Roof auction realities

The Internet offers many conveniences that save time and money. You can book plane tickets, order groceries and shop for gifts online. And now, roofing contractors can bid on projects online in roof auctions. But unlike eBay,® a popular auction Web site that awards items to the highest bidder, roof auctions allow bidders to view other bids and then lower their bids. Projects ultimately are awarded to the lowest bidder. Because of this, roof auctions have become a controversial issue in the roofing industry.

Roof auctions have become attractive because building owners and developers are under constant pressure to lower construction and maintenance costs while attempting to maintain quality materials and workmanship. However, roof auctions do not accomplish this objective. In fact, roof auctions can result in higher overall costs, lower quality and increased litigation. Roofing industry professionals need to educate building owners and explain the limitations of roof auctions.

What are roof auctions?

A roof auction occurs when a building owner invites roofing contractors to post bids for a project on the Internet. Instead of the conventional sealed bidding approach, all bidders are able to view others' anonymous bids during the roof auction. After viewing other bids, bidders have the option to lower their bids. Typically, a specific time frame is given during which bids can be posted and changed, but an extension may be triggered for a predetermined time if the lowest bid changes.

Roof auctions violate the integrity of the competitive-bid process. Instead of awarding work based on the best overall bid, the auction process formalizes a price-shopping format. Also, once bids are made public, the idea of a roofing contractor placing his best, one-time bid is lost, which subjects the bidding process to abuse and can cause a roofing contractor and building owner to suffer financial losses.

If you want building owners to avoid roof auctions, you must educate them about why roof auction bidding is not in their best interests. You should suggest building owners consider the following:

• Building owners who have used roof auctions have been disappointed by the results because of higher project costs and poor workmanship. These owners should be consulted about their experiences and roof auctions' shortcomings.
  
  
• Roof auction bidding doesn't guarantee the lowest price. There are many hidden costs, including change orders, that tend to increase a project's financial price.
  
  
• Roof auction bidding eliminates the potential benefits of a roofing contractor, designer and building owner working together to produce the best possible project.
  
  
• Roofing work is not a commodity and should not be purchased according to price alone. Building owners should understand a bid evaluation must include a quality aspect, which should consist of the quality of the physical installation and materials, services provided, a schedule, and the relationship between the building owner and roofing contractor.
  
  
• Building owners also should be aware a financially strapped roofing contractor who wins a bid that is too low might be forced to close his business. The implications of this might include damages to a building's interior, delays and legal costs. In such a situation, it would have been cheaper to choose a higher-priced contractor.

Suboptimization

You also should understand why roof auctions are bad for the construction industry.

Roof auction bidding is one of the worst displays of suboptimization, the practice of focusing on one aspect of a system without regard to the effects on other parts of the system. (In the case of roof auctions, the construction process is the system.) Edwards Deming, a management and quality consultant, introduced the idea of suboptimization in the 1950s. He taught that suboptimization of a system doesn't produce the best results. In the case of roof auctions, roofing contractors are trying to provide lower costs to building owners but often at the expense of quality. In fact, the more complex a system—and the construction process is very complex—the greater the need to advance the entire system to improve costs and quality.

For example, if a developer reduces an architect's fee by 10 percent, the architect may not do enough research to ensure a roof specification matches a building's conditions. The roofing contractors who participate in the roof auction are bidding in a highly competitive situation and bid exactly according to the specification. Unfortunately, the winning roofing contractor learns on-site that the specified roof system will not work, which results in a change order. In addition, if the architect only produces 90 percent of a drawing after his fee is reduced, the project likely will require several change orders, which will result in higher overall project costs. Thus, the architect and building owner will suffer losses, and the contractor will be blamed for the change orders.

Braess' Paradox, which was theorized in 1968 by German researcher Dietrich Braess, states when you attempt suboptimization, you have a 25 percent chance of improving a system, 50 percent chance of no change and 25 percent chance of making the system worse. I believe because of extensive pressure on roofing contractors' prices during the past few years, virtually all suboptimization benefits already have been realized and suboptimization only will result in negative effects on the industry.

All project stakeholders must work together to lower costs, improve quality and remove antagonism.

