Why “Early-Stage Bid Intentions” are Critical to Establishing New Relationships Between Contractors and Can Ultimately Raise Minority Firm Economic Participation in the Heavy Highway Construction Industry
Harold Blake Smith
Bidrunner.com
Abstract
In 2006, a new bid solicitation system that more effectively gathers and compiles “early-stage bid intentions” between contractors in North Carolina’s heavy highway construction industry was studied in conjunction with the Department of Transportation. This “new” system was compared alongside traditional methods of bid solicitation, such as faxing. Analysis of 146 awarded contracts during 2006 suggests that when general contractors randomly used the “new” system for sending out bid invitations and a randomly selected treatment group of minority subcontractors used the system to send back bid intentions and other interactive communications, there were 57.61% more contracts awarded to the treatment group than to the control group. This paper will propose that using properly structured communication systems to strategically increase specific communication events and reduce inherent “communication gaps” early in the bidding process can raise minority participation rates; and can assist oversight agencies to better manage and validate their programs. In addition, the same principles outlined here can be applied to a wide variety of other industries where influencing market outcome is deemed desirable.
Introduction
On every public project in which public funds are appropriated, general contractors are required to hire a predetermined percentage of minority owned subcontractors, or at least demonstrate that they have made a “good faith effort” to do so, in accordance with TEA-21 legislation. The nature of these communications early in the bid solicitation process between general contractors and subcontractors play a critical role in determining which subcontractors are ultimately awarded contracts. For decades, the traditional systems used to communicate between general contractors and potential minority subcontractors have been difficult, at best.
In October 2004, a patent application was filed for a new commercial construction bid solicitation system. Among the 43 claims outlining innovations of this new system was detailed a fresh approach to communicating, gathering, and compiling “early-stage bid intentions” communicated from one subcontractor to another general contractor. A “bid intention” is a general term referring to the process by which subcontractors communicate to a general contractor in advance whether, or not that firm intends to submit a response bid for a particular project. Bid intentions are most significant when they immediately follow a general contractor’s sending of bid invitations to subcontractors, much like a person might RSVP to a social invitation. The sooner one responds, the better for the host.
Early on, this new patent pending system’s approach to monitoring and tracking dynamic bidding activity appeared very significant. In 2006, when enough general contractors and subcontractors were using the system in a defined geographical area and the Department of Transportation responsible for that area had the ability to supply contract data, the significance of such communication events was adequately tested and realized.
Traditional Methods of Transmitting Bid Invitations and Bid Intentions; and Why This Creates Communication Gaps that Discourage New Contractor Relationships
The problems with traditional methods of gathering bid intentions originate with the inherent limitations created by the methods in which general contractors send out bid invitations. These methods include faxing, mailing, emailing, posting on a third-party’s website, and other one-way or “dummy” methods of delivering bid invitations to subcontractors. They all share similar structural flaws. That is, once the bid invitation is sent by the soliciting general contractor it is cumbersome for the subcontractor to return a bid intention and so it does not happen in mass. When it is returned, the information is not easily compiled into useful data needed by the general contractor to make critical project decisions. Thus, at the very earliest stage in the bidding process, a vital link in the communication chain is broken.
Among these traditional methods, faxing is the most prevalent. With this method several dozen, or perhaps several-hundred bid invitations, are laboriously faxed to targeted subcontractors. For the sake of argument, assume a given project includes a scope of work that one of these targeted subcontractors is certified to perform; assume the project is within the geographic area covered by this subcontractor; assume they can adequately complete the work in a timely manner; assume that they actually receive the faxed bid invitation and want to perform the work. If these planetary systems are aligned, the subcontractor may or may not check the little box on the bid invitation and fax it back to the general contractor indicating that they will bid on the project, i.e., return a “bid intention.” Subcontractors not bidding the project will almost certainly neglect the fax. Interested subcontractors, more than likely, will simply wait until the bids are due, then laboriously fax back a one-page response bid for that project to the general contractor. In most cases, this is the sum total of the communication events between the general contractor and subcontractor that occur. The following month, the cycle repeats itself. This is particularly true if there is no relationship history between the subcontractor and the general contractor. When bid day arrives this subcontractor’s bid is, more often than not, lumped in with other similar bids. The general contractor simply cannot take such a large financial risk on a new minority subcontractor who cannot properly demonstrate if they are “ready, willing, and able” to handle a project - or non-minority subcontractor, for that matter. The general contractor’s time constraints and self-serving inclinations are, once again, to work with the same “go-to” firms they have worked with in the past.
