When someone is under pressure, they tend to make foolish mistakes. This applies to businesses and governments, too.
In 2005, after Hurricane Katrina ripped through multiple US states, the US government made some costly errors.
Below, Mark Ford outlines what those errors were, and how you can avoid them in your own business dealings.
What Hurricane Katrina Can Teach You About Giving Vendors Your Business
By Mark Ford
Over a decade ago, after Hurricane Katrina, the US government — under pressure to respond quickly — awarded two enormous contracts for temporary housing to two giant businesses: Fluor Corp. and Bechtel National, Inc.
Both projects proved hugely costly and ineffective.
In retrospect, it’s easy to see that the people affected would have been better off if the government had taken a bit more time. Responding as it did, the government violated two very basic rules of business:
- Don’t award a contract without at least one other competitive bid.
- Don’t agree to cost-plus pricing (whereby the selling price is determined by adding a specific dollar amount mark-up to a product’s unit cost).
One can understand why a novice would make the first mistake. You are eager to get the business going and don’t want to delay progress by reviewing bids. You know the company — either by reputation or from prior experience — so you assume you can trust it to do a good job at a fair price. So you opt, in effect, for one-stop shopping.
I’ve done it. And I’ve seen colleagues and employees do it. And not just once, but over and over again.
There’s a reason it recurs so frequently; ‘buying right’ is tough and time-consuming. One is always tempted to make the faster, easier decision.
But we should resist the urge. Keep in mind: A vendor that knows it’s getting the contract, however well intentioned, will naturally take less time in studying the project before bidding on it.
That lack of early analysis leads not only to sloppier pricing, but also less creative approaches to solving problems.
And cost-plus pricing means that mistakes will be paid for by the customer (in the case above, the US government) and not the vendor. Again, that means less attention is paid to the process.
If you or someone who works for you makes this mistake, understand it. But don’t allow it to continue or it surely will.
Make it a protocol to get competitive bids for all significant new work and double-check pricing on all long-term relationships. And don’t ever agree to cost-plus.
Thanks, Mark. This story goes to show how anyone — even a well-oiled machine like the US government — can violate basic rules of business if they’re under pressure.
Director, Wealth Builders Club Australia
Editor’s Note: Mark has spent more than three decades dispensing wisdom like this…and now he’s compiled it into the most comprehensive wealth-building program in existence…
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