"Low Ball" Pricing in Consulting Proposals 2

[PM]

Should consulting engineering firms who engage in so-called "low ball" pricing be discipled? (ie. "low balling" is proposed pricing by a firm or individual that is substantially less than the average of the competing prices, and intended to "buy" the assignment)

Is this a problem in your market area and how do you deal with it?

Regards,

 

[Hush]

The following is an excerpt from the code of ethics of the Association of Professional Engineers, Geologists and Geophysicists of Alberta, I'll make the assumption that most associations have the same or similar clause.:

"Professional engineers, geologists and geophysicists will build their reputations on the basis of the merit of the services performed or offered and shall not compete unfairly with others or compete primarily on the basis of fees without due consideration for other factors."

Interpretation is wide open but I would think that if the bid was made with no expectation of profit (i.e. the intent was to deprive the competition of work) the company would be in violation of this code of ethics. But if the bid is low because their costs are lower or they're willing to accept a lower margin, I can't see that being a violation.

 

[chubPE]

Disciplined by whom?

 

[PM]

Hush's point where the motives of a "low balling" firm may involve malice toward a competing firm or individual seems clear cut enough. What about a firm who prices their proposals with reduced margins, and the motive is not malice, but an attempt to buy their way into a market? In other words price based competition rather than skills based competion.

Extrapolating this forward suggestrs that all the expert firms will eventually have to reduce their margins in order to win commissions. The result will include the gradual reduction in reinvestment of profits to develop technology or the erosion of expertise from that market place because high salaries eat into the firms' reduced profits. Can this be good for the Public?
Regards,

 

[BobPE]

My words of wisdom on the subject goes like this....

You Get What You Pay For.....

And I may add....

Pay a little now or a lot later....

It's not so much the firms fault for low balling, a lot of blame goes onto the customers that accept such antics from these firms. I run into it all the time and since I like being involved with clients and customers, I often get a call during or after low balled projects to help fix them...it often time gets very ugly...What to do? I have no clue....

BobPE

 

[BML]

This may not apply to engineering work, but I thought that the United States (and many other countries) had "dumping" laws that made it illegal to sell a product below cost. Of course, exceptions could be made for outdated or clearance items. I think the main intent was to prevent a company from gaining a monopoly-type position in a market by undercutting everyone else but making up the profit in other areas. Could this be applied?

BML

 

[redtrumpet]

BobPE hit this one on the head.

Engineering associations love to promote the idea of the two envelope bid. The first envelope details the firm's qualifications for performing the services. The client selects the firm with the best qualifications. Then, and only then, does the second envelope from that one firm get opened. This envelope, of course, contains the price.

If anyone has ever seen one company that has actually used this system, I'd love to hear from you.

Don't expect your engineering association to help you either; chances are the president or one of his old-boy cronies is also the chief lowballer.

As Bob said, you get what you pay for. Clients will pat themselves on the back for saving 10% on the consultant only to pay millions down the road in increased operating costs, reengineering of systems that don't work properly, and expensive rework to accommodate expansion plans.

 

[dpa]

You don't always get what you pay for but you surely don't get what you didn't pay for. I never go with the low bidder, at least not now that I no longer work for governemnt.

 

[GregLocock]

I see no problem in a company bidding low if it can do so. If my methods and systems are superior to yours so I can do a job to the same standard for less then I deserve to drive you out of business or force you to improve your game.

Not a very comfortable attitude, but anything else is inefficient and in the long term will do more damage than good.

The real question is - how can the customer tell in advance whether the work will meet his requirements? Cheers

Greg Locock

 

[PM]

Left un-checked, I presume everyone recognises there will be consequences.

Does anybody have a problem with the fact that expertise is often the first casualty which results in mediocre engineering work in the longer run?

Regards,

 

[BobPE]

GregLocok:

I agree with what you are saying, but I think you are talking about a qualified firm where what you described would not be considered "low balling." I have seen high price firms (names withheld to protect the guilty) do damage as well.

redtrumpet brought up a very good practice of allowing people to review qualifications. This eliminates the hard line price number from being circulated to lay people that you may have reviewing the proposal that can only grasp price and will vote in accordance with the low bid. I have had the opportunity to bid several jobs this way and they all are still working to this day.

A good indicator to tell in advance whether a company is BS'ing you is to look at their representative that is talking to you.. Chances are he/she is a sales person for the company with little or worse yet no technical experience. This is the start of the downfall in most cases. Take the company to task, you are in the driver seat as a client. Demand that you get representatives to meet with you that are senior and will be working on the project DURING the bid phase. If you get a bunch of junk during the bid phase, chances are your project will too soon be junk.

