Updated: 11th April 2020
Suicide Bidding: Lessons from Carillion
Put simply, suicide bidding is the practise of contractors submitting tenders for jobs at relatively low prices in an effort to compete in an increasingly squeezed economic landscape. This bidding war results in contractors agreeing to take on work which will see them breaking even, or even making a loss but maintain turnover and keep its’ skilled labour working. As the name suggests, this practise can be ruinous to the future viability of a company should it continue to operate in this way.
In a stretched and uncertain environment where cost versus quality may be a deciding factor, or overall demand is stagnating then many contractors may find they have little alternative but to aggressively reduce their bid in order to secure contracts and keep work and money coming in, in the hopes that things will improve in the future.
A necessary evil?
Some contractors are finding themselves faced with the prospect of either winning contracts at a low price, or missing out on securing work altogether; for many they feel it is better to acquire a job with tight margins than failing to obtain work at all and risk losing their workforce as a result. However, with profit margins so lean, there is little room for error; should problems be encountered during the contract the company’s financials could be placed under extreme pressure. RBR Advisory’s Paul Barber commented:
“When competing for jobs, often work is price sensitive. In many cases, charging the lowest price might seem the best option for gaining a contract at that time. But the old adage that ‘turnover is vanity, profit is sanity and cash is reality’ can be overlooked.
“Subcontractors should go into these projects with their eyes open. They need to ensure that their costings are absolutely accurate, their terms and conditions are tight enough to take account of unforeseen circumstances, and that they maintain strict financial management throughout.”
The construction industry in a post-Carillion world
The collapse of Carillion should have been a wakeup call, serving as a stark reminder of the precarious nature of the industry, and how continually shaving costs is an unsustainable business strategy in the long-term even for huge companies.
While the issues Carillion were dealing with were numerous, at least a portion of their problems can be traced back to a trend of engaging in suicide bidding. Paul explains:
“In simple terms failures like Carillion were down to them running out of cash. This should be a warning to other contractors engaged in the dangerous act of suicide bidding; if the low price contract does not have enough profit in it to start with, or should an unforeseen circumstance arise during the work thereby causing further costs, then you can very quickly run out of cash. Once this happens, the situation can turn sour very quickly, cash flow difficulties being a common cause of business distress and indeed insolvency.”