Construction Is the Only Industry That Signs Contracts It Knows Will Lose Money
Construction is the only major industry where signing a contract you know will lose money is a rational commercial strategy. Average net margins sit at 2-7%, yet the system rewards the contractor willing to go lowest – then punishes them for doing so. The real money gets recovered through change orders, claims, and in some cases litigation funded by third parties. This isn’t a failure of individual judgment. It’s what a broken procurement model produces when you run it at scale for decades. Until the contracting structure changes, no estimating software fixes it.
There’s a line that gets repeated at construction industry events, usually with a tired laugh: if you price it right, you won’t win it. The joke lands because everyone in the room knows it’s true. In competitive tender environments, the contractor who submits an accurate, fully-loaded estimate will frequently lose to someone willing to go lower. The low bid wins. The accurate bid goes home.
Think about that for a moment. In what other industry does the person who prices their work correctly get penalized for it? Not finance, not manufacturing, not professional services. Only construction has institutionalized a procurement model that actively selects against accurate pricing and then acts surprised when projects run over budget, relationships deteriorate mid-build, and firms with strong pipelines collapse because the work they won is quietly bleeding them out.
This isn’t a problem caused by bad estimators or undisciplined contractors. Most of the people caught in this cycle know exactly what they’re doing. Underbidding to win work – and planning to recover margin through change orders, claims, or both – is a deliberate strategy. The system taught them to do it. And until the system changes, the best technology in the world won’t fix it.
The underbidding problem in construction is structural, not behavioral. Low-bid procurement makes it rational to win work at a loss and recover margin through claims and change orders. Owners get the contractor who priced lowest, not the one most likely to deliver. The result is adversarial projects, inflated costs, and an industry that treats litigation as a business model rather than a last resort.
Why Underbidding Is Rational, Not Reckless
The commercial logic that makes losing money on paper make sense
A contractor looking at a competitive tender has a straightforward problem. They know what the work actually costs. They know their overhead, their labor burden, their material exposure. They can build an honest number. But they also know – from experience, from watching competitors, from losing jobs to bids they couldn’t understand – that the honest number is probably not the winning number. Someone else is going to come in lower. Maybe significantly lower.
So the choice becomes: submit the accurate price and lose the job entirely, or submit a price that wins the job and plan to make the margin up somewhere else. For a firm that needs work to keep crews busy, maintain bonding capacity, and service debt on equipment, the second option has real commercial logic. An empty pipeline is an existential threat. A loss-leader project at least keeps the machine running while you figure out where the margin comes from.
“If you estimate the project correctly and your price is accurate, you don’t win the job. There’s always someone willing to price lower – whether they’re planning a claim from day one, or they just don’t know what they’re doing.”Owen Drury, founder of Bricks & Bytes, construction estimator for 12+ years
Where does the margin come from? Change orders, primarily. Every project generates them – designs change, clients change their minds, site conditions differ from what was assumed, scope creep accumulates. An experienced contractor knows this, and some price accordingly: bid low to win, then recover through legitimate change order pricing once the project is underway. The owner is now locked in – switching contractors mid-project is expensive and disruptive – which changes the commercial dynamic considerably. The low bidder who looked like a bargain at tender is the only viable option at negotiation time.
The Claims Economy: When Change Orders Aren’t Enough
How litigation became a business model in construction
Change orders cover a lot of ground. But when the initial bid was aggressive enough – or when costs move significantly between tender and execution – change orders alone may not bridge the gap. That’s where construction claims enter the picture. And claims, in a meaningful number of cases, are not a last resort. They’re planned.
Third-party litigation funding in construction disputes is a recognized practice, particularly on large public contracts. Specialist funders assess the merits of a contractor’s claim against an owner or client, advance the legal costs, and take a percentage of any settlement or award. For a contractor sitting on an underwater project with a legitimate scope dispute, this creates a financing mechanism to pursue recovery without absorbing the legal cost upfront. The fact that this industry has a functioning ecosystem of claim financiers tells you something about the frequency and predictability of these disputes.
- Low bid wins the job. Accurate pricing loses. The contractor who prices to cover costs and make a fair margin is outcompeted by someone willing to go lower.
- Change orders start accumulating. Designs change, client decisions shift scope, site conditions differ from what was tendered. Each change is an opportunity to recover margin at a price the client can no longer shop around.
- Claims are filed if gaps remain. On large contracts, disputes over scope, delays, and extras are almost expected. Third-party litigation funders advance legal costs in exchange for a share of any settlement.