Bid invitations sent by stamped mail or as email attachments perpetuate similar communication breakdowns, simply at slower or faster rates of disintegration. The most insidious of these methods has been the rise of third-party bid invitation postings on various websites. While they are attractive in their “high-tech” packages, they often promise more than they can deliver. That is, they send subcontractors searching out multiple websites to track down posted bid invitations, identify the projects they are interested in bidding on, and then, send the general contractor back searching the same websites to hunt down these interested subs. Or maybe, the general contractor will get an email notification first, listing a few names of interested subcontractors. This is a bit more helpful, but the subs still have to be hunted down! Contractors have neither the inclination, nor time needed to make these types of systems work well for minority firms to any measurable degree. And why should they? They already have their “go-to” guys.
This is evidenced by contract data furnished by the North Carolina Department of Transportation. The number of awarded contracts is used here, not dollar amounts, because it is irrelevant to a new minority subcontractor who does not get awarded a contract whether the other guy got $10,000, or $100,000. Most likely, they simply need the first project to get started with a new general contractor. In 2001, 62 individual general contractors were awarded various public highway projects, hiring 414 different subcontractors. This means that general contractors established economic relationships with an average of 6.68 subcontractors, per project. In 2005, 44 individual general contractors were awarded various public highway projects, hiring 278 different subcontractors. This means that general contractors established economic relationships with an average of 6.32 subcontractors, per project. Therefore, 29.1% fewer general contractors were awarded contracts, hiring .36% fewer subcontractors per project. In essence, the available subcontractor market dropped 29.46% between these years. Additionally, of the 278 different subcontractors hired during 2005, 77.62% were the same subcontractors who received contracts in 2004. The remaining 22.38% percent were overwhelmingly non-minority firms, such as general contractors acting as subcontractors, or engineering type firms hired for specialty projects. Thus, the figures show how difficult it is, under this system, for new minority subcontractors to secure new business with general contractors. In such an environment it doesn’t matter how many bid invitations are faxed to subcontractors. Competition flattens or declines and prices are pushed up. The “good ol’ boy” network, as such, remains very healthy in the heavy highway construction industry. This reality is well understood within the industry, and one would be hard-pressed to find a general contractor, subcontractor, or agency official who would offer a more plausible alternative explanation.
Breaking Up the “Good Ol’ Boy Network,” One Piece at a Time: Closing the Communication Gaps and Building New Contractor Relationships
The following structure can be arranged in near endless combinations of programming languages and design expressions.
It is suggested that the “document push” or “search-for-me” bid solicitation structures, which require hours or possibly days expediting, be replaced with one that produces instantaneous bid invitation delivery on a mass scale. As well, it should create the capacity for easy, immediate bid intention returns by a large population of subcontractors. One way to do this is to produce, on-the-fly, dynamically (database driven) populated web output pages for each general contractor, which call up documents that are stored in a centralized document server, and assign these documents a unique identifier; then, in seconds, transmit only those individual page links to all subcontractors. These links can be made accessible through a simple email delivered link, or as a link that is available in a centralized subcontractor panel. As these links are clicked, opening the bid invitation document(s) for each subcontractor, capture these clicks as unique digital events in the database. Since all general contractors are sending bid invitations using the same database, the capture of these digital events can be used continually to verify subcontractor contact information, identify irregularities, or simply to expose those subcontractors who don’t care about receiving and responding to bid invitations.
Adjacent to the bid invitation link, place a series of pre-defined bid intention links (yes, no, too busy, not in the area, etc.), which immediately transmit back to the general contactor the subcontractor’s bid intention. As the subcontractor declares his/her intention by clicking one of these links, the system captures these secondary digital events in the database. Create a private bid intention output page for each general contractor, which queries the bid intention data so that each general contractor can view, in real-time, which subcontractors are going to bid and on which projects. Next, make available a text box input mechanism which allows the subcontractor to explain their bid intention, say “hello,” “thank you,” or even compose and return a quick response bid on-the-spot. Additional inputs can also be made available, for example, allowing the subcontractor to request general contractor assistance with credit, bonding, equipment, supplies, or materials, in keeping with the intent of TEA-21, subcategory F and G of Part 26, Appendix A. This data can be immediately compiled alongside the bid intention data for the general contractor. Now you have created a “sparking mechanism” that can act as the foundation for on-going dialogue between contractors.
