Market Price in Construction Business

Uncategorized Aug 01, 2022

Discussions about price must be well prepared beforehand to get a good business deal. Some common situations from the field can be pointed out:

  1.  The subcontractor didn't really understand the price list

When you negotiate with a subcontractor from another country, and he has not yet fully mastered the local operator's price list, the latter will naturally tend to make comparisons with the reference prices he knows on his domestic market. He could make an error of analysis in good faith and refuse your offer, whereas the price would be perfectly acceptable to him.

  1.  The purchase price is too far from the market price

Once you have eliminated any risk related to an error in understanding the price list, it may happen that your purchase price is not attractive enough for the subcontractor. This could be the case, for example, with a fixed-price master agreement that was negotiated over a year ago. Indeed, the price schedule would not integrate the evolutions of raw material prices which can be sometimes very significant (raw material purchases are one of the first expenses of the subcontractor).

However, during the negotiation, the Consultant will be able to identify several levers to find solutions or compromises in the interest of both parties.

It is important that the subcontractor considers the profitability of the project satisfactory, because in the opposite case, the subcontractor could be tempted to find a compensation by himself by reducing the consumption of raw materials for example. This solution is risky because the under-consumption of sand or gravel in the trenching work could quickly lead to problems of subsidence of the road and therefore to complaints from local residents. Repairs, in turn, result in additional costs and delays in delivery of the work.

  1.  Compensate for low price with productivity measures

During the negotiation, the contractor will almost always try to argue that your purchase price is too low compared to the market price. Is this the end of the story? No, not really. In reality, a lower price can be accepted by the subcontractor if his productivity is higher. In other words, the more efficiently the contractor works, the better the compensation for a day's work because of the higher volume of work billed. The Consultant may suggest to the Contractor additional productivity levers (better distribution and organization of work, use of specific machines allowing to work faster or to use less resources). It will not be necessary to forget thereafter to retain the productive subcontractors by bringing them sufficient volumes to contribute to reward, if necessary, the efforts invested in modern technologies and working methods.

 The chances of success in signing a good commercial agreement are significantly improved with a little education, knowledge of market prices and a demand oriented towards the search for productivity.

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