Work Without Pay: Good for Architects, Engineers and Contractors?
The lowdown on whether construction service firms should give away services to get work
Are loss leaders (products or services sold at a loss to gain customers) sound business strategy – or an unnecessary drain on profitability that encourages bad behavior from design and construction clients?
Does it make sense for architects, engineers and contractors to provide some free up-front construction services (design, pre-construction) in the hopes of landing a project or new client? Or is the “free sample” approach unprofessional in the world of professional services?
Those questions were front and center at the recent Architecture, Engineering and Construction Executives Network program in Philadelphia, which featured the presentation, Building a Culture of Profitability, by June Jewell, a CPA with AEC Business Solutions, and M. Scott Hursh, a CPA with Stambaugh Ness.
When the question was posed, it led to a spirited discussion.
Some attendees believed that it made perfect sense to take a project at a loss to gain a new client. The counter argument to that approach was that the client will never accept full fees from you afterward and you’ll never be whole, much less profitable, with that client. And yet the counter to the counter was that loss leaders allow you to “buy” new credentials, which you can use to leverage new business from other similar clients.
But the danger there is that it may be many years until those unprofitable projects lead to new opportunities within the new market segment.
Over the past few years I’ve talked a lot about the client requirement for “3 in 3” or “5 in 5”; that is, three extremely relevant projects completed within the past three years, or five extremely relevant projects completed within the past five years. So with this logic, does the loss leader strategy dictate three or five below-cost projects to “buy” enough credentials to succeed in a new market?
Although there are certainly firms out there employing the loss leader strategy, some have had more success than others. In the height of the Great Recession, firms were using this approach as a stopgap just to “keep people busy” and trying to mitigate their losses – losing $20,000 on a project seemed like the better course of action than losing $120,000 from having staff sitting around, totally unbillable.
Anecdotally, “freebie work” seems like a more common approach. An architect providing a rendering or floor plan at the proposal stage – or a contractor giving away preconstruction (precon) services – are common applications of this strategy. In both cases, the “free” work is viewed as a marketing expense, not unlike offering a free sample or giving away a month of free software use.
But firms in the A/E/C industry are notoriously bad about tracking these expenses – and even when they are tracked as “marketing,” they are often not broken out further, making it difficult to determine the true cost of client acquisition.
Part of the thinking for using this approach often revolves around the hope that if you are selected, you’ll be able to roll those costs directly into the project. Of course, because these free services are often provided with many assumptions – and limited or no input of the client or end-users – more often than not once your firm is selected, you must start over. However, your project is in the red. (So much for hope being a viable strategy!)
Alas, we live in a world with many clients requiring or expecting free work if you want to propose on a project. They expect renderings or 3D models or construction cost estimates (with no design having occurred, mind you) or intricate schedules. Even MEP engineering firms can get in on the fun with requirements for energy calculations; so what if the building has yet to be designed and no systems have even been studied or selected! And when US government agencies are requiring a high level of upfront work, they are setting the standard for other clients – public and private.
But are the loss leader and free work approaches truly strategic? Or are they strategery?
To get a pulse for how A/E/C firms feel about these approaches, I reached out to several industry leaders to learn their thoughts. Not surprisingly, the opinions were all over the board!
In her landmark book, Find the Lost Dollars: 6 Steps to Increasing profits in Architecture, Engineering & Environmental Firms, June Jewell addresses the loss leader strategy head-on. Early in the book she identifies ten profitability traps, and intentionally taking projects at a loss is Trap 3. June writes: “First and foremost, you are setting your company up for a long future of losing money with that client. You can rarely start off at a low threshold and increase it later. In most cases, you will never be able to get a profitable project with this client, and you will get trapped in a long-term vicious cycle of continuing to provide services at a loss.”
She believes there are a couple of other reasons why this approach should be avoided: “…it can have the negative effect of causing tension between your project managers (PMs) and the client, as they struggle to keep costs in control and limit the amount of loss that is realized. This practice leads to a negative relationship with the client, and an unfair burden placed on your PMs, as they strive to make the client happy and help the firm make a profit.”