Some subcontractors will take advantage of these tools, while others will not. As outlined later in a case study, this will become a critical factor in determining which subcontractors are able to “fire-up” new relationships and which will self-extinguish old relationships because of neglect or non-interest.
Finally, compile all bid invitation and bid intention activity data pertaining to all general contractor groups for applicable oversight agencies. Bid invitation data and bid intention data are considered non-proprietary; and as such, general contractors don’t have a problem with oversight agencies viewing this data. In fact, they welcome an analysis of the data by the agency if it is used to help determine whether or not the contractor made a “good faith effort” to reach subcontractors. This makes it possible for the responsible oversight agency to have actual firm-to-firm activity information with which to identify and assist in developing contractor relationships.
For example, if an oversight agency knows in advance that ABC subcontractor is going to bid on a particular project with XYZ general contractor; and if they have never worked together before, then the agency can better create programmatic scenarios that help these firms get together. A targeted contractor network meeting, in which specific subcontractors furnish qualification/financial information to specific general contractors, would be such an example (the “new” described system automated this and other transfers, as well). Then the agency can watch subsequent bidding cycles to measure a program’s efficiency. Under traditional bid solicitation and communication practices, oversight agencies simply do not have good firm-to-firm management tools and cannot generate activity reports for analysis. It is understandable that broad-based “growing your business” type seminars have had little effect. Program success and operative management require a department to first “expect,” and then “inspect.“ This requires proper management tools. It is also not surprising that a culture has developed within these agencies that distrusts general contractors – in fact, these sentiments have become so institutionalized that many agency department personnel feed on this distrust and maintain their jobs, as a result of it.
A Firm-to-Firm Approach: 2006 North Carolina Department of Transportation Case Study
Why some “sparks” catch fire while others fail to ignite is the culmination of a crazy mix of variables – a near endless combination of heat, fuel, and oxygen. There is one thing for certain. If no “spark” is created there is little chance of combustion. As seen in the faxing, stamped mail, email, and bid posting structures, there are ample opportunities for randomly developed “sparks” to self-extinguish. Common sense and a little experience tells us that those sparks which are carefully fanned and nurtured from their inception have the best chance of survival.
From January 1, 2006 to December 31, 2006, the North Carolina Department of Transportation supplied awarded contract data. Variations of all bid invitation systems, described above, were in play simultaneously by all general contractors. Traditional methods and the “new” system were sometimes used separately by general contractors, sometimes used in conjunction with each other, and sometimes alternated from one month to the next. The North Carolina Department of Transportation selected 100 certified minority subcontractors out of approximately 450 certified firms to be trained on the “new” system. Some of the selected subcontractors used the system regularly, some used it intermittently, some totally ignored the system, and some – unbeknown to NCDOT – had already gone out of business and needed to be replaced. The minority group to most quickly utilize the “new” system -- and keep using it most regularly -- was Caucasian, women-owned businesses. As the 100 chosen subcontractors received training on the “new” system, in small groups that met from late 2005 throughout the first half of 2006, they were placed in the study and their bidding data was captured.
General contractors were not privy to which subcontractors were in the study; however, they dictated whether these 100 subcontractors were considered a “control group” or “treatment group” population by which method they used to send out the bid invitations each month. That is, if a general contractor used the “new” system to send out bid invitations, then the subcontractor group was considered a “treatment group” for that bidding cycle with that general contractor. If they used “traditional methods,” the subcontractor group was considered a “control group” for that bidding cycle with that general contractor. Since the new system captured all transmission events, one only needed to look at the aggregate “fires” produced, i.e., contracts awarded from general contractors to subcontractors, then determine whether or not the “sparks” could be traced back to the bid invitation sending. If so, then the “new” system was in play and deemed as relevant in helping to produce a “fire.” This was a particular luxury of the “new” technology – as it would be, for example, if the pharmaceutical industry could use the same groups simultaneously as the “placebo” and “active ingredient” groups, alternating randomly every month. This eliminated any opportunity for bias, or undeterminable variances between groups.
The question asked was: “When general contractors sent bid invitations through the “new” system, did subcontractors using the “new” system get more awarded contracts than when the general contractors did not use the system and those same subcontractors were left to revert to traditional bid transfer systems?”