Building annuities through bids and annual contracts: Contractor's Corner - Nov 2015
By Dave Stafford
Whether you’re retired and hope to outlive your funds or you’re in the flooring business, it’s great to have an annuity. You’ll have a vehicle whereby money will roll in with much less action from you. When you wake up in the morning and get to the office, there will be several orders for processing. No hard-fought close for a sales order, no standing in line hoping you have what that client wants, and no worries about price. You’ll already have the order!
This happy situation awaits when you’ve been awarded a term contract to provide products, services and complete installation. Now that you have a contract, you focus on selling the menu that you have to offer. The stress comes in making sure the client is using the menu effectively for them and for you, and delivering the selected items on time for their complete satisfaction.
Bids may be available to you as a flooring dealer from a variety of sources: government, institutional, property management, developers, national chains, multi-state companies, healthcare and the like. Some bids are for a specific project and can be very large or small. They usually happen when a need is defined, the products are known, and method of installation and site prep are specified. One bidder will be selected based upon lowest price or some combination of price and best value. Stripped of anomalies, best price usually wins a specific project. You have one shot at this bid, and if you win, you do that project.
Many of these jobs are put out as an IFB (invitation for bid) where the products and services are strictly defined, including performance time with liquidated damages provisions. Or smaller bids may give you some leeway to propose product changes, methods of installation or delivery. These usually fall into the RFQ (request for quote or proposal) category. In all cases, though, these bids are for a specific project or projects where funding is in place and a current requirement exists. With these bids, however, you only have one shot to win. If your price is too high or cannot meet the “best value” parameters, you lose. In short, this type of bid is a gamble—all or nothing.
TERM BIDS AND MULTIPLE AWARDS
Buyers and purchasing agents have gotten smart and have said, “If we are buying the same products and services over and over again, why not just save a bunch of money and aggravation by putting out one bid stating what we want and expect to purchase over the next year (or two or five years), make an award, and then issue task orders against that contract?” This genius of an idea is used by co-op buying groups in municipal and healthcare, many school systems, local, state and federal government, property managers, developers and even general contractors.
This type of annual contract may cover a range of products, including most types of flooring; services such as cleaning, maintenance or emergency operations; and installation services like take up and removal, floor prep, patching or floor leveling, and product installation. As one astute buyer said, “If I can define it and establish a unit price, then I can add it as a menu item. That way I cut out most change orders and the ‘price fantasy’ from contractors.”
Most of the multi-year term contract bids are of the IFB variety—you must respond exactly as directed in the bid without offering up any changes to terms, conditions or scope of work. If you were to state any conditions to your bid, in most cases your bid will be tossed out as “non-responsive” (to the terms of the solicitation). Most term contract bids provide for a single award. A few may allow for a primary and an alternate award (when the main contactor cannot perform, they have a backup). Some bids with huge expected volume covering a large geographic area may be of the multiple award variety; examples would be federal GSA contracts and some state contracts from states like Texas and California.
An integral part of this type of term contract award is that the award is for an indefinite amount and an indefinite quantity of products and services to be purchased through the contract term. Specifically, there is usually no guaranteed purchase amount (or perhaps $100 or something small) or quantity. Some companies have found that there was zero business because funding for flooring purchases did not materialize. I once spent many hours landing such a contract and did zero business for two years. However, in the third and fourth year of the five-year contract, sales volume was in seven figures. Be aware that just because you get an award, the floodgates don’t automatically open.
BUILDING YOUR ANNUITY
What you’re looking for are opportunities where you have a chance to perform work, if or when available, over a set period of time at a guaranteed price. Some examples of this would be the federal government’s GSA contract program, where most contracts are for five years, having three or four renewal terms. State governments have similar models or an accreditation process whereby you are “certified or eligible” to offer pricing to agencies within a given area. They may also participate in multi-state term contracts. Most large municipalities and school systems have annual contracts that run for two to four years or have one-year contracts with two or three renewals possible. Some large property management companies and developers maintain contracts of the task order type with dealers, especially if they have a number of projects or different buildings. Start thinking about the opportunities in your own geographic area. The obvious place to start might be within your own city or county and with the local school system.
