Answering this question is often awkward because its hard not to sound self-serving, but I’ll give it my best shot. The simple answer is that in most cases the salesman is making a guess as to how much you’re willing to pay. If he sees you as someone who is on a tight budget, he’ll drop his price a little, but if the salesman thinks you’re doing real well and money isn’t the biggest issue, he’ll pad his price a little higher.
Why? In almost every construction-related job, salesman get either a commission or a share of the profit. So, the higher the profit margin he can sell the job for, the more he makes when the job is done. There’s nothing wrong with the sales rep making a living and the contracting company making a fair profit so they can stay in business, but unfortunately any business transaction can be taken to excess.
A good example is what often happens when a homeowner calls us for an estimate for some exterior home remodeling. We will invest our time and money to drive to their homes, carefully measure and inspect, and then sit down with them and do our best to give them an honest quote for the work they want to have done. Then, this homeowner will probably get three or four more quotes that will often range from very high to ridiculously low with several somewhere in the middle of the pack.
What often happens is that the homeowner will choose one of the lowest bids, which more often than not turns into a nightmare. Several times a homeowner who did not hire my company (usually they chose a lower bid) emailed me a few weeks later to tell me of the poor experiences that they had with the contractor they DID hire. Other times I have personally gone back to a house when I was in their area to look at the jobs I didn’t get that were finished by another company, and many times to my trained eye it was obvious where the contractor had done shoddy work. Those homeowners would often come to the sad realization that they got what they paid for.
Why are some companies bidding so low?
Every once in a while business slows down for a lot of reasons, and this can cause contractors to panic because their cash flow is reduced while bills keep coming in, suppliers want to be paid, crews need to be kept working, office staff needs to be paid, etc. During times like this, the contractor will tell his estimators to bid the jobs close to cost just to get some jobs going. And in times of severe distress, they may even quote jobs below cost. But a company that is that desperate for business is usually a very poor risk. Ask yourself if it is possible they may not be around much longer… are they going to pay for their supplies or will they choose to skip out on their suppliers and let you handle the problem after they don’t finish? Are they going to use the same brand name products they promised they’d use or will they try to sneak in some cheap generics or second-hand materials in the hope that you won’t notice? Its a real simple principle… very low bids usually mean lower quality work.
Don’t let any of them tell you that they get their materials at a discount!!!
A lot of our competitors try to explain why they quote so low by saying that they are high-volume and have purchased so much material from their supplier that they have a special price that is far lower than his competition. This is baloney… suppliers all over this country have been repeatedly asked to confirm this claim ad nauseum, and if you compare the material costs at all of the large supply yards, there is very little difference in wholesale prices. So, if someone tells you they are getting their materials at a big discount that is not available to other companies, and if his quote is far lower than the other companies’, there are only three possible explanations: (1) They could be using inexperienced day labor and/or simply under-paying their crews because they are low-skilled; or (2) They are cutting many corners and substituting material, especially in areas you won’t be able to see right away, but will become noticeable in a few years as the job ages. (3) They could be using stolen material… this was a big issue in this area for several years but after 2008 the construction industry slowed down due to the bad economy, so there were fewer construction sites and therefore less material available to steal. If you remember, in May 2007 the Houston Police broke up several “chop shops” (places that bought stolen construction materials and resold very cheap) around the city after a long sting operation. Now that new home construction has picked up again, the theft of materials has too, even though most construction companies are getting better at securing the materials that are left at job sites after hours.
I say all this to get to this one very important point: the lowest bid is almost never your best bid. If you want a quality job, most consumer protection organizations say you should get at least 3-5 quotes, eliminate the lowest and the highest bids, and pick one of the companies in the middle. Companies that bid very low are able to do so because they are cutting back somewhere to increase their profits, which means you are not getting the quality you thought you were getting.