attempting to strike it rich. 

Of the top rated programs, “Auction Hunters” features two experienced diggers named Clifton “Ton” Jones and Allen Haff. While the program focuses on lost and abandoned relics and artifacts of bygone owners, the show teaches a great lesson about discipline.

During their weekly excursions across the United States, Jones and Haff have five to 10 minutes to establish their budget or “estimate” on the unit. Their estimate must be based on observations from the threshold. They quickly tabulate their expected haul based only on what they can physically see. A casual glimpse of an antique armoire, a glimmer of precious metal or even the flash of gunmetal all provide contextual evidence for their bid. 

More often than not, these units quickly proceed into bidding wars. The auctioneer rattles off bids at a frantic pace, and the bidders feverishly raise their paddles. But Jones and Haff stand fast and avoid getting caught up in the frenzy. Once mob mentality takes over, the veteran duo simply walks away. They understand they could be walking away from “buried gold,” but they always reflect on their overall success rate. For every successful unit—one that yields a high margin cache—they may have 20 to 30 units that fail to produce a profit. 

As bid lists have ballooned with their television success, emotional, uneducated bidding has risen. Jones and Haff simply shake their heads as bids escalate beyond their budget.  

Today’s construction marketplace resembles an overpopulated storage lot. Bidders look at a bleak economic environment and cast their bids carelessly. “Keeping the iron moving and crews busy” has become the rallying call of many desperate businesses. They no longer act disciplined.

Bad Reasons to Bid

In the “race to the bottom,” contractors have moved toward emotional bias and away from methodical decision-making. How often do contractors say, “We had no business bidding on that project”?  Here is a short list of bad reasons that plague the decision-making process:

• Location—Some contractors work in locations they cannot afford. They allow their egos to write the checks.
• The Best Customer Label—Contractors toss around the “best customer” moniker very loosely. Do you win projects because you truly provide value or because you do work below your costs and overhead?  Do not confuse customer loyalty with poor job costing.
• Equipment Cost—Contractors sometimes think their equipment does not cost anything since they own it. Applying direct costs, such as the cost of owning equipment, can become distorted because these costs can be manipulated to zero. 
• Competition—You do not know your competition’s cost structure. Do not base a bid decision on what your competition can build. Learn from them, but do not bet the farm on it.

These specific examples share a common thread: the power of emotions and a lack of discipline. People usually base poor decisions on a short-term and myopic perspective. Making a decision based on your gut feeling can pay off sometimes. But in other instances, making business decisions without consulting your brain can often lead to terrible consequences. Ultimately, successful businesses have found a happy balance between subjectivity and objectivism.  

The Evaluation Tool

The greatest decision-making processes use fact-based criteria garnered from the firm’s historical performance. For instance, from the time contractors uncover an opportunity, they have a “locker full” of data. They know the potential number of bidders, customer history, past performance in that geography or niche, designer performance and their own backlog (relative to the estimating department and the firm). 

While one of these factors may not disqualify a project, three or four unfavorable characteristics may portray a less than flattering picture of the future. Best-of-class decision-making tools use a scoring system directly tied to past performance.

Scoring your company allows you to identify critical success factors. The scoring criteria should be based on how the firm has performed over a given period. The criteria could change and should be regularly reviewed because market conditions and the demand for goods continue to change. 

Also, scoring by one firm may vary dramatically from another. For instance, in the case of location, one firm may exhibit higher performance on projects further from their office, while their peers demonstrate the opposite. One size does not fit all—this truly requires customization. Once again, your score should be based on your firm’s historical record. After examining two to three years worth of completed projects and grading them post mortem, you can easily create this benchmark.

The Decision

The scoring system should create a tool that stimulates discussion and provides contextual arguments for or against specific projects. Ultimately, this eliminates making decisions in a vacuum and creates a more collaborative environment. Jones and Haff always discuss the power of their partnership, and they constantly communicate before and during the bid process. As they define their bidding criteria, they routinely play devil’s advocate and challenge each other’s perspective—can we really sell that for a profit, and what do we know about the bidders at this lot?

Evaluation Tool

A Scoring System for Estimates

Use this scoring system to choose projects (1 is the lowest score, and 5 is the highest):

Customer History

• Score of 1—No history, negative feedback from contractor community, poor Dun & Bradstreet score (where applicable)
• Score of 3—Completed projects in the past, average ability to pay on time, hard bid purchasing (commodity perspective)
• Score of 5—Preferred relationship, value-based pricing, no issues with accounts receivable

Location

• Score of 1—Greater than 50 miles from the home office/yard/warehouse
• Score of 3—Approximately 25 miles from the office/yard/warehouse
• Score of 5—0 to 10 miles from the yard/warehouse

Number of Bidders

• Score of 1—Eight to 10 potential bidders
• Score of 3—Three to seven bidders
• Score of 5—One to two bidders

Construction Business Owner, January 2011