Construction Business Management

Article

Competition, Risk, and Construction Company Failure

The construction industry has been for many years, and certainly continues to be, one on the most highly competitive of all industries. Second, risk permeates the industry in general and construction operations in particular. Third, the failure rate for construction companies is among the highest of any business.

Competition is at the heart of most contract awards in the construction industry. For many years in recent U.S. history, owners (who decide what the contract award system will be for a construction project) have employed lump-sum competitive bidding or unit-price competitive bidding as the primary method for awarding contracts to prime contractors. In these contract award systems, a series of documents, called the contract documents for the project, describes in detail the work to be done and sets forth the owner’s requirements in the work. With this complete set of contract documents in place, contractors who are interested in the project will prepare proposals, or bids, wherein they set forth their proposed prices on a lump sum or unit price basis. These are the prices for which they would be willing, if selected by the owner, to enter into a contract to fulfill all of the requirements of the contract documents in constructing the project for the owner.

Contractors’ proposals are submitted to the owner on a specified date and time, and in a designated location. Typically, the contractor who submits the lowest bid, or the lowest valid bid, is selected by the owner to be the contract recipient. So contractors are in competition with one another for the contract award, based on the lowest price for which they are willing to enter a contract to fulfill the contract requirements as established by the owner.

The rationale on the part of the owners in their use of this contracting method is that if the contract documents completely describe all aspects of the work to be performed, and if all of the bidding contractors prepare their proposal prices based on this same information, then the owner will receive the benefit of all of the contractors competing with one another for the contract award. The owners can then make a decision based on the price submitted by each contractor. Thus, the owner will know what he or she will receive, that is, what the contract deliverables will be, as described in the contract documents. Additionally, the owner should be able to have the work performed at the best possible price, based on the competition by contractors for the contract award.

While other methods of contract award are frequently employed today, competitive bidding is still very commonplace. Even when methods of contract award other than competitive bidding are utilized by owners today, competition among contractors for the award of the contract from the owner remains central to the project delivery method of choice. The competition may be based on many different criteria, such as contractors’ record of successful projects completed in the past, the quality of work performed, quality assurance programs, safety records, qualifications and credentials of the contractors’ personnel, and so forth.

Competition among contractors for the contract from the owner remains at the heart of owners’ seeking to obtain maximum value for their construction contract expenditures. Additionally, in the same fashion in which owners place contractors into competition for the award of the prime contract (the contract between the owner and the prime contractor), prime contractors typically employ a competitive methodology with subcontractors for the award of the subcontracts to the specialty contractors who will be selected to perform work on the project.

From the foregoing, it can be clearly seen that competition among contractors is, historically and today, very deeply embedded in the culture of construction contracting. Every indication is that this fact will remain a constant in the industry. Construction contractors continually are in quest of some means of achieving a competitive advantage, so as to maximize their prospects for the award of construction contracts.

Want to learn more? Check out Construction Supervision by Jerald L. Rounds and Robert O. Segner.


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