Could it be as simple as that? I guess all those visual effects dummys would have to do to avoid going out of business would be to raise prices. See! That wasn't very hard and now the problem is solved, right?
No, not really.
Usually the next words out of a typical director's or producer's mouth, after glibly talking about underbidding that causes industry instability which annoys them, the next thing that they complain about is that visual effects is way too expensive. “Oh my god, I cant believe how expensive these nasty awful ugly horrible visual effects companies are”, they say. "In fact, what should happen is that the visual effects company ought to do the work for free. Its the least they could do if they werent so ... well... greedy, awful, selfish!"
So we are going to examine this thing called "underbidding" and when we are done I think you will agree with me that it is a symptom of a much larger problem, that problem being that visual effects is a stupid business to be in. You may quote me.
The first fact of life that one must realize about bidding on visual effects is that the visual effects facility is a “work for hire production service facility”. The facility bids to do certain work for the production at a fixed price and the money it receives on delivery is generally the last money that the facility will see for that project. When the project is over, if the facility does not have another project it must live on its profits and reserve, or just lay everybody off.
Or one might underbid a project in order to break into a different part of the business, perhaps this might be your first feature film project, or your first character animation project. You might underbid the project to give a deal to the production so they will go with you although there are other facilities with a track record in that area that are also bidding.
Or it might be that you bid the project at more or less break even to be certain that you will have any work at all going through the shop because otherwise you will have to lay everyone off. Running a visual effects or computer animation production facility is a lot like juggling for months or years at a time. It is quite an art to keep enough work going through a shop so that you don't have to fire everybody. Thus, a facility might bid a project at less than its full rate to guarantee that it has a certain amount of work going through the shop during that period.
Or one might underbid (or bid at cost) because the client asked you to, promising that one can make it up with overages and change orders, a topic we will discuss in more detail later. Again, this is very common.
Or you might underbid the project also because the client asked you to, but promised to work with you to keep the costs down and make it work for that amount of money. Ha.
Or there is the ancient tactic of lowballing a project to get it in the door and then nickle and dime the client in order to make up a profit. A facility that does this will get a reputation for doing it, and I have one or two in mind as I type this paragraph.
All of these reasons exist in the real world and I have seen all of them in play at one time or another. I personally, or facilities that I have managed, have bid a project less than we should have for three of these reasons (because the filmmaker was a friend of the partners and we wanted to work with him and help him get his film done, to be considered for a project when we were new in the business and because the client promised to work with us and make the project work for the money available).