Negotiating Contracts In The U.S.A.

by | Oct 3, 1993 | Articles

Originally Published in 1993
It is always important to note with whom you are dealing in contracts. It used to be very simple to know that the buyer was a contractor/installer. Today, however, with everyone trying to save money, the buyer could be the owner, the general contractor, the architect/designer, an importer, a distributor, or even an agent. In this article we will assume the buyer is the contractor/installer.

 

There are several phases in the bidding process. Many times initial bidding requests are for purposes of investigation and pricing only. Thus, there is no intent to buy the stone. The purpose is to estimate the job’s cost, including alternative material costing. Many times there are not complete plans on the job or many details are missing. These speculative bids are common. The evaluation of this costing is then presented to the owner to study whether or not it is within budget and affordable overall. Many times the job allows other materials for comparison, wood flooring, stone, ceramic, or carpeting. After further investigation the job is then redesigned. Sometimes value engineering is required, and the job will be out for bid again in several months. Value engineering means that they are going to study the costs and see what can be done to cut costs in various areas with a subcontractor’s input. Therefore, it is important that you ask questions when bidding such a job and try to understand the situation. Perhaps you can offer a voluntary alternate, a suggestion on how to cut costs. You should be prepared to follow up at a later date and keep abreast of this job and its progression.

When an architect has selected a stone, he normally has not investigated all the costs attributed to this stone. He uses general numbers that have been supplied to estimate budgets for the owner on what previous jobs have cost or what it should run based on a sales representative number for the stone. However, there are many variables to consider. What is the current exchange rate for the stone being bought? When will the stone be needed? Many times you can bid a job today, but the stone will not be needed for a year or more. What thickness, size, and finish of stone are required and how does that affect the estimated costs originally given the architect? The architect may have been given a budget cost on 30cm x 30cm x 2cm honed, and the job now requires fifteen other sizes, some parts honed while others are flamed or textured finish. What is the installation method and what costing was allowed for this? Whether the job is interior/exterior or floors/walls will affect the costs. It is important before giving out estimated costs that the architect give all proper information to the right parties to get the right estimates. So many times this is not the case, and the job is over budget. The job may require some cutting at the job site, or the stone may require repair if it arrived damaged. Too many times all parties concerned are not knowledgeable of the stone and the problems that may occur. Architects and contractors may treat the job like ceramic tile and pray there are no hidden problems that may arise.

 

The normal bid process follows several stages.

The architect and owner may select a general contractor or may put the bid out for general contractors to bid. Each general contractor will have a select group of subcontractors or installers he will request bids from in order to take their lowest bid. A typical job may have as many as ten general contractors bidding and, in turn, thirty subcontractors bidding it. These subcontractors may be ceramic tile setters, marble setters, mason contractors. etc. Generally, the lowest bidder will get the job. There are variables to this that must be considered, such as:

1. Was a specific stone and supplier specified in the bid documents? If you were that supplier, you will stand a better chance of getting the job. However, you must know whether or not the architect controls this with the general contractors and subcontractors. Many times there is no control, and the supplier will be shopped for lower prices. In certain states general contractors will take the supplier’s name off the bid documents to the subcontractors as they do not allow lock or closed bids for competitive reasons. In these situations, the general contractor may demand similar stones be quoted to lower the cost whether the architect agrees or not. One ploy that many suppliers use is to change the name of the stone in order to make it harder for others to bid the job easily.

2. Was an alternate stone specified or are alternates allowed either by demand or voluntarily? Many times the suppliers can offer other suggestions to lower the costs and make their bids more competitive. If in doubt, offer alternates voluntarily. Perhaps you can state “if done in this recommended size or thickness, the cost could be lowered to . . . .” Is there another stone similar to what the architect or buyer wants that may be less expensive?

3. When will the stone be required for the job? Some jobs are fast track, meaning stone will be needed within 90 days or less. Other jobs require shop drawings, sample submissions, and mock ups for approval, so the time could be nine months to a year or longer before the job requires stone. This can affect any supplier’s costs. Immediately on receipt of the request for a bid, ask the buyer questions about the job. The more you know, the better. The supplier should know that the stone may not be required for one year, what his labor costs are, whether ocean freight will be rising in that period, and what potential exchange rates are. In order not to raise costs, he may offer to purchase the stone in advance and store it.

4. What terms of payment are you offering? Many buyers require open account or payment terms, and others are willing to pay by letter of credit but want 60 day terms. Everyone is trying not to use his own money to finance this job. The typical contractor is not paid until after installation and this could take months. Always qualify your bid with payment terms at the time of bidding so no misunderstandings are made. This many times requires the supplier know to whom he is bidding and the credit worthiness of the buyer. Offering qualified buyers incentive terms of payment many help a supplier get the job. The mentality with buyers is they do not like to work with letters of credit. There are other secure methods of payment that could be negotiated.