June is also worried about what this approach has done to the industry as a whole: “There has been a trend over the last five years toward declining fees, and this practice only leads to pushing them lower for all of us.”
John Doehring, the Executive Leader of Advisory Services and Training for PSMJ Resources, a leading authority on A/E/C firm management, concurs with June: “At PSMJ we argue strongly against both the ‘free work’ and ‘loss leader’ approaches to developing new business. While a lot of firms do indeed practice these ‘strategies,’ in the long run neither is very effective in supporting and promoting a strong, high-value, professional services brand.”
I’ve often heard A/E/C executives lament that architects and engineers aren’t viewed the same way as other licensed professionals, like doctors or attorneys. But John draws a direct comparison in the way A/E/C firms market themselves with other professional services: “What do you typically get for free from your doctor, or dentist, or lawyer? When was the last time your accountant offered to do your income taxes – gratis?”
John believes that “giveaways” may make sense in just two instances. The first may be a free ebook in support of a high-end training product (which is actually a strategy that PSMJ uses), and the other is when it is a “very small part of an overall project” (like “a free quickie diagnostic assessment on the front end of a major consulting assignment”).
“It’s this second situation that has the design industry in trouble,” he notes. “Offering a quick, conceptual rendering might tease the client to move forward with you, and might make sense, but providing complete drawings and plans ahead of time – with no guarantee of winning the work? I’d categorize that approach with this technical term: stupid.”
M. Scott Hursh
“Taking work at a loss or significantly below your normal rates creates the perception that you are a low cost provider,” cautions M. Scott Hursh, CPA, CCIFP, CDA, CGMA, managing principal of the AE Group for Stambaugh Ness, accounting, business, and technology advisors serving the A/E/C industry. He says, “ In most cases you will struggle to increase pricing on future projects with this client because they expect you to be cheap. In addition, these clients tend to refer other clients looking for the lowest price.”
So profitability, management, and accounting consultants to the A/E/C industry clearly think that loss leaders and gratis work are a bad idea, at least in the vast majority of cases. But how do industry practitioners feel about these strategies?
Brian DiSabatino is president and CEO of EDiS Company, a Wilmington, Delaware-based construction manager and design-builder. Brian concurs that these approaches don’t make much sense: “I think the most important thing is to understand the risk that our customers confront, when beginning a project and entering into relationships with consultants, especially new consultants. We never offer ‘free’ services because that both communicates that our relationship has no value and the customer doesn’t value a good relationship … free is for the valueless consultant or the non-relationship-based customer. Rather, we respect the needs of the customer and adapt a patient approach.”
Some A/E/C firms believe that free, or at cost, services make sense for strategic accounts. An executive with one of the country’s largest construction firms shared this: “Our business is built on relationships. We all need more of those to establish new and increasing business. Once in front of a potential client it sometimes becomes a choice to provide design and precon at costs, offer for free, or to charge a billable rate which indicates a return on investment. I believe that if the effort involves a long-term strategy to gain access into a larger firm with lots of work, then providing services at costs makes sense. If it’s a smaller opportunity, less future work or potentially a one-off project, then it does not make financial sense. We always evaluate reward verses input or loss of earning initially to play the long-term game. It has paid off in the past, but when it doesn’t, it certainly is painful.”
Clark Nexsen, a 450-person architectural and engineering firm headquartered in Virginia Beach, VA, views loss leaders and free work differently, according to Thomas Townes, AIA, FSMPS, CPSM, director of business development at their corporate headquarters: “We do not arbitrarily or typically get involved in loss leader opportunities. It is not part of our business development planning DNA. Simply put, loss leaders do not suggest sound strategic planning and the word ‘loss’ suggests a negative end-result.”