Competition

The roofing industry is a competitive market, and a better way to compete is for contractors to base their bids on quality and not lowest cost. When there is strong competition, competitors tend to improve their skills to stand out from their competition.

However, a problem arises when contractors slash prices without regard to actual costs with the intent of being more competitive.

Roofing contractors must find ways to lower costs without sacrificing quality and attain a sufficient margin between cost and price to ensure a profit. When a building owner purchases roofing work at a price that is insufficient to cover project costs and earn a reasonable profit, quality suffers and problems tend to multiply, which can cause higher overall costs. It would be far better for contractors to price bids fairly with regard to quality, cost and profit.

Although some building owners may ask why they should pay more than the lowest price, I would ask them whether they are sure they are receiving the best quality from their low bids. I would say they are not receiving the best quality because I have been hearing more complaints about poor quality from building owners as price competition has increased.

Proponents of roof auction bidding, such as procurement consultants, argue roof auctions are about competitive price and value. They defend their position by saying they have developed software to evaluate bids according to issues other than price.

An educated building owner will want to evaluate price, quality, schedule, experience, service and communication. I guarantee a procurement consultant's software program doesn't properly analyze all these issues. Instead, the program focuses on price.

Proponents of roof auction bidding also argue there are benefits to the process, such as developing a list of bidders. But I believe these benefits can be obtained in a different format.

Examples of failures

Several roofing contractors have told me some procurement consultants already have stopped using roof auctions because of poor results.

For example, a roofing contractor recently won a small project via a roof auction based on a higher bid than he would have submitted in a traditional bidding situation. This occurred because bidders often submit a high first bid knowing they can change bids to compete with other bidders. If there are few bidders competing in a roof auction, a roofing contractor might win a project at a higher price. In this case, the building owner obviously didn't benefit financially from the roof auction process.

The same roofing contractor also bid on a large project through a roof auction in which the low bid almost was 20 percent below his costs. With such a discrepancy, it's hard to believe the winning contractor wasn't forced to cut material or labor costs, neither of which would make a building owner happy.

In another case, a building owner was accepting roof auction bids for maintenance work. All bidders were required to use union labor, and the building owner specified a set number of hours for the project. Bidders merely multiplied labor rates by specified hours. The building owner also established a maximum bid that would be accepted. However, when the required labor hours were multiplied by labor rates, the figure was higher than the maximum allowed bid. When this was brought to the building owner's attention, he responded that it was the roofing contractors' responsibilities to find other ways to save costs. The roofing contractor who reported this situation didn't bid on the work.

Quality

Roof auctions create a price war between roofing contractors to offer building owners the lowest price for a project. But buying based on price without regard to quality is absurd.

For example, the commonwealth of Pennsylvania bids truck purchases through online auctions. However, its bidding system includes a quality aspect. The commonwealth includes a truck's purchase price in an equation that consists of salvage value, operating costs, maintenance costs and others. If the commonwealth decides it will keep the truck for five years, it determines the total cost of the truck for that period. The lowest cost during the five years is the basis for selection, not the cheapest purchase price. Bidders can change their bids but it is difficult for them to determine the low bidder only by viewing others' bids.

The state of Hawaii also has developed a unique bidding program. The state uses a complex evaluation system to rate roofing contractors; the highest-rated roofing contractor who bid below the state's budget, regardless of whether he is the lowest bidder, is chosen. If two roofing contractors receive the highest ratings, the lower bidder is selected for the project. Hawaii had been eliminating the best roofing contractors even before bidding because these contractors refused to participate in the highly competitive bidding situation. Now, the state is achieving better quality roof systems and lower project costs. Initial bids are higher, but hidden costs of accepting bids that are too low are eliminated.

Final thoughts

Your obligation as a roofing professional is to deliver the best value to your customers. Building owners should hire contractors because they provide a niche expertise and offer quality at a fair price, not necessarily the lowest.

It is important everyone in the construction industry understands that it's critical for building owners and developers to obtain construction services at the highest quality level and best value. All stakeholders working together to improve a project's quality and lower costs will improve the construction process. Roof auctions do not support this goal.

Ted Garrison is president of Garrison Associates, Ormond Beach, Fla.

NRCA's position

In June 2002, NRCA's Executive Committee adopted a position paper regarding roof auctions. Click here to read the paper.