BobPE

 

[GregLocock]

We see low-balling (or manipulative pricing) quite a lot. People really are prepared to promise to develop a system free of charge, and then manufacture it at a fixed delivered cost per part. The tears come later. I have written several specs, with the aid of vendor, and then when the system doesn't quite meet some of the non-critical ones they'll hold their hands up and say - oh, well, this is what you'll be getting, what are you going to do about it? Bear a grudge, kick the cat, stick pins into effigies. They know they've got you over a barrel.

I have also heard of firms that deliberately low-ball for several years as part of a strategy to get bought out by their bigger competitors. This is quite a neat strategy for them, and gives us a short term benefit, in the low price, and a possible long term benefit, in that we have new baseline for costing parts and projects.
Cheers

Greg Locock

 

[BobPE]

GregLocock:

Don't curse in here.....You said VENDOR!!!!!! I can't even begin to summarize all the work I have done in my career to fix VENDOR designs. You have to remember, as the engineer the math counts and defines the solution. The vendor only supplies equipment and it has to stay that way to work in my opinion. If you give the vendor freedom to influence design, of course you will have failure and finger pointing in the end. They don't have liability insurance and as long as their equipment is working, no matter what is happening to your process, they have no risk and their lawyers will gladly inform you of that.

The low ball for purchase scheme is a big problem in the industry, but the good part about that is the liability for design transfers to the new company. It may be a little more difficult for the lawyers to find, but they do!!!!

Great chatting with you about this,
Take care..

BobPE

 

[Ron]

Greg...one problem with your premise of doing more with less is that low bidding is not predicated upon efficiency as much as it relies upon "risk management". If I'm willing to take more risk than you, I might be willing to take fewer steps in the process and thus become more "efficient", thus lowering my price. A bit like Vegas, huh?

Until about 1978 or 1979, bidding for engineering services was precluded in the code of ethics of several major engineering groups in the US. The feds decided that was an unfair restraint of trade and that engineers could no longer include prohibitions against bidding in their codes of ethics. That's unfortunate.

Some areas have "qualifications based selection". As RedTrumpet (can you shift gears with your right foot?)stated, that routinely gets reamed, one way or another. Even in my state, where qualifications based selection is the law for any project over $10,000 (US), there are ways that procurement people and engineers use to get around the requirements.

 

[GregLocock]

Well, let's get specific. I used to specify something like 3 million dollars worth of rubber/steel suspension bushes a year.

We had two vendors, both of which were (laughing) full service suppliers.

One of these had access to a good non-linear FEA consultant , who would model each bush as it was designed and flag up the likely stiffnesses, and any durbaility issues, and could also take a stab at any injection moulding problems with the part.

The other did not. he relied on copying similar parts, modified to get the required characteristics, and then progressive mods to his proto tool to get to the required spec.

I would expect a development program with the first vendor to be cheaper in the long run, even if we had to pay directly for the consultant, since the chances are that the first-off parts would be close enough for useful work.

Therefore, if vendor A came in with a cheaper quote, I could trust it, as it was based on better technology. The risk was less as well (proto tools have a 6 to 13 week lead time, and time is our major risk, although cost is our main driver).

Cheers

Greg Locock

 

[Ron]

Greg,
You make good points as usual. I think though, we are talking apples and oranges. In your manufacturing scenario, I would agree. In the more nebulous world of "consulting" where the product is "engineering judgment", it becomes less clear, thus the tendency to allow fees to wander all over the board.

Ron

 

[redtrumpet]

Ron,

I'm too young to have grown up in the days of the right foot shift, and my Triumph is one of the new breed from the Hinckley works, not the old Meriden factory. However, a couple of years ago I took a spin on a right foot shift BSA Rocket 3. It took some getting used to, but I managed to pull it off.

Are there some motorcycling stories in your past?

 

[Ron]

redtrumpet...only a couple of years of fun and some skin left on the asphalt. I had a small "rice burner"...couldn't get the hang of right foot shift on the Triumph or some of the Italian ones. Yeah, that was a few years ago (late 60's, early 70's).

 

[thebigdog]

The fact of the matter is: So long as buyers "bid" engineering work, and solicit "bids" from large numbers of firms,and, so long as firms are willing to participate in that process, there will be firms who will lowball. There could be many motives - wanting that first job for a new client, wanting that first job in a new market sector, needing the work to keep work load up, trying to keep competitors out of "your client" ... and the list goes on.

The question originally asked was whether the practice is ethical or not. If you want to do it, you will find a way to justify it as ethical. In my experience, the good news for the rest of us is that most firms only get away with it once or twice - after the client sees what he gets, the low baller rarely gets a second shot.

 

[PM]

I've noticed a trend toward less moral certitude on ethical matters in this forum. Come to think of it, there seems to be less certainty in society as a whole also. Where are we headed when there is almost no right or wrong, only rationalizations toward what is possible?

Regards,