Introduction
As the effects of the COVID 19 lockdown take effect there have been a number of knee jerk reactions and interesting demands by builders for large discounts (up to 30%) on future tender prices.
In this article we consider whether providing such a discount is wise.
The immediate situation
All we know is that things are going to be harder than they have been and prices are going to drop.
Essentially, everything is going to be stress tested.
How much harder and the extent to which prices will drop is an unknown.
However, the reality is that they do not drop dramatically overnight.
Prices will trend down. While that trend may be steep, it does not fall off a cliff.
Why a trend down?
The reason for the trend down is that:
- There are projects in the system that have not taken new prices structures into account;
- Suppliers are still geared to levels of expenditure which mean they cannot provide reduced prices;
- Labour prices have not reduced as a result of the unemployment rate; and
- Subcontractors still have to pay pre COVID 19 prices for items they had previously bought on credit.
Extinction pattern
Previous experience shows that those who race to the bottom, especially subcontractors, are the first to become extinct.
The worse than the bottom is buying jobs below cost for the sake of keeping work crews together. This environment is going to be around for a longer period than anyone has the resources to fund losses.
You would be better off sitting on the beach.
At the bottom are those who quote at cost. That is also buying the job at less than cost because projects where that happens are always badly run and result in losses due to delay costs and the builder stringing you out for money. The consequence is that you inevitably run out of money before things get better.
You would be better off sitting on the beach.
What should you do?
The answer is simple.
Do what you normally do to price a job based on the:
- Quantity of materials to be supplied;
- Number of hours needed to install the materials;
- The price you will have to pay for those materials and the labour;
- A buffer for all that extra stuff and being messed around on site; and
- Profit.
As the prices you have to pay drop due to economic factors you can also you’re your prices.
If you are not winning contract because you are engaging in good business sense then sit on the beach.
Arbitrary discounts
Do not just jump in and offer arbitrary discounts that do not bear any reality to the pricing structure in the market.
You never know, that discount may not be sufficient if materials and labour prices drop enough.
Assessing the correct price based on what you will have to pay is the most appropriate course of action otherwise you would be better off sitting on the beach.
Where you can save
Evolution was not driven by giant leaps forward.
You only had to be about 1% better than your competitors to outperform and outlast them.
The same issues apply in this environment. You can make sure you are doing better than your competitors by:
- learning the lessons of the Survival Course;
- encouraging timely payment by applying 67P Interest;
- learning the lessons of the Survival Course;
- taking advantage of the Contract Management System so that you are always in a position to claim what is legally owed to you and delays are paid for by the builder and not you;
- using the Subbies Budget Control to make sure nothing gets out of hand; and
- saving accounting fees using CS4T to stay on top of your minimum financial requirements.
Contact us if you want us to help you.
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