The following
material is for informational purposes only. Before taking action that could
have legal or other important
consequences, PSMJ Resources suggests you speak with a qualified professional
who can provide guidance
that considers your own unique circumstances.
Some
clients will always select the lowest price in choosing an A/E firm. These
clients will obtain
quotes from several firms
and pick the low hourly rate as the winner. Clients who have “purchasing
agents” in control of selection, or who must approve the decision made by a
selection group, are always likely to base selection on perceived prices for
services.
So how can you avoid
playing the cut-rate game?
First, recognize
that clients who use price as the sole selection criteria cannot be converted
into “relationship” clients. They will not be
open to mutually supportive working arrangements.
Second, realize
that you can’t possibly be a winner every time in competitions like these. Some
other firm will always quote
lower; there are just too many firms out there.
Cut
your costs, keep your profits
Once you have accepted
that price will be the sole selection criteria, how do you respond (assuming
you have not decided to
avoid responding altogether)? The overall goal is to make your proposed prices look low, while not
compromising your basic pricing.
Here are some
high-leverage proposal tactics that, in a low-fee competition, will allow you
to quote
lower hourly rates, while
keeping a higher profit potential:
• Make your price (or
rates) dependent upon being paid 50 percent of the fee up front as a retainer.
• Make the payment terms
10 days—rather than 30—from date of invoice (with a high late payment penalty).
• Don’t just limit your
liability; include a “hold harmless” clause shifting responsibility to the
client
for design errors.
• Eliminate any redesign
that would go over construction budget bids. State that this will be an
additional service.
• Add a higher percentage
markup to subs and reimbursable.
Try
some fixed-price tactics
If you are quoting a
fixed-price fee, try these scope modifications:
• Have all project
meetings at your office, thus eliminating local travel time. Include any travel
time as an additional service.
• If you prepare zoning
permitting applications, do it as an additional service.
• Clearly state that you
will use “proven design solutions,” and then reuse as much as possible from
prior projects. Studies and new solutions will be additional services.
• Be very clear in stating
the number of things you will do as basic services. It’s not enough to say
“monthly meetings”; you need to say “6 monthly meetings of two hours each,
attended by the project manager.”
• Flatten your hourly
rates by lowering the principal rate and raising staff rates. Clients who are
price-sensitive often focus only on the highest rates.
The
best tactic: offer choices
What happens when the client
calls and says, “You have the job, but we can’t pay a retainer”? The secret is
to be prepared with pricing options. Be ready to say, “We can skip the
retainer, but the fee increases by 2 percent.” Even better, if your
proposal offers the choice of either a 50 percent retainer or a 2 percent
additional fee, you can refer the client to that part of your proposal.
A key to this approach is
to include a standard “terms and conditions” page in your proposal, and then
send it along with your price quote. Think along the lines of airline tickets
or rental car agreements that print limitations on the back (although we do not
necessarily recommend using 4-point type).
Does
this sound like we are advocating you act like a contractor who relies on
change orders? Quite frankly—yes.
In low-bid situations, if you don’t strictly define what your
price includes, and then charge for
services beyond that price, you sacrifice
profit. This applies to all businesses, not just A/E/C firms. Your
other choice is simply to say “no” when asked to bid
in a price-only competition. If you don’t want to limit your services or
quality, this may be the more profitable way to go.
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