What To Do With Huge Bid Variations

What To Do With Huge Bid Variations

Written by Marty Latz, Latz Negotiation Institute

We recently solicited bids to repaint our house from three residential painters/painting companies, all of whom came recommended by friends or family. We also requested bids for an upcoming home renovation. (Yes – our house needs some work!).

Despite having gone through this for similar projects 10-15 years ago, I was still surprised to receive a huge variation in the bids. In fact, some were almost twice as expensive as others.

My corporate procurement clients have also shared similar stories of variations in their bids, which run into millions of dollars in differences.

What is going on? Assuming the bids include the same scope (apples to apples, right?) – and this obviously needs to be investigated and confirmed – then how can this be explained?

Three main factors should be evaluated in these negotiations.

1. Explore their Plan Bs

Some bidders may be much busier than others. And the busier they are and the better their Plan Bs/alternatives to doing a deal with you, the stronger their leverage. This often translates into a higher bid to you – sometimes much higher.

One of the painting bids, for example, came from a larger company that does a lot of work for homeowners’ associations. It regularly gets hired to paint multiple patio homes and condominiums. Its average project is much larger than for one single family home (assuming that home is not owned by a billionaire!). And it does great work.

But in bidding on single homes, it bids based partially on its other work/Plan Bs. This makes sense for it. For us, this took it out of our range.

Importantly, just because it’s busy and has a higher price does not mean better quality. It’s possible. But it also might mean it has great salespeople or a more effective marketing department that brings in more business.

2. Assess their costs and margins

When we bought our house over 20 years ago, we decided to build a guest house and bid it out. One bid came from a builder recommended by an extremely wealthy friend. His bid was double the others.

Why? Because he mostly did work for extremely wealthy individuals. Interestingly, his quality was equivalent to the others (although he said it was much better). But he just worked for a lot of clients who weren’t price sensitive. In fact, some considered him great because of his high prices.

In effect, he charged a “wealth premium” and had an extremely high profit margin. My attitude? Good for him. But not for us.

My negotiation point? Assess the bidders’ costs and margins, which include overhead, personnel, materials, profitability, etc. My regular column readers will recognize these as elements of my Third Golden Rule of Negotiation – Employ “Fair” Objective Criteria.

Here’s another example. Last year we considered replacing six windows in our house. One bid was a bit greater than the others. Why? Because it needed to cover its higher overhead costs, which included significantly more on sales and marketing than the others.

How did we find out? By asking each bidder how it differed from its competitors. I then confirmed its reputation with friends in the industry.

3. Focus on your non-financial interests through independent references

I recently had lunch with a client who built a very successful homebuilding company from scratch. Since these renovation bids were on my mind, I asked him what he considered most crucial in choosing amongst the bids. “Check their independent references,” he said. He was right.

I would add the following. One, don’t just ask for references. If you only do this, they might cherry pick ones that may not give you the straight scoop. Instead, request a list of customers from the last year or so. Then contact at least three.

Two, when you speak to each (and I would recommend a call), get a detailed explanation of the bidder’s strengths and weaknesses. Don’t be satisfied with just “he’s a great contractor.”

Instead, explore how the bidder might satisfy your crucial non-financial interests like quality, expertise, experience, responsiveness, style, customer service/satisfaction, etc. Ask for examples. I sometimes even request ratings for each on a 1 to 10 scale.

Some might call this overkill. But it’s well worth it if you’re looking at a significant project.

I learned this the hard way years ago.

Latz’s Lesson: If you get a huge variation in bids, check out their Plan Bs, costs and margins, and especially their independent references.

---

Marty Latz is the founder of Latz Negotiation Institute, a national negotiation training and consulting company, and ExpertNegotiator, a Web-based software company that helps managers and negotiators more effectively negotiate and implement best practices based on the experts' proven research.  He is also the author of Gain the Edge! Negotiating to Get What You Want (St. Martin’s Press 2004). He can be reached at 480-951-3222 or Latz@ExpertNegotiator.com

ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN • Premier Indiana CLE