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The real estate industry is built on relationships, and few are more important than the ones that real real estate owners build with service providers.
Every property and project manager has stories about vendors putting doorways in the wrong places, painting over light switches, misplacing very large pieces of equipment in seemingly small spaces, or any number of things that made them want to bang their heads against a wall.
But they probably still think of that vendor as their ‘go-to.’
“I’ve got a guy for that.”
— Every person you know in real estate
That’s because over time, real estate owners and vendors build trust in each other. They share expectations, a familiarity with the process and the ability to work together to bring projects to successful completion.
Many owners even consider their vendor bench to be one of their competitive advantages: a trusted group of experts who can be relied upon on to bring their organization’s vision to life.
So, how can owners make sure their list of preferred vendors is optimized to get their projects completed on time and on budget? In short, the key is having the right number and the right kind of service providers.
Reaping the Benefits of Competitive Bidding
According to a study published in the Journal of Construction Engineering and Management, triple bidding leads to an 8% reduction in a “bid low price.” In addition to side-stepping situations where the vendor you usually work with is busy and can’t take your job, having multiple bidders on your capital and construction projects allows you to get competitive pricing.
Competitive bidding can also help you mitigate risk in an industry that is rapidly adopting innovative technologies and solutions. If you’re sticking with vendors based solely on past relationships, you might be falling behind the curve. Are there newer ways to manage your projects? Are there more efficient ways to get quality work done at better prices? You won’t know unless you’ve optimized your vendor management process to be able to invite multiple vendors for every bidding event.
Does 'Triple Bidding' Mean Three Vendors are Enough?
Competitive bidding is sometimes called triple bidding, but that doesn’t mean that having three vendors for your job is necessarily the right number.
First of all, inviting three vendors to bid may not result in receiving three bids. It’s a good idea to track your bid submission rate across projects. If you find that you generally have one or two vendors who don’t participate, you already know you’ll need to expand the pool of bidders.
The size of your project will also play a factor in determining the right number of vendors to invite to bid. We’ve found that owners using our project management platform typically invite an average of 3.3 bidders across all projects.
Average number of bidders invited per project on Honest Buildings
However, when we segment the data to projects between $100,000 - $500,000, an average of 2.96 bidders are invited. For projects between $1,000,000 - $5,000,000, the average number of bidders grows to 3.81.
Average number of bidders invited by project size on Honest Buildings
The Minimum Number of Vendors You Need
There are a few reasons that you may have too few service providers on your preferred vendor list, or within a particular trade. Often times, owners find themselves short on options when the construction market is hot or when their company hasn’t had a lot of projects in the past and vendors don’t know to pursue their business.
To be honest, it’s also hard to get comfortable with new vendors who may not understand your processes or comply with your RFP requirements. Sticking with the few vendors you know seems easier than spending time to build new relationships or opening yourself up to the risk of an untested vendor.
No matter how much you like your 'go-to' vendor, you need to have more than one or two options.
No matter how much you like your 'go-to' vendor, you need to have more than one or two options. Here are some signs that your list is too small and you need to allocate resources to find additional service providers:
• You always use the same vendor again and again
• One bidder is awarded more than 70% of your work for their particular trade
• The types of projects you’re executing have expanded beyond the skillset of your current vendors
• Some of your vendors are getting busier and no longer provide quality bids or competitive pricing
• You feel that certain vendors have “gotten comfortable” and are no longer providing the level of service or attention to detail that they’ve historically provided
• The bid process is taking longer because you’re struggling to get enough bids to run a truly competitive process
• You’re receiving fewer than three bids on your projects, or the number of bids submitted has been decreasing over time
• Your list feels stale and you have a gut feeling that you could be doing better
The Dangers of Having Too Many Vendors
Remember the study we referenced earlier that found that competitive bidding reduces costs? The same study determined that savings continue to increase as the number of participating bidders increases.
So does that mean you can invite dozens of bidders for every project and cash out on an early retirement? Sadly, no.
The time and effort it takes to prepare a quality bid is often significant for a vendor. Therefore, they will evaluate your project based on their chances of winning the work. In general, vendors look to win 20-30% of the jobs they bid, or one out of every three to five projects.
In general, vendors look to win 20-30% of the jobs they bid, or one out of every three to five projects.
If you have lots of bidders on a job, the win rate for each vendor will be low and some vendors will decide to drop out. Some might tell you directly that they no longer want to bid on your business because it’s too unlikely that they’ll win.