- The owner pays more than the original price anyway. Total project cost frequently exceeds what an accurate tender would have cost. The low-bid “saving” disappears into change orders and claims – plus the significant friction cost of managing disputes.
The uncomfortable truth for owners and developers who default to lowest-bid procurement is that they’re not actually getting the best price. They’re getting the lowest number at tender – which is a very different thing. The total cost of the project, including change orders, claims, delay costs, and the management overhead of navigating a contractor who is financially stressed on your job, typically exceeds what a fairly-priced contract would have cost from the start. The saving was an illusion. It just took 18 months to reveal itself.
What the Margin Numbers Actually Tell You
An industry running on margins that leave no room for error
The average net profit margin across construction sits at roughly 2-7%, depending on the sector and project type. For commercial GCs on competitive work, 3-5% is a typical target. That’s the margin between a profitable year and a loss-making one. It’s also the margin between a project that delivers as planned and one that hits a single unexpected problem – a contaminated ground condition, a trade that goes bust mid-build, a material price spike – and goes into the red.
That thinness is not just uncomfortable. It’s structurally dangerous. A firm running at 3% net margin has almost no buffer against execution risk. Add a labor burden that’s shifted upward without being recalculated in the bid, insurance costs that have moved in a hard market, or material exposure on a lump-sum contract over an 18-month build period, and the margin vanishes faster than most senior leadership teams can track it in real time. Bridgit’s research found that contractors who bid projects 12 to 18 months before construction starts are particularly exposed to labor and material inflation coming directly out of gross profit – because there’s nowhere else for it to go on a fixed-price contract.
“Underbidding to win work is a margin problem disguised as a revenue solution.”Bridgit, Construction Profit Margin Analysis, 2025
This is the trap. The firm that wins the most work is often not the firm making the most money. Revenue and profitability are decoupled in a way that surprises people outside the industry. A contractor running $200 million in annual revenue at 2% net margin is making $4 million. A focused, selective firm doing $50 million at 8% net margin is making the same amount and carrying a fraction of the execution risk. Matt Stevens, who has spent decades working with upper-quartile contractors, makes exactly this point: the biggest contractors are rarely the most profitable. The discipline to say no to work priced below a real margin floor is what separates firms that build genuine equity from firms that are always one bad project away from trouble.
The Procurement Structures That Make It Worse
Why design-bid-build practically guarantees adversarial projects
Not all procurement models are equal in terms of the margin pressure they create. Design-bid-build – still the dominant model on public work – is the worst-performing format for project economics precisely because it excludes contractors from the process until the design is complete. By the time a GC is invited to tender, the scope is fixed, the drawings are finished, and the only variable is price. That’s a competitive commodity environment by design. The contractor who finds the most risk to transfer back to the client through claim-friendly contract language, or the one willing to assume the most risk at the lowest price, tends to win.
Public projects compound this further. Budgets are set by cost consultants, often years before a project goes to market. By tender day, the market has moved. Material costs have shifted. Labor rates have adjusted. The number on the budget approval document bears limited relationship to what contractors are actually pricing. The resulting “overrun” – frequently cited as a failure of project management or contractor performance – is often nothing more than the gap between a stale budget and current market pricing. The contractor didn’t fail. The procurement timeline did.
- Design-bid-build (lowest margin protection). Contractor excluded from design; selected purely on price; no skin in the game for constructability or cost certainty during design. Claims and change orders are structurally inevitable.
- Construction management at risk (CM@R). Contractor involved earlier, guaranteed maximum price agreed before construction. Better alignment, but the GMP negotiation is still a contested process.
- Design-build. Single point of responsibility for design and construction. Reduces the number of claim interfaces but increases design risk for the contractor. Works well on repeat-build project types.
- Integrated project delivery (IPD). All parties share risk and reward. Structured to eliminate the adversarial dynamic at source. Genuinely collaborative but requires contractual maturity that most supply chains lack.
- Two-stage tendering / early contractor involvement (ECI). Contractor brought in during design to provide pricing intelligence and constructability input. Reduces late-stage surprises but requires owners willing to pay for that engagement before contract award.
The firms doing best commercially are those that have engineered themselves out of the pure competitive tender environment wherever possible. Repeat client relationships, negotiated frameworks, design-build routes on standardized building types, and ECI appointments on complex projects all reduce the degree to which margin is exposed to the lowest-bid dynamic. It’s not a total escape – competitive work exists and always will – but the goal is to limit how much of your pipeline is subject to a race to the bottom.
