In the construction industry, work is carried out by the client, the general contractor, and subcontractors.
In this process, price negotiations are inevitable, and since a lower construction unit price naturally leads to a higher profit margin, contractors tend to choose construction methods that allow them to offer discounts and keep costs as low as possible.
However, if we get swept up in this wave of price cuts, it will trigger a chain reaction of negative effects in various areas. Let’s take civil engineering projects as an example.
Problems That Arise When Prices Are Low
I believe it’s no exaggeration to say that, when it comes to carrying out construction work, everything hinges on payments to subcontractors. This is because if the general contractor tries to cut payments to subcontractors, problems arise in various areas.
First, if a subcontractor is offered a discount, there is a risk that they will cut corners on the work. This is because they might think, “Since I won’t get paid even if I do all this work anyway, I might as well cut corners at some point.”
However, from the general contractor’s perspective, that’s not an option. Just because the construction unit price has dropped doesn’t mean they can tolerate shoddy workmanship. This is where a serious rift develops between the two parties. Money issues tend to create rifts between people.
What the General Contractor Should Do
While general contractors must naturally consider their own profits, they need to make arrangements to pay their subcontractors as soon as they can reasonably expect to secure those profits, so that the construction project can proceed smoothly.
Although the amounts to be paid to subcontractors are often largely finalized at the budget execution stage, let’s take another look at the potential for detailed expenditures.
For example, if it rains at the job site, what is the likelihood of a collapse? What materials will be needed for the restoration work? It is necessary to identify these details as thoroughly as possible and incorporate them into the budget. It is important to set aside a budget in advance that is sufficient to cover the costs of subcontractors.
Furthermore, if, when a disaster actually strikes, the message is, “Please carry out the restoration work, but we won’t pay for it,” contractors will naturally become dissatisfied. Any factors that are likely to lead to such dissatisfaction should be thoroughly eliminated in advance.
What Subcontractors Should Do
Although subcontractors are in a difficult position, they must avoid becoming “yes-men.” They need to set a minimum threshold for the amount they’re willing to accept for a project, and have the courage to say “no” when offered a price below that threshold.
It’s extremely dangerous to say “yes” reluctantly—worried about what will happen if the next job doesn’t come in—just to please the general contractor. To begin with, there’s no need to work with a general contractor who doesn’t have your profit in mind.
Furthermore, even if the unit price for construction work is negotiated down, the general contractor will generally not compromise on the scope of work. It’s not worth the money, and even if a subcontractor wants to cut corners and get out of the job early, the general contractor will tell them that won’t be tolerated—so the subcontractor has no choice but to perform the required work, whether they like it or not.
Subcontractors shouldn't just be "yes-men" to everything. It will only end up hurting them in the long run.
The Best Way to Escape the Haggling Hell
The key to resolving these issues is to clearly understand each other’s points of mutual benefit.
Given that the general contractor also lacks a budget, it is obviously impossible for them to pay subcontractors. If they believe they can generate a profit, they must also consider ensuring that a fair share of that profit is returned to the subcontractors.
To ensure that subcontractors make a profit, the general contractor must be able to recover the actual costs incurred from the client.
The basic principle is not to simply carry out the work as instructed, but to clearly understand how much it will cost and ensure you are paid accordingly. If you don’t speak up, the client will proceed within their own budget, so you need to be careful.
Subcontractors, too, must not demand excessive payments when the prime contractor cannot secure a profit. If that’s the case, they should have the courage to turn down the job from the start.
Perhaps the best way to escape the hell of haggling is to never forget that it’s a give-and-take relationship.