QUESTIONS TO ASK
You might ask a purchasing agent or facilities manager questions like: Do you have in place any annual or term contracts that involve the purchase and installation of various types of flooring? If not, would you be interested in the term contract concept for flooring and installation activities? If so, what is the term of the current contract you have in force? What company has your current contract?
Do you anticipate that the current contract will be renewed, extended or rebid? If it will be renewed or extended, it will be for what length of time? If this is going to be rebid, when would this be done? How will this be advertised? Is it your policy to make a single award to the lowest price bidder, or will you consider multiple awards on this contract, such as a primary and alternate contract supplier? Is there a particular process whereby I may request a copy of the most recent award under the Freedom of Information Act statutes (FOIA)?
These questions are intrusive and, if asked abruptly or without proper preamble, may anger the buyer. The better way to get answers is with a warm-up where you explain about your company, its capabilities, and why you are interested in becoming a supplier. “Jeff, we have a terrific product line that would be perfect for your county, backed up by our expert, certified installation. We’d like to see if there is a way we could do some business. With that in mind, I’d like to ask some questions to see if we might be a good fit.” With a skittish buyer who is clearly uncomfortable, stick to the main points: “How do you buy flooring and installation? Do you have a term contract in place? What’s the name of the supplier, the length of the current contract and when/if it is to be rebid?”
Should you hit a responsive chord with the buyer and you feel there is a real connection, then ask, “So, Jeff, what do you have coming up over the next year as far as funded projects? How about the overall budget for flooring? How’s your current supplier performing for you? [It’s very important to find that out.] I believe you said this was a single award, right? How would you feel about plugging in an alternate supplier if one could provide products and services at similar prices to take care of those rush jobs?” [If he’s really having problems and is locked into a longer term, he may be able to add you as a supplier on his existing contract.]
“Are there any particular challenges or things you’d like to change with your current contract?” I once had a buyer turn red in the face and the veins pop out in his neck when I asked that question. I thought he was going to have a heart attack. “Every time I have a flooring project, I get multiple requests for change orders with frivolous reasons why this was an ‘unexpected, hidden site condition.’ Hell, he should have priced some floor prep into every job as stated in the solicitation. I guarantee you I will take care of that with this rebid!”
Steps to take before you think about providing that bid: Get a copy of the current award and pricing being paid under FOIA (which may take some time, so plan ahead); make sure you can actually get the products that will be required at the right key dealer price level; and make sure you can handle the expected volume of product and installation with current credit lines and personnel. Be realistic about your costs and profit when pricing each line item; depending on bid parameters, you may “load” pricing on some high-use areas and adjust on marginal items rather than a set markup. Do not bid based upon getting change orders!
Are you prepared for the process of getting paid and the length of time it may take to get their check? A question I always asked was, “I know the solicitation says valid invoices will be paid within 30 days, but how long should I figure for your processing before my invoice is approved for payment?” Most government agencies “start the calendar clock” for payment from the date your invoice is approved as a valid invoice, not from the date your invoice was received. I usually got answers from 15 to 30 days, which meant that if I invoiced right after the job was done, I would probably not receive payment in fewer than 45 to 75 days. So, figure in float when getting terms from your suppliers on this bid.
PERSONNEL AND MARKETING
Sure, it feels great to get a bid award, but now the real work begins. Now you need to begin marketing your menu of products and services. If there is a universal failure among most companies, it is waiting for the phone to ring rather than aggressively following up with potential clients who can use the contract you’ve just received. Here’s the difference: End users or facility personnel just have to have a need and money in their budget—all the hard work of selection has already been done for them. What you have to market is your contract award, expertise, service and exceptional on-time delivery. Some purchasing agents or facility chiefs restrict your contacts, preferring to screen agency requests, and some do not. An agency, such as GSA, expects you to aggressively market your contract, and if you do not and low sales result, your contract will be canceled.
Hopefully the case has been made to consider the annuity possibilities for a multi-year term contract in your backyard. Yes, it will require some long term planning, perhaps years. Make sure your company is a good fit in terms of product offering, credit lines, expected volume and installation capabilities. This is not a niche built overnight. I’d suggest a three to five year focus. Also, consider a blend of term contracts; local government, schools, state or federal government, healthcare. Some diversity will hedge your bets and you’ll sleep better at night.
Copyright 2015 Floor Focus
Related Topics:The International Surface Event (TISE)