5 Ways to Negotiate with Sub-contractors to Reduce Construction Costs

5 Ways to Negotiate with Sub-contractors to Reduce Construction Costs – In the competitive construction industry, controlling costs is critical to achieving strong project profit margins. In a post we made earlier, we discussed extensively the various ways to mitigate construction costs and one of the major ways to achieve this is proper negotiations with the subcontractors. Sub-contractors are usually hired to complete specialty works like electrical, plumbing, and HVAC. If you do not negotiate well with them, you might end up spending above the initial budget for the project.

By negotiating effectively with these crucial partners, general contractors can reduce sub-contractor bids and realize significant cost reductions. This article will discuss 5 practical negotiation strategies to employ when working with sub-contractors to lower construction costs, how to prepare for it, and documents to get ready for the negotiation.

5 Ways to Negotiate with Sub-contractors to Reduce Construction Costs

The five strategies to be discussed in this post include:

1. Leverage Relationships and Loyalty
2. Bundle Multiple Projects
3. Offer Flexible Payment Terms
4. Focus Negotiations on Scope Reduction
5. Leverage Competitor Bids

Leverage Relationships and Loyalty

When negotiating with sub-contractors, leverage existing loyalty and relationships to your advantage. Sub-contractors who have worked with your firm regularly in the past and have an established relationship are more willing to prioritize your projects and offer better rates. Highlight past projects you’ve collaborated on successfully when negotiating to appeal to the sub-contractor’s sense of loyalty. Additionally, suggest and reinforce the potential for future collaborations to  encourage the sub-contractor to bargain in good faith. Leveraging relationships leads sub-contractors to go the extra mile for negotiated cost reductions.

Bundle Multiple Projects

Another way to drive down sub-contractor costs is to bundle multiple projects together into one negotiation, rather than negotiating each project separately. in order words, capture many projects at the same time and negotiate for all. This consolidated approach offers efficiencies to the sub-contractor by allowing them to allocate resources and staff more optimally across projects. These increased efficiencies translate into cost savings that sub-contractors will be willing to pass along through more favorable negotiated rates. Make it clear you have multiple projects on the horizon you could offer exclusively, subject to chance based on an attractive upfront pricing. The promise of a pipeline of bundled work gives sub-contractors incentive to sharpen their pencils and offer deep discount. Ways to Negotiate with Sub-contractors

Offer Flexible Payment Terms

Sub-contractors often build financing costs into their project bids if they worry about general contractors delaying payments. Allay these fears during negotiations by offering to formalize flexible, sub-contractor friendly payment terms like faster payment schedules or milestone-based invoicing. By modifying payment terms, you incentivize sub-contractors to reduce their pricing since you lower their financial risk. Consider offering a discount for early invoice payment if cash flow allows. Moving to standardized, simplified invoicing and payment processes also lowers administrative costs that can be shared as savings with the customer.

Focus Negotiations on Scope Reduction

Rather than bluntly demanding outright reduction in price, focus negotiations with sub-contractors on identifying areas of scope reduction on projects. In order words, point out areas for possible reduction of materials etc. This collaborative approach allows the sub-contractor to weigh in on potential savings tied to specific specifications and materials. Areas ripe for evaluation include swapping out custom materials for stock materials, evaluating less expensive substitutions, scaling down to standard model HVAC systems or prefabricated components. By involving the sub-contractor in a productive dialogue about their own costs tied to project scope, both parties can identify areas to scale back and thereby reduce price.

Leverage Competitor Bids

One of the most effective negotiation tactics is leveraging competitor bids to apply downward price pressure. Make it clear to sub-contractors that they have been selected from a competitive bidding process and that you have alternate bids in hand. Ask the sub-contractor to rationally justify in detail why their pricing differs dramatically from other competitors without divulging proprietary details about the competitor’s bid. The specter of losing the job to a competitor motivates sub-contractors to creatively identify cost reduction possibilities.

How to prepare for a negotiation with sub-contractors

Preparation is key to conducting successful negotiations with sub-contractors. some of the preparation tips include:

1. Conducting proper research. Review past work the sub-contractor has done, costs charged, and feedback from others who have worked with them. This will give you a baseline for reasonable costs to expect.
2. Take the time to Break down project specifications into individual line items and associated costs for labor and materials. Identify areas where there may be room for possible changes in products/standards to reduce costs.
3. Compare and benchmark sub-contractor bids against one another. Look for large variations you can query the high bidder on to identify potential areas for cost reductions.
4. Know budget limit before entering negotiations. Determine any areas of flexibility on your end with payments/deposits/scheduling etc. that could be bargaining chips.Ways to Negotiate with Sub-contractors
5. Outline your negotiation strategy and range of desired outcomes ahead of talks. Do this by preparing questions to pose and responses to counteroffers or points requiring clarification.

Following these steps will position you to negotiate from an informed stance with the insights and data needed to drive hard bargains with your sub-contractors around prudent cost concessions.

what are some key documents to prepare before negotiating with sub-contractors

Here’s a list of documents required while dealing with the sub contractors

1. Scope of Work Documents – Detailed scope of work specifications, drawings, and standards provide clarity on expected deliverables and allows sub-contractors to accurately estimate costs. Having an airtight initial scope makes it easier to identify areas to scale back if needed during negotiations.
2. Timeline Schedules – Provide estimated schedules and project milestones to allow sub-contractors to plan resourcing and identify dependencies that could impact pricing.
3. Request for Proposal Templates – Create standardized RFP templates for each work package that clearly outline required cost breakdowns, timelines, experience pre-qualifications etc. This facilitates comparing “apples-to-apples” bids.
4. Competitor Bids – Secure at least 3-4 bids per trade package to leverage during negotiations to press sub-contractors to match or beat pricing. Maintain confidentiality by only asking about specific gaps rather than divulging competitors’ entire bids.
5. Payment Term Sheets – Prepare standardized payment term sheets you can present formally outlining invoicing schedules, deposit amounts, bonus/penalty clauses etc. to utilize as bargaining chips in driving cost concessions from sub-contractors.

Conclusion

Controlling construction costs is imperative for success in the low-margin construction business. As specialized trade or business partners, sub-contractors play an outsized role in determining overall job costs and profitability. By focusing negotiations on loyalty incentives, bundling work, modifying payment terms, reducing scope, and leveraging market competition, general contractors can realize substantial reductions in sub-contracted work.