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2015 TOCICO International Conference

Transforming Businesses Track

Russ Johnson
Associate Professor
Washington State University

Transforming the Competitive Bid Game-A Sub-Contractors Mafia Offer to a General Contractor
September 7, 2015

Winning work through the competitive bid process can be extremely difficult and frustrating and doubly so if you are a sub-contractor who can only get the work through a winning bid with a contractor who also has the winning bid. Additional frustration comes from the reality that it is common for only one or two bids per ten prepared to result in winning a contract. Add to this the fact that most bids are lost by less than two percent of the total contract price and you have an environment that is anything but fun and very often results in feast or famine circumstances for the individual businesses.

This presentation shares analysis that was done and the material that was prepared for a Woodworking Millwork sub-contractor’s Mafia Offer to a general contractor. The offer was developed to create additional business to leverage significant capacity revealed after implementing DBR and Critical Chain in the organization.

To make this offer required a breakthrough realization for the sub-contractor and being able to capitalize on that breakthrough in a way that insured that the general contractor won the bid and the sub-contractor also got the job. The sub-contractor realized that the work they currently had under contract was sufficient to at least breakeven financially for the next 9-12 months at their previous productivity levels where it would have consumed more than 95% of their available capacity. With the DBR and CCPM improvements they had realized, the same work would take less than 70% of that capacity. Since the existing work already covered their operating expenses, any additional work that could be performed using the remaining available capacity only had to cover the additional truly variable costs associated with that work. Even if there were some minor increases in OE, the gap between their cost for this work and the price the market would pay was between 40% and 50% of their traditional pricing.

The next challenge was how to sell this opportunity. To simply bid more work at a significantly lower price had several potential negative effects and was insufficient to insure winning that work as the general contractor still had to win the bid. They needed a way to insure that their lower price not only guaranteed them selection by the general contractor but also gave the general contractor 90% or better odds of winning the larger job.

The offer led the contractor through several steps:

  • Agreement that there was a common problem: Both the sub-contractor and the general contractor suffered from several similar circumstances in the competitive bid environment:
    • A large investment in a bidding staff that returned less than desired results
    • Pressure to cut this staff and expand it at the same time
    • No approach to significantly improve there bidding success
    • Pressure to switch to negotiated contracts versus competitive bid to generate work but the realization that the switch is blocked as the skills needed to succeed were different than the skills present in the bidding staff
    • Knowledge that they were losing most bids by less than 2% of the final contract price yet were unwilling to lower their bid price any further.
  • The injection: The sub-contractor would offer a discount on their bid sufficient to lower the general contractor’s bid by 1%-2% of the total job price which would improve the odds of winning the overall bid to over 90%.
  • How the sub-contractor could afford to do this: The above mentioned fact that this work came without overhead and other costs.
  • How this would work: An exchange of lower margin for significantly improved cash flow for the sub-contractor which would require the contractor to not hold retention (up to 10% of the price through and beyond the end of the project), pay the subcontractor’s suppliers directly and pay progress payments every two weeks and in no more than two weeks of submittal.
  • A second part of the offer: Exclusivity – A payment of a job end bonus (.25%-.5% of the total Job price) to the Subcontractor in exchange for the General contractor having sole access to the price reducing offer.
  • Other benefits to the general contractor
    • Ability to strategically pick jobs to pursue (clients that may be doing multiple projects over several years)
    • Significant gains in productivity of bidding team
    • No more conflict in the form of pressure to increase and decrease bidding team staff at the same time, and many more

The presentation will also share the other limiting issues for the subcontractor, significant losses due to errors that had drained cash and consumed bank and supplier lines of credit, and how this proposal addressed those issues as well.

The presentation will include what worked, what didn’t work and what to do differently in the future.

RUSS JOHNSON has been teaching and implementing Theory of Constraints, Lean and Six-Sigma/Quality Management tools and concepts at the university level for many years. During that time he also worked in conjunction with the Iowa Small Business Development Center and Colorado’s Manufacturing Extension Partnership to bring these concepts to more than 100 companies via student centered projects and direct consulting.

He has many published articles and professional association presentations on supply chain management, project management, Quality systems/Six-Sigma, lean production and Rapid prototyping/rapid tooling. Dr. Johnson is certified in the TOC Operations (Drum-Buffer-Rope) and Supply Chain (Replenishment) Management and TOC Critical Chain Project Management applications by the TOCICO. Dr. Johnson is also an active member of several professional organizations including ASQ, APICS, SME, and TOCICO.

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