What Technology Can and Can’t Fix
Better estimating is necessary but not sufficient
There is a version of this conversation that ends with a pitch for estimating software. Accurate cost data, faster takeoff, real-time material pricing, AI-assisted quantity generation – these are all genuine improvements over the spreadsheet and gut-feel methods that still dominate the industry. If a contractor is underbidding because their estimates are inaccurate, better tools help. Knowing your actual labor burden, your true overhead rate, and your historical cost-per-unit on similar work is foundational to bidding at a price that reflects reality.
But the deeper problem isn’t estimating accuracy. It’s that even an accurate estimate may not win you the job in a lowest-bid environment. The contractor who knows their number correctly and the contractor who prices recklessly low are both submitting tenders. The procurement model doesn’t distinguish between them. The technology that fixes estimating accuracy doesn’t fix the incentive to underbid deliberately. Those are different problems, and conflating them leads to investment in the wrong solution.
Where technology does have a meaningful role is in the change order and claims management process – making sure that legitimate scope changes are captured, documented, and priced correctly in real time rather than accumulating undocumented and then becoming a dispute at project end. Firms that recover margin effectively from change orders tend to have strong process discipline around scope documentation: every verbal instruction followed up in writing, every additional cost priced and submitted promptly, every delay event logged when it happens rather than reconstructed six months later. Technology that systematizes that discipline has direct commercial value regardless of the procurement model. For a deeper look at where construction’s financial performance problems are actually rooted, the Bricks & Bytes analysis with Matt Stevens covers the five numbers every contracting CEO should be tracking – and why most aren’t.
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Join 2500+ ReadersWhat Has to Change
The shifts that would actually move the needle on margin
Fixing the underbidding problem ultimately requires changing what gets rewarded at procurement stage. That means owners – public and private – making procurement decisions on factors beyond the lowest number on the tender return. Track record on similar projects, financial health of the bidding entity, approach to risk allocation, and evidence of delivery capability all predict project outcomes better than bid price does. Several jurisdictions have moved toward best-value procurement frameworks on public work, and the evidence on cost outcomes is broadly positive. It takes more effort to administer, which is why it hasn’t become the default.
It also means contractors being willing to hold a margin floor and walk away from work that doesn’t clear it – even when the pipeline looks thin. That’s easier said than done when crews are idle and overheads are ticking. But the alternative is winning work that erodes the balance sheet, consuming management bandwidth on adversarial projects, and building a reputation for cost overruns that makes it harder to negotiate the next job on better terms. The firms that have escaped the low-bid trap have almost universally done so by narrowing their focus, building repeat relationships where trust substitutes for competitive tension, and developing enough specialist expertise that they’re not easily commoditized on price. Construction’s productivity problem – labor output per hour that’s barely moved in 75 years, as Goldman Sachs research via our analysis shows – is partly a consequence of this dynamic. When margin is thin and the bid is the battleground, there’s no commercial headroom to invest in the efficiency improvements that would allow you to price lower sustainably rather than just recklessly.
The conversation about construction technology, procurement reform, and margin improvement all connect at the same point: an industry that pays for delivery certainty and quality will invest in the tools that produce it. An industry that rewards the lowest bid will keep getting exactly what it selects for.
| Factor | Low-Bid Procurement | Best-Value / Collaborative Procurement | Impact on Contractor Margin | Impact on Owner Cost | Technology’s Role |
|---|---|---|---|---|---|
| Contractor selection basis | Lowest tender price | Track record, capability, price | Forces underbidding; damages margin from day one | Illusory saving; recovered in change orders | Limited – procurement model drives behavior, not tools |
| Change order exposure | High – scope disputes inevitable when margin is compressed | Lower – aligned interests reduce friction | Change orders become a recovery mechanism, not an exception | Total cost typically exceeds a fair tender price | Change order management tools capture and price scope changes in real time |
| Claims and litigation | Common – third-party claim funding exists because disputes are predictable | Rare – risk sharing reduces incentive to claim | Legal cost and management distraction; sometimes necessary for survival | Significant – delay costs, legal fees, management overhead | Document management and delay analysis tools support claim substantiation |
| Contractor financial health | Poor – 27% of contractors use personal money to fund operations | Better – fair margin supports reinvestment | Thin margins leave no buffer for execution risk | Financially stressed contractors cut corners or fail mid-project | Job costing and WIP tracking catch margin erosion earlier |
| Technology investment | Low – no commercial headroom to fund it | Higher – margin creates capacity to invest | Firms with margin can afford tools that improve productivity and reduce risk | Owners benefit from more capable, better-equipped contractors | Estimating, scheduling, and field management tools all require margin to justify |
