Dredging nowadays is a commodity. Meaning clients don’t select a dredging company based on expertise, your new shiny vessels, your nice head office, or the people you employ. They care about one thing only and that is price. There are rare exceptions but by and large this is how the industry now operates.
The conclusion is simple. The company that can dredge the cheapest and still make money will survive, thrive even. While the remaining companies will keep struggling.
The only reason that so many dredging companies are still alive today is that they all charge more or less the same price. No company has a clear advantage over the others.
On individual projects there might be quite a price discrepancy, where company A bids much lower than company B. But on the next project it can be the exact opposite, company B bids lower than A. This has more to do with how the companies estimate for the project, and their eagerness to get the project, than any structural advantage one has over the other.
Getting more projects is therefore quite simple, you bid the lowest price. The REAL question is, how can I bid the lowest and still make money? If you start losing money on projects the company will quickly be bankrupt.
So how do you ensure that you don’t lose money on the project?
- Estimate accurately, both production and financial.
- Bid above the estimate
- Execute the project as estimated
What if you estimate correctly, but then find your bid is too high? Two reasons can explain it. The first reason, which I hear quite often, is that your competitor is very eager to get the project, so he bids on or below cost price. This is not something you can control, and it won’t last if your competitor is actually bidding below cost price. After a few projects he will go out of business. If, however, your competitor does end up making a profit on the project, then this is not the real reason you lost the project.
Which brings us to reason number two, your competitor can dredge cheaper than you can. Estimates are typically based on previous experiences. If your competitors estimate is lower than yours than he had experienced a lower cost price on another project or even multiple projects. If he can sustain that, meaning he can still make a profit at these rates, then be warned! He has a competitive advantage over you and you need to reduce your cost of dredging. If you don’t address this issue you will go out of business.
When I say you need to dredge the cheapest, what do I mean by that? It seems simple, you charge the least amount of money for a certain project. This in essence means that your cost per cubic meter dredged is the lowest, which I call the unit rate. Conclusion, you need to lower the unit rate.
This can happen in three ways:
- You bring your costs down but keep the production equal.
- You increase your production but keep costs equal.
- You increase your costs but increase your production a lot more.
It is about finding the perfect balance in your total investment in your production. In the graph on the right this is shown.
Most companies focus on number 1, cutting costs. Few companies focus on number 2 and almost no company focuses on number 3. If you struggle in getting projects and keep losing bids on tenders it is time to start working on number 2 and 3. You need to increase your production, not cut more costs.
At Strategic Dredging we are experts at increasing productions. Contact us via this form to learn more.
To your success,