A tough economic climate can lead to an upsurge in suicide bidding – tendering at silly prices. Post-tender feedback during these difficult periods has highlighted some huge variations in bidders’ prices. This includes a significant proportion of bids at below cost.
What is Suicide Bidding?
Suicide bidding is where a tenderer bids way below the market rate in an attempt to buy the business. This means their bid will make much less profit than the industry norm. But it may well be below cost! Either way, the bid offer will be unsustainable long-term. Resulting in bad service delivery, wrangling over invoices and loopholes. Or even going bust!
The reasons for buying business can be wanting to grab market share. But more commonly, during financial dips companies try and buy business to cover costs. Thus enabling them to retain their trained workforce and other resources.
Suicide Bidding Following the 2009 Recession
This worrying practice was demonstrated in 2010 by RICS in the construction industry. A survey of nearly 400 quantity surveyors showed contractors putting in bids below cost:
- 20% of tenders submitted during 2010–11 were priced at a “sub-economic level”
- Most suicide bids were 10% below cost but some were 40% under cost!
The findings also showed that over 50% saw a client accepting a “sub-economic tender” knowing it was “potentially unviable”.
Construction industry tender prices fell by about 15% since the start of that recession and suicide bidding caused some contractors to go bust. They ‘bought’ contracts (at or below cost) in the hope they could retain their trained staff and ride out the dip… But they couldn’t!
I remember working with a construction-industry client on a reasonably small 6-month contract during that period. They lost the bid on price by a significant margin. When our client got the post-tender feedback, they saw the winner’s price wouldn’t even cover their purchase-cost of scaffolding. Ouch!
Tendering in Tough Times
During hard times tender with caution:
- Be aware of current intense price competition
- Qualify your tender opportunities carefully (especially where the price / quality split is heavily biased towards price)
- Maximise your quality score
If you have any problems with tendering, contact us for an informal chat about help with tenders.
When pricing your bid, consider what you need to make to stay in business. Losing a bid is always rotten. But if your competitor has ‘bought’ the work, they might not be around post-recession.
It might be best to lower expectations and accept a lower hit rate. It’s better to win a few good contracts rather than lots of poor ones.
Suicide Bidding – Summary
Suicide bidding means trying to win a tender or contract at an unrealistic and unsustainable cost. Buying work!
It can horrible trying to manage a business during a slump. But I’d always advise proceeding with caution when trying to compete with silly prices.
The Covid crisis is causing financial hardship and uncertainty. Will we see more suicide bidding?
Have you seen suicide bidding in your industry?