5. It is important to advise the buyer of the lead times required to supply the stone as this may push the buyer to purchase sooner. Many problems have occurred because when the buyer was ready to purchase, there was not enough time to make it and bring in onto the job site, so another stone will be used or none at all. Always qualify this at the time of bidding. If you can offer a quicker lead time or better availability of the stone, you may improve your chance of getting the order.

6. Advise the buyer of potential problems with the stone and variations. This should never be taken for granted. The buyers or the architects may not know the variations as the stone was selected from a 10cm square sample. If there is to be variation, explain this verbally and in writing as best you can with color descriptions, veining, shading, spotting, pits or holes, seams or cracks, etc. Many jobs have been lost because no one knew of the problems or variations.

7. Know your buyer. The best result of successful bidding is to know whom you are dealing with. Having a relationship with the buyer and knowing how he works is important. As well, you should know the job and know who the players are before bidding it. Many jobs have been lost because the supplier depended on an importer or a contractor only to find out the general contractor was not the low bidder that his contact was working with, and he lost the job because he did not quote other parties. How much profit each buyer puts on the stone may vary from 15% to 30% or more. Jobs are lost not because your price was high but because your buyer’s price was high. Those who are aggressive normally will have a higher success rate of getting contracts.

8. Know the selection and variation the architect is willing to accept. Jobs are won and lost on this point. Some jobs are specified as a general term, such as “Rosa Porrinho,” but do not state which quarry or which selection, light, medium, or dark or whether seconds are allowed. Prices can vary from supplier to supplier based on this. The variation in price can be as much as 35%. If in doubt, qualify your bid and give the lowest price but state your selection. Most times the buyer will use your price and qualify his bid to show this selection. It is usually understood by all buyers that they will receive first quality stone, but this is usually a terminology that applies to workmanship and not selection. Not all buyers understand the stone and the selection, and it is the supplier’s job to tell them what they are quoting at the time of the bid.

9. Follow up on the job. Set time frames for when you will fax or call or visit the buyers and see what it is that they require to get or close the job. The mentality in the U.S. is persistence and service. People like to know that a supplier will support them and react quickly. When a bid is requested, respond the next day with a price.

The bidding process is very quick. Typically the architects will release the drawings to the general contractors and advise them they have two weeks or one month to make their proposals. Then the general contractors release these drawings, with a fee, to a potential subcontractor. These subcontractors have to go through a mountain of paper work to do a take off of the job and estimate the work to be done. This may take a week or two. They are then in a position to ask the suppliers for a quote. This may only allow the suppliers two days or so to respond with prices.

On the bid date give your prices to the subcontractors in the morning. Buyers ask for prices for the previous day but many times do not receive them until the morning of the bid day. Some general contractors will have favored subcontractors with whom they are confidential and show them other bids in hopes they will lower their bid and give them an advantage over others. After the general contractor is selected, usually because he has the lower price, everyone waits for the contracts to be signed assuming no changes in design are made. This process may take months before final negotiations of the subcontractors will take place. The general contractors may start again shopping the subcontractors to see how they can improve their profit on this job. The subcontractors may start shopping their suppliers to lower prices. Everyone starts negotiations. Even alternates to the stone specified may be studied. Usually within two weeks of the bid date the buyer can find out who was the successful low general contractor and whether his price to that general contractor was low enough to have a chance of getting this job.

Some suppliers have tried to bypass this process and go directly to the general contractor or the owner to see if they can cut someone out and save the owner money by buying directly from the supplier. This may sometimes work or may upset your relationships with the subcontractors. Everyone must make this decision sooner or later and know again who the players are.

It is always helpful for the suppliers to promote their products through architectural representatives directly to the architect. The selection process for the stone is important and allows the supplier to have advance notice of bids and to know the job and other information that his competitors may not know. Inviting architects to visit your quarry or facilities and help pay some of their expenses is always a good idea. It is an investment in the future.

Offering technical data on the stone and supplier qualifications is always helpful. Offer A.S.T.M. test data on your stone. Show the buyer how much better your stone is than an alternate stone being considered. Know the application for the stone and assure the buyer your stone will be suitable for the use specified. A supplier must constantly sell himself to buyers and show they are qualified to supply jobs, especially those more difficult than the customary 60 cm square pavers. A supplier should always have a form pre-prepared to fax or mail out with his bid showing expertise, testing of the stone, jobs done similar to the one being quoted, how he controls this stone, if possible, or any other selling points that will distinguish him from other bidders.

Finally, be prepared in advance to offer the buyer a discount. All buyers like to know they can negotiate and get lower prices and assistance from their suppliers. The successful suppliers will offer the buyer 5% or 10% or more when requested to help get the job even though this discount may have been built into the price at the time of quoting. Recently with the devaluation of the peseta by Spain at 8%, many suppliers faxed immediately and told perspective buyers of this opportunity which effectively lowered the costs and made it affordable for all parties concerned.

Contractors come in all shapes, sizes, and mentalities. The game of bidding a job and getting the job can be quite complicated as there are so many players and different types of people. What works in western Canada may not work in New York or Atlanta and is completely different for Mexico. Communication is most important and knowing the game and the players will help you win in negotiations.