Low bids for construction projects both help and hurt
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Opening the bids for construction projects has suddenly become a pleasant experience for government officials. Those bids have fallen sharply, and many are coming in way under estimate.
City officials in Albert Lea say the bidding process is becoming very competitive. There are more bidders per project and they're coming from farther away, because tight credit and the recession have sharply reduced the construction of new homes, office buildings and other mainstays of the construction industry.
"We were really pleased," said Victoria Simonsen, Albert Lea's city manager. "We're doing five major projects this summer, and all of those came in between 10 and 20 percent less than where we anticipated them to be."
At the Minnesota Department of Transportation, 70 percent of the road projects bid this year came in under the engineer's estimate, with some as low as a third under. The total savings for the state will run into the millions of dollars.
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"We've been saying all along that it's a great time to build," said Dave Semerad, CEO of the Associated General Contractors of Minnesota.
Semerad said what's good for the city and the state, though, is not always so good for construction companies. He said the shortage of work has made competition for contracts so intense that some companies are bidding less than what it costs to do the job.
"It's not good business to bid below cost," he said. "It's sometimes referred to as 'profitless prosperity.'" Companies may bid under cost believing they can figure out ways to save enough money to turn a profit. Semerad said the practice drives all bids down, cutting profit margins for everyone.
One of the most eye-catching bids so far this year was for a water treatment plant in South Dakota which will also serve parts of Minnesota. The low bid was one-third lower than the estimated $96 million price tag, saving an eye-popping $35 million.
Tom Benassi is with the winning bidder, the Foley Company of Kansas City. Despite the low bid, he said the company will make money on the project.
Benassi said there's more to the low bids than desperation. He said for one thing, the costs of steel, concrete and other products used extensively in construction have fallen because of lower demand.
"Right now, materials are about 20 percent less today than they were November of 2008," he said.
Benassi also said construction unemployment has cut so deep that even some of the most experienced workers are out of work and available to his company. He said with their advanced skills, they're generally the most efficient workers.
"That higher efficiency means less overall cost to the construction company," Benassi said.
Benassi said the low bids seen now likely will end quickly once the recovery takes hold.
Some industry observers say the low bids themselves are part of that recovery. They may spur governments and private companies to move up any construction projects they have to capture the reduced prices. If that happens, it will increase hiring and lower unemployment.
