https://swimmingintheflood.libsyn.com/101-inflate-your-contract
I was working on a bid recently for a public contract in a city near Boston. It was a public works project which would extend for over two years. And, this was a competitive bid, meaning that the lowest responsible bidder would be awarded the project. Owners of public works projects are a little hamstrung in this process because the must take the lowest responsible bidder as a measure of fairness in the bidding process and for the taxpayers. While frustrating at times, the process is certainly fair. If you want the job, you need to be qualified for the work and have the lowest price.
We estimated the required manpower, the equipment required, field management, project management, IT requirements, insurance requirements, vehicles, holidays, supplies, website modifications. We put a lot into this bid.
The last piece we needed to think about was the cost of labor. Actually, this part was easy. As a public works project, we needed to follow the Davis-Bacon Act. The act outlines the minimum wage to be paid for each hour and the amount of benefits that need to be paid as well. And trust me, you want to make sure that you get this number plugged into your spreadsheet correctly. I’ve watched enough episodes of The Sopranos to understand the trouble that can come if certain guys are being paid what certain guys should be paid.
Here’s something else you need to be prepared for. This job is going to last over two years. What happens if one of your workers wants a raise? Forgettaboutit! The Davis Bacon scales has increases coming in six months and six months after that and six months after that and six months after that. In fact, they’ve got their pay raises laid out for the next five years.
These trade union guys know a thing or two about fighting inflation…from their side
Welcome to Swimming in the Flood; a podcast where we develop the resilient leader’s mindset by navigating difficult currents in business. My name is Trent Theroux.
Inflation is gripping the country right now. I don’t need to explain to any of you Developing Resilient Leaders that what you paid last year for a dozen eggs you can only now get eight. Inflation robs each of us of purchasing power with every dollar we spend. Here’s a dirty little secret about
inflation – it’s always in the rear-view mirror. The inflation numbers we view are always about what already happened. Very rarely do we receive guidance about the inflation to come. Think for a minute. How many times have you heard how much milk cost last year? Me? About twelve times this morning…then again, I listen to financial reports on my way to work each day. For you, have you heard about the increased price of milk five times over the last week? Sure, you have. It’s a simple conversation like the weather. However, unlike the weather, there isn’t someone on the six o’clock news predicting, with suspect accuracy, that it’s going to be in the upper 60s with a 20% chance of rain in the afternoon.
Economists can’t give you a good prediction of what inflation will be in the next month or year. They have a target. They have a notion of what they want the inflation rate to be. They have tools to manage inflation, but they cannot accurately predict where inflation will be.
A lawyer friend who is now in his early 70s was telling me a story about when he was a student at the University of Rhode Island in the early 1970s. He was on the student activity board and was responsible for finding acts and entertainment to come to the school to perform for the students. Your familiar with musical acts that perform at colleges. They are typically alternative music, one-hit wonders or some band that no one has ever heard of but was willing for a few hundred dollars to take on a college crowd.
The lawyer, well he was a college student then, but we will call him the lawyer. The lawyer signed the band Chicago. Yes! That Chicago, as in “does anybody really know what time it is?” He got Chicago to come to Rhode Island for $3,000, which in the early 1970s was probably a lot of money. He signed them in September to play at one of the graduation events in May. They signed a contract which had an onerous clause to penalize the band if they did not play…Lawyers? Right?
During the time between September and May, Chicago released a quadruple LP (that’s a four-record set for the Gen Zs in the audience). They sold our Carnegie Hall for five straight days and their popularity, along with their fees grew. When May arrived, Chicago was commanding $6,000 per performance, but their contract was for $3k and my lawyer friend wasn’t about to give them a discount. However, he did have a proposal. If Chicago would come back to Rhode Island the next year, he would pay them $10,000.
The band considered the offer and countered that they wanted $12,000 for their next performance. The future lawyer signed them to a $12,000 contract for next year’s performance. Can you guess how this turned out? It shouldn’t be hard. Chicago became an even bigger band. With song like – 25 or 6 to 4 and If You Leave Me Now. The following year, Chicago was commanding over $25,000 per show…. except in Rhode Island where they were paid less than half their going rate. So, what did Chicago do wrong that the labor unions got right?
I am now going to give you my unscientific, non-peer reviewed, resilient leader theory on managing inflation. Are you ready? Got your pencils out? Here’s it is. Inflate Your Contract. You heard it. Inflate Your Contract. The theory is simple. Here’s how it works.
As we discussed earlier, the labor unions set out cost of living increases five years into the future. Every six months, they get a pay raise. Unfortunately for them, right now, the raises they negotiated five years ago are below what the current inflation rate is. Inflation is eating into their paychecks, but not as much as Chicago.
Chicago did not foresee the value of their services. They looked only at what they were worth at the moment and ignored what their market value would be in a year’s time. They needed to inflate their contract. They needed to identify the trajectory of their success, compare that to the market for their services and project the price they should command for a night’s work.
Quick show of hands. How many of you can name a huge section of the workforce that falls into this same trap? My magic mirror shows me that many of you are scratching your heads searching for the answer. In truth the answer is simple. It’s you. It’s you! Most likely you are a little like Chicago here. Let me explain.
I want you to imagine that you earn $25 per hour. Forget benefits and the like. Your wage is $25 per hour. Now, eggs cost $5 per dozen. That’s the price of a dozen cage free large brown eggs today. The eggs represent 20% of your hourly wage. Last year, the same eggs were $4 per dozen, 16% of your hourly wage.
Now, you are outraged at the 25% increase in the price of eggs. You are come home and kick the puppy kind of mad about the price increases in all the groceries at the store. What do most people do? At some breaking point, a worker will go to their company and seek a raise to help them pay for their groceries and the like. According to the government’s Bureau of Labor Statistics, the average wage increase over the past 12 months has been 5.1%. And you get a hard earned 5.1% increase in your compensation…good for you! Or, is it?
Your wage just increased by 5% bringing your hourly rate to $26.25 per hour. Eggs now cost 19% of your wage. Wait a minute!! Last year, the eggs cost 16% of your wage. The percentage of price increase of the eggs went up more than your wage increase. You are really not a whole lot better off than where you were before. Actually, a little worse. Here’s why. How much do you expect the price of eggs to go up next month or the month after? I don’t know precisely but I can guarantee that they won’t go down.
The price of eggs won’t go down because inflation won’t go to zero next month or at any month in the near future. The wage increase you negotiated is most likely to last for a year. Does that sound right? Most of us don’t walk into our boss’s office every other week and expect a pay bump…unless you have a contract that allows for it. Or a better strategy.
When I am negotiating a speaking contract, I have a price that is good for the next 90 days. 90 days only. Past that date, I need to assess what the market will be. Maybe my speaking will take off like Chicago’s greatest hits? Maybe it will be measured and steady the way it has been for a few years. Anything past 90 days is up for review. Hourly workers can think in the same terms. You have already been hit by inflation. The higher price of eggs has cut into your earning power. Understanding how inflation will move over the next year is a tool you can use when discussing your next salary. The 5% raise is great, but only gets you even to where you were a year ago. Inflate your contract. Identify your trajectory of success, compare that to the market for your services and project the price you should have for an honest hour’s work.
All this sounds easy, right? Sure. Right until your company explains why they can’t. Phew. Well, we will tackle that issue in another podcast.
Folks, thank you for listening to Swimming in the Flood. Resilient leaders face challenging currents, and it is tough navigating, but with one tack or another we can get there together.