top of page
Search

The Hidden Economics of Contractors: Bidding at Cost


Margins that once ranged from 8–12% have collapsed. In oversupplied markets like Denver and Austin, projects are being awarded at margins barely covering overhead. This is not just aggressive pricing—it’s the product of intense competition, oversupply, and procurement systems focused almost entirely on cost.
Margins that once ranged from 8–12% have collapsed. In oversupplied markets like Denver and Austin, projects are being awarded at margins barely covering overhead. This is not just aggressive pricing—it’s the product of intense competition, oversupply, and procurement systems focused almost entirely on cost.

The Numbers Don't Lie


Average industry profit margin: ~6%

Many GCs today: 2–3% margins

Competitive metros: 1–2%



What’s Driving This Reality

Several interrelated factors contribute to this challenging low-margin environment, and understanding these elements is crucial for stakeholders within the industry:


  1. Client Procurement Has Changed

One of the primary drivers of this phenomenon is the shift in client procurement practices. Clients are increasingly prioritizing the lowest bids, often reducing complex projects to simple price comparisons. This trend has led to a de-emphasis on quality, expertise, and the value that experienced contractors can bring to a project. As clients focus solely on cost, they may overlook critical factors such as safety, reliability, and the long-term implications of choosing the cheapest option available.


  1. Market Saturation

The commercial construction market has become saturated, primarily due to low entry barriers that allow new contractors to enter the field with relative ease. This influx of competitors has intensified the bidding process, compelling many established contractors to bid at break-even points or even at a loss to sustain their operations and maintain cash flow. The result is a highly competitive environment where contractors feel pressured to lower their bids significantly, further driving down overall profit margins.


  1. Risk Transfer

Another critical factor is the increasing tendency for clients to transfer more project risks onto contractors without offering additional compensation. This shift places a heavier burden on contractors, who must now manage these risks internally. The need for robust risk management strategies has become paramount, as contractors must navigate potential pitfalls while still delivering projects on time and within budget. This added pressure can further erode profit margins as contractors invest in risk mitigation measures. (Read more: Autodesk)


Where Contractors Could Theoretically Make It Up

Despite the challenging environment, there are several avenues through which contractors can seek to regain profitability beyond the base contract:


These strategies work together to counter low-margin bidding pressures and create sustainable competitive advantages. Implementing just one can significantly impact your bottom line; adopting all five creates a comprehensive profit maximization system.
These strategies work together to counter low-margin bidding pressures and create sustainable competitive advantages. Implementing just one can significantly impact your bottom line; adopting all five creates a comprehensive profit maximization system.

When margins are razor thin, even small efficiency improvements can protect profitability. That’s where Hardline comes in—by capturing and structuring jobsite conversations automatically, it eliminates hours of manual note-taking, miscommunication, and rework. As material and storage costs spike, Hardline helps teams respond faster to procurement issues, coordinate deliveries in real time, and prevent costly delays. The result? Projects stay on schedule, labor is used more effectively, and storage overruns don’t eat into already thin margins.


The Client Perspective

From the client's viewpoint, low margins can be a double-edged sword. While they help keep project costs down, they also drive contractors to innovate and improve efficiencies in order to survive in a competitive landscape. Clients benefit from the resulting advancements in construction techniques and technologies, which can lead to higher-quality outcomes.


However, unexpected change orders can quickly erode client trust because they make the project feel unpredictable and financially unstable. Even when justified, surprise costs can create the perception that the contractor underbid the project or failed to plan properly. Over time, repeated changes shift the relationship from collaborative to adversarial, with clients scrutinizing every decision and questioning the contractor’s transparency. (Read more: AIA Contracts)



The Sustainability Question

If thin margins persist:


  • Quality risks — Cheaper materials, rushed schedules

  • Industry consolidation — Smaller firms exit

  • Talent drain — New professionals look elsewhere


98% of large-scale projects already experience cost overruns of >30% (eSUB). Add shrinking profit and the long-term picture is challenging.



Conclusion

Ultimately, the commercial construction industry must undergo a fundamental shift from a cost-focused mentality to one that values innovation, quality, and efficiency. Contractors who successfully adapt to these dynamics will not only survive but thrive, using the current challenges of tight margins as a catalyst for improvement and a competitive advantage. By prioritizing strategic growth and embracing new methodologies, the industry can pave the way for a more sustainable and prosperous future.


Sources:





 
 
 
bottom of page