Other vendors will just stop providing their most competitive pricing, or they will put subpar effort into estimating because they know their chances of getting the job is too low to justify the cost of investing the time needed to put their best foot forward.
Here are some signs that your vendor list is too big:
• Contractors won’t return your call or are actively opting out of your list
• You have a low participation rate in your bid process and the number of bid submissions is declining over time
• You have contractors bidding regularly without winning any work
Let’s not forget that you need the goodwill of these vendors to do things outside the scope of work that you pay them for, like providing an early estimate of walking an acquisition site for you. If you’re active in the leasing market, where time is of the essence, you’ll really need to make sure that you have General Contractors available who are willing to quickly turn around estimates for your leasing team to send to tenants.
The moral is that vendors have overhead and expenses and profit margins to manage, just like you do. Create a process that treats them with respect and fairness in order to maximize their investment in your relationship and their willingness to execute high quality work.
Confidently Sourcing New Vendors
If it turns out you don’t have enough vendors on your bench, or that you don’t have enough of the right kind, you’ll need to scout new ones.
Since everyone in real estate seems to “know a guy” who can do whatever it is that needs to be done, you probably won’t need to look far. Circulate your request internally, ask former colleagues at similar companies and check with your other consultants who usually have wide networks.
If that doesn’t turn up any leads, look into publicly available data. Many of the permit records at the Department of Buildings identify which vendors have worked which jobs. Research projects similar to the one you’re planning and generate a list of vendors with relevant experience.
Once you generate a list of new vendors, you’ll want to take each one through a pre-qualification process.
Each vendor is your potential partner on your future projects. Ensure they meet your standards before putting them on your list to do any work. The rigor of this process can vary based on scope, but we’d recommend using the most meticulous process possible to proactively uncover any problems.
Getting the Right Fit
Once you have an idea of how many vendors you need to invite to run a competitive bidding process for the project at hand—keeping in mind that it’s not an exact science—you’ll need to decide which specific vendors to invite.
Your team knows best which specific skills, accreditations and capabilities your vendors need so we won’t bore you with generalizations about what to look for. Instead, we just suggest you keep the following in mind:
• Vendors often want to take the biggest job they can get because these tend to lead to the highest profit margins. You should find out their average project size to make sure yours isn’t more of a stretch than they can handle.
• If a contractor doesn’t have experience in a certain type of project, they’re unlikely to have the subcontractor relationships they’ll need in order to build out the team and get the job done on time and on budget.
• Sometimes a vendor will take on a project that is smaller than their average in order to build a relationship. That’s good. Sometimes they’ll only take on a small project if they know they’re going to be able to get a high bid through and they will make a big profit. That’s bad.
• Make sure you have the latest and greatest information on the vendors. Those who you thought were too big, too small or who specialized in one area in the past may have changed over time.
The final thing to keep top of mind is that the bidding process needs to be completed quickly. Your vendor bench needs to be ready to pull from at any time or your project might be delayed.
After all, if you only have two General Contractors on your list and one is too busy to bid on your project, you’ll have to scramble to backfill your GC list and get competitive bids. Or worse, you might decide you don’t have time to wait and move forward without getting competitive pricing, meaning you won’t get access to the cost savings that ‘triple’ bidding can provide.
If you had prepared your vendor bench in advance, you would have had enough time to go through a competitive bid process without slowing down the project.
Using Your Preferred Vendor List
Since your team may be working with vendors across a number of different buildings, it’s important to arm them with your preferred vendor list so they can pull bidders from the bench and avoid any blacklisted contractors.
This means that your list needs to be an actual list.
You would be surprised to know how many owners don’t realize that their list of preferred vendors is not actually written down anywhere. Your team needs to be able to easily access this information or your efforts are wasted.
It’s also important to have a process in place for keeping the list up to date over time. Assign someone on your team to be the vendor bench coordinator. This person will ensure that the list is accurate and current—a valuable, real-time asset for you and your team.
Our final recommendation for world-class vendor management is perhaps the most important: make time for it. It’s important that you actually spend time doing this stuff.
Measure your vendor list and make the improvements. If you’re weak in certain trades, focus on building relationships in those areas. Set a goal for how many qualified vendors you want to have in a certain category and talk about it in your monthly internal construction meetings until you hit the goal.
Additional Industry Resources
• The Urban Land Institute (ULI)
• Commercial Real Estate Development Association (NAIOP)
• Building Owners & Managers Association International (BOMA)