| Repeat business potential | Low – adversarial projects damage relationships | High – collaborative models build trust and repeat appointment | Repeat clients reduce bid cost and margin risk | Repeat contractors reduce owner management overhead and delivery risk | CRM and relationship management tools support pipeline development |
In a competitive tender environment, the contractor who prices accurately often loses to someone willing to go lower. For a firm that needs work to sustain its pipeline, keep crews employed, and maintain bonding capacity, winning at a thin or negative margin can be preferable to not winning at all. The expectation is that margin will be recovered through change orders – additional scope priced at a rate the client can no longer shop competitively – and in some cases through formal claims. This is a rational response to a procurement model that rewards the lowest number rather than the best total value. It’s not a failure of estimating discipline; it’s a deliberate commercial strategy developed in response to how work gets awarded. (Source: Bricks & Bytes)
Net profit margins across construction typically run between 2% and 7%, with commercial GCs on competitive work often targeting 3-5%. These margins are thin for several interconnected reasons: competitive tendering drives prices toward cost; fixed-price lump-sum contracts pass material and labor inflation risk to contractors; projects are priced months or years before work starts; and the industry’s fragmented supply chain makes cost control difficult across the full delivery chain. Autodesk research puts the average net margin around 6%, though this masks significant variation – well-managed firms in specialist niches achieve higher margins while firms competing primarily on price in commodity markets often operate below 3%. (Source: Autodesk)
Third-party litigation funding in construction involves a specialist funder assessing the merits of a contractor’s claim – typically against an owner or developer – and advancing the legal costs in exchange for a percentage of any settlement or award. The funder takes on the financial risk of the legal process; if the claim fails, the contractor owes nothing. The existence of this funding model reflects the frequency and predictability of construction disputes: funders only back claims they believe have merit and commercial value, and the market has sustained multiple specialist firms focused on construction and infrastructure disputes. For contractors with legitimate but complex scope or delay claims, litigation funding can make the difference between pursuing a valid claim and absorbing the loss. (Source: Bridgit)
Partially. Better estimating tools help contractors build more accurate cost models – understanding actual labor burden, overhead allocation, and historical unit rates rather than working from memory or outdated data. If underbidding results from estimating inaccuracy, better tools help. But the deeper problem is that many contractors underbid deliberately because accurate pricing loses competitive tenders. A contractor who knows their true costs and prices accordingly may still lose to someone willing to go lower. The technology doesn’t change the procurement incentive. What does help is change order management technology – tools that ensure scope changes are captured, documented, and priced promptly in real time rather than becoming end-of-project disputes. That protects the margin recovery mechanism even if it doesn’t fix the root cause. (Source: Bricks & Bytes)
Several alternatives reduce the adversarial dynamic that lowest-bid procurement creates. Best-value procurement evaluates contractors on track record, capability, financial health, and price – not price alone. Early contractor involvement (ECI) brings builders into the design phase so pricing is grounded in constructability before scope is fixed. Design-build creates a single point of responsibility and reduces the number of claim interfaces. Integrated project delivery (IPD) shares risk and reward across all parties, structurally eliminating the incentive to claim. Two-stage tendering – competitive on approach and team, negotiated on price with the preferred contractor – provides cost certainty without pure price competition. The evidence on outcomes from best-value and collaborative procurement models is broadly positive, though they require more administrative effort from owners and procurement bodies. (Source: Levelset)
The firms generating consistent, above-average margins have almost universally done so by reducing their exposure to pure competitive tendering. That means building repeat client relationships where trust and track record substitute for price competition; developing specialist expertise in building types or sectors where they’re not easily commoditized; pursuing negotiated frameworks, ECI appointments, or design-build routes where available; and holding a genuine margin floor rather than chasing revenue at any price. Revenue and profitability are decoupled in construction in a way that surprises people – a firm doing $200 million at 2% margin makes the same as one doing $50 million at 8%, while carrying four times the execution risk. The discipline to walk away from work below a margin floor is commercially rare and commercially essential. (Source: Bricks & Bytes / Matt Stevens)
Public procurement compounds the underbidding problem with a timing problem. Budgets are set by cost consultants, often years before a project goes to market. By tender day, the market has moved – material costs have shifted, labor rates have adjusted, and the figure on the budget approval document may bear limited relationship to current pricing. The “overrun” that results is often not a failure of contractor performance. It’s the gap between a stale budget and current market reality. Add to that the design-bid-build model that excludes contractor input during the design phase, the political pressure to report a low initial cost estimate to secure approval, and the two to three year permitting and procurement timelines common on public work, and the overrun is practically structural. Better procurement timelines and earlier contractor involvement would reduce it significantly. (Source: Bricks & Bytes)
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