However, sometimes a bit of upfront design is viewed as a viable marketing strategy. Tom says, “Based on our market segment, strategies and experience, we could spend some predesign marketing dollars to win an opportunity. Other than design-build, which we also strategically evaluate, these are decisions we are making as a company and not at the request or demand of a client. Our marketing budgets identify where we might be spending extra dollars for charrettes, design build efforts, or for demonstrating our design process, but it’s always strategic, and based on our probability of winning the work.”
Peter J. Kienle, FSMPS, CPSM, MBA, of Kienle Communications, has worked with architecture, engineering, and construction firms of all sizes during his career. He presently consults on business development and marketing, and has watched the industry evolve. “For a true loss leader, like when Kroger advertises sirloin steaks at less than cost to draw in more customers, is not really the case in our industry. To go low in your pricing up front sets a bad precedent because the client expects you can do that level of pricing in the future. So you may be stuck at losing money all the way through.”
Although this approach is flawed, Pete also believes that clients face pressure to accept this strategy. “My best example of low bidding design work was a housing authority that put out an RFP for a study. The bids came in at $12,000, $52,000, $53,000, and $58,000. We knew that the $12,000 bidder was just trying to get in and then position themselves for the design work. By the bids you know the right price for the cost plus about a 10% profit is in the mid-$50,000 range. The owner took the $12,000 bid knowing the firm could not do what they wanted for that. And the reason was that it was publicly-bid and the public would be outraged if they knew the agency was paying $40,000 more for something than it ‘cost’ – they would be on a TV news investigation show!”
Yet Pete also believes that a little free upfront work isn’t a bad thing: “It is common in our industry to do something for free or gratis to get to know and develop a relationship with a client.” He notes that this approach originally came from the contractor-side of the A/E/C industry: “(contractors) had more up front they could give away since they stood to make so much more than designers on their contracts.” He adds, “I see nothing wrong with helping an owner who asks you to try to get a handle around the cost for a project and give them 10 or 12 hours of time of a designer/cost estimator. But if an owner wants a 50% or 75% level of drawings submitted, I walk away. You know they are going to want these freebies all along the rest of the way. Plus I have seen where, say, five shortlisted A/E firms spend $50,000 each to design a project – the owner requested this design and gets $250,000 of design for free – to take to the interview, and the owner takes the parts he likes in each design and uses it. That is very unethical and I have always recommended walking away.”
Are there better approaches than loss leaders and free upfront work?
PSMJ’s John Doehring believes so: “The best recipe for professional success is to price the firm’s core services based on the value delivered to clients, rather than on the effort needed to deliver them. But of course this requires developing and delivering real value, in the customer’s view, sticking to your guns, and learning to say ‘no’ to those clients who don’t see the deal the way you do. Learning to say ‘no’ thanks to new opportunities that don’t fit is, I believe, the single biggest skill missing in many organizations today. At PSMJ we don’t strive to push our products and services on the entire market. We’re in the game to do business with clients who think and act like we do, and who want to do business with us.”
Scott Hursh believes that you need to change your perspective: “Instead focus on the value you bring to that client and use references from other clients who are happy to pay you what you are worth. This may take longer than ‘buying’ a project but will result in a portfolio of clients who recognize your value and are willing to pay for it.”
Adds EDiS CEO Brian DiSabatino: “…we see what is important to the customer. Do they need us to delay receipt of payment? It’s not off the table. Do they need us to take the risk of ‘if we get it you get it, but we all need to risk our time and talents?’ Of course we will. Or would they like to dip their toes in the water with a staggered ‘pay as we go’ approach to a menu of services? That’s a reasonable way to build trust.”
“Trust” and “value” are words that come up again and again when discussing the topic of loss leaders and free services – specifically the potential negative impact that these approaches could have on your ability to build trust and demonstrate value over the long term of a relationship. And yet many firms believe that there are limited, strategic applications of these approaches as a way to land a project or build relationships.
But at the end of the day, most people believe the adage: “You get what you pay for.”
What do you think? Is there a place in the A/E/C industry for loss leaders and free upfront project work? Or does this approach train clients to behave badly and reinforce the perception of A/E/C firms as simply being commodities?