Self-Taught MBA: Negotiating with Subcontractors
If you give up your power in the purchasing end of your operation, you have little leverage to make any money.
When you read about dealing with subs, you’re often left with the impression they comprise a protected class. You’re told to love and appreciate them. You cannot negotiate their price, you must remain loyal to a select few, and your prices to your customers should simply come as the mathematical sum of their bids, plus a hefty markup. Then pray your customers can afford the result.
My business was affordable housing, and this bottom up approach never worked for me. The market dictated my price, almost like a commodity, and I had to figure out how to cleave a small profit margin somewhere between my buyers and my vendors. In Los Angeles, this came easily.
In SoCal Contractors Rule
Southern California tract builders invented the piece price approach, whereby subs became specialists in specific skills, such as cutting stair strings, or hanging drywall, and bid per square foot of material installed, each sub undercutting competitors by a penny or more, and making up for it with efficiency.
When I worked in LA, subs signed a piece-price agreement, with a bunch of stringent clauses, and if one sub didn’t show up at 9:00 AM, another sub was doing the work by 10:00 AM. At Christmas time, all the subs came to my office bearing gifts. The contractor was king until a deep recession came, and I moved to Nebraska.
A Local Phenomenon
It was in Nebraska that honed my subcontractor negotiating skills. Unlike New York City and Los Angeles, where I cut my teeth as a homebuilder, there existed no competition between the Midwestern tradesmen. I discovered that subs named their price, and told me when they would come do the work. At Christmas, I drove around like Santa Clause, handing out presents to all my subs. I even recall a highly recommended finish carpenter telling me, “I don’t do no schedules or nothing like that. I won’t work with time commitments. When I can, I’ll get to you, and I’ll finish when I’m done, and I don’t want nobody else in the house while I’m working!” He didn’t get the job, I didn’t like him, but I still recall this conversation as emblematic. It was horrible for me, at first.
Subs are a local phenomenon, and how you negotiate with them, depends on where you build. Some towns have enough wealth that you can avoid price wars, passing subcontractor price-creep onto customers. In other places, consumers push back on outrageous prices and will force general contractors to compete. Most of the time, the cost cutting comes from the bottom line for the GC.
Maybe you hire employees and do the main trades in-house. I have found this works well, but only for periods of time, as the builder’s economy obeys macro economic cycles out of our control. You’re a good guy, and never want to lay off your faithful employees, so as work slows, you struggle to keep them working far too long. Whatever cost benefit you had when things were going well, you lost.
Negotiating is Work that Pays
Our culture does not embrace the bazaar mentality that exists in places like the Middle East and Latin America, where you negotiate intensely to buy tomatoes and bags of rice. Only at the auto dealer do Anglo Americans do much dickering. So, you may feel uncomfortable negotiating with subs, and they may feel put off by your even trying. Especially in Middle America, where I discovered – to my delight – that not even home buyers asked for concessions. They paid sticker price. But I didn’t, never have.
The Nickle and Dime Approach
My objective was to save at least 10% on every purchase. If it cost $5-bucks, I would find a way to pay no more than $4.50. When building a $100,000 house, the result was a profit of $10,000. This was the market I worked in – the lowest and most competitive price. I could not, however, simply bid out the jobs in the Midwest as I did in Los Angeles. I had to work very hard to get my price.
I developed a method. The first thing I did, was to design and blueprint every job to achieve the price point required. I used alternative means and methods, such as what nowadays we call “advanced framing,” and offbeat (at the time) technology, such as shallow foundations, unreinforced stem walls, and all the material and labor sparing techniques available. The building department hated me. The cost savings were real. Yet convincing subs that this unusual approach would save them enough money to justify lower prices became the biggest challenge.
Like any good negotiator, I knew the best way to sell an idea was to buy it. In other words, to steer the other party toward the solution you want, so they propose it to you, and then you accept it.
For example, no plumbers in my area were using flexible, PEX piping. Nobody believed in it. I had studied the material and knew that it could provide considerable labor savings, and, at the time, due to a copper shortage, a small material advantage as well. Instead of trying to convince my plumber, I asked him to consider PEX and get back to me. He was already convinced it was no good, but I paid for him to attend a training seminar with the manufacturer. Afterward, I asked for his report. He remained skeptical but willing to try it.
Next, I proposed an experiment. I had two identical homes to build side-by-side. I asked my plumber to pipe one with copper, the other with PEX – without a price reduction. Through the Homebuilders Association and the manufacturer, I arranged for a time-and-motion study. A pretty young woman came with a stopwatch and a notepad and took a detailed survey of every minute spent, and every movement the plumbers made on each house. Although it was my plumber’s first experience with PEX, the presence of a manufacturer’s rep made up for the lack of experience.
With the results of the study in hand, which was also widely published, I negotiated a lower price for the rest of my projects using PEX. In fact, that plumber no longer installed copper, and by now, every plumber in the area uses PEX. It was a lot of work to get the plumber to back off his number, but the benefits accrued for years. I didn’t twist his arm, he would have walked away. I taught the plumber, in a face-saving way, how to do his job for less.
Make Your Jobs Easier
It pays to get to know the workaday experience of your subs. Spend an entire day with each trade while toiling on one of your projects. See if you can identify the pain points. For example, I noticed that my electrician was modifying framing to install his electrical panel. I asked him about it, and he complained of the time it took, and the how the builder’s never even thought about the spacing he needed to nail up the box, and limited access for the riser above it, which sometimes had roof framing in the way of his conduit.
I went back to the office, I drew a precise interior section of what he had described and presented it to him. “If I frame it like this, would this save you any time?” Yea, was the answer. “How much?” Bout an hour. “How much is your hour worth?” He got my drift right away, and said, “Yea, I’ll knock off a few bucks if you frame it this way every time.” So, I did. I also asked him, what else I could do? He took me to the kitchen and showed me where he needed blocking, to place boxes precisely, so he would not need to install an extra receptacle on a wall just to meet minimum code spacing.
This exchange with the electrician light a lightbulb in my brain and I repeated the exercise with every single subcontractor. All showed me their pet peeves about contractors that cost them time, inefficiencies that I could solve. Every one of them agreed to “knock off a few bucks.”
The Round Table Approach
Talking to the subs, especially the opinionated and loquacious ones, I discovered they all had ideas, not only about their trade but on how to make the entire construction process more efficient. To get them engaged, and talking to one another, I began what I called the Subcontractor Roundtable. I invited subs to a conference room at the local steakhouse for lunch. I provided meat, drink, pencils, blueprints, a chalkboard and an easel. A conversation ensued that got them all making recommendations to make the work cost-effective.
For example, the plumber suggested an electric water heater would save him time and money in the stack (he would not have install ventilation). The electrician complained this would add to his cost, but when we compared the decrease vs. the increase, the change generated an overall cost reduction, so we adopted it. These meetings changed many elements in my standard construction practices, and created bonds between the subs that played out as increased efficiency and comradery on the job site.
The Hardball Approach
Despite the collaborative approach I’ve just described, my objective in every purchase remains saving money. Controlling costs, not making subs happy. To this end, I still use some hardball tactics. One, that I learned from a master negotiator, the psychologist Gustavo Rabin, author of Becoming a Great Leader: Lessons from Silicon Valley, consisted of one simple question: “Can you do it for less?”
No matter the price offered, the technique entails looking a bit taken aback. Wait in silence a little longer than comfortable. Then ask, “Can you do it for less?”
Many times, I have been surprised at the power of this simple technique, and even concerned about the price reductions offered. What Gustavo taught me was that you made your money when buying, not selling. When you buy, you’re in control. When you sell, the buyer has the power.
If you give up your power at the purchasing end of your operation, you have little leverage to make any money.