Most contractors land their jobs through bidding. If a contractor is reserved about bidding, the business is likely to starve and fail. Construction bidding is no easy feat, and contractors need to be aware of market forces, necessary costs, and competitor prices. Contractors may sometimes need to bid for many jobs to stay afloat simultaneously. As much as contractors get mentoring and training skills on how to perfect their bids, they make mistakes along the way and painfully acquire the knack for making successful bids.
This article will explain the dynamics of construction bidding and improve your bidding process and win more bids.
Table of Contents
Quick overview of the bidding process
The construction bidding process is a sequence of activities that provides a proposal for building a structure for a potential customer. Subcontractors also advertise their services to contractors through the bidding process. Successful bids start from construction cost estimates. One examines the construction plans and performs quantity takeoffs. There are a lot of complexities that come with the bidding process. However, one can smoothen these complexities using construction estimation software. The standard bidding process involves the sequence of the following activities:
- Bid solicitation: Here, the owner requests proposals and seeks bids. The owner provides the project specifications, drawings, and scope documents for the interested parties to come up with bids.
- Subcontracting: This depends on the contract terms of a project. Here the general contractor seeks bids from subcontractors on some pieces of work. In other cases, the general contractor might seek subcontractors after winning the bid.
- Bid submission: Here, the contractor submits bids to the client within the stipulated deadline.
- Bid selection: Here, the owner reviews the bids to see whether they meet the satisfactory criteria. The owner then chooses the successful candidate for the project.
- Contract formation: This is the final phase in the bidding process. The contractor and client finalize the legal grounds for the project and enter a contract.
How to successfully bid for a job
Your bidding strategies should be among the things that make you unique from your competition. Unfortunately, most contractors lose more bids than they win. However, you can improve your bid-hit ratio by following strategies used by skilled contractors. Finding an edge over your competition makes you step into the client's door. Compiling a winning proposal or bid is a skill that takes skill and knowledge. It is more complicated than putting numbers together. Below are some of the necessary steps you need to take to win bids.
1. Evaluate the project size
You first need to conduct an initial assessment of the project and determine whether you can undertake the project with your available resources. Is it residential, industrial, or commercial? Have you worked on a similar project before? Learn to say no to projects that are beyond your resource scale. As a contractor, you need to distinguish profitable jobs from jobs that will drain your funds. You need to assess your backlog on other projects to determine whether your firm can do the work. You also need to check your cash flow and attest that you can complete the work on time without having to jeopardize any pending obligations. Knowing your limits helps you not extend beyond them.
2. Understand the bid instructions
Most contractors mistake bid proposals for job applications, but it is more complex than that. A reasonable bid demonstrates deep knowledge of the industry. Understanding bid instructions helps you assess the client's requirements and calculate costs. This will show you whether the project is profitable for you in the long run. Check the bid documents such as project drawings, reports, specifications, bid date, and the criteria used in calculating the bid score. This will help you adjust your bid accordingly.
3. Ask questions if required
After assessing project documents, a contractor might have questions regarding the project. If a contractor has questions, such as missing documents or unclear details, they should ask the client's representative questions. The design team reviews these questions, and the answers are sent in an additional document known as addenda. This other document provides clarification and missing information on the bid. Bid dates can also change in missing documents, and the client communicates this before the submission. Any information described in the appendices also ought to be included in the bid documents.
4. Figure out what you'll subcontract
When you consider the scope of your work, you will come across some common areas where you do not have the speciality to complete. Subcontractors are specialists in their line of work. Most contractors outsource mechanical, electrical, and plumbing works (MEP), glazing structural steel, and underground utilities from subcontractors. If your project involves such jobs, it is safe to hire a subcontractor. Hiring a subcontractor costs less than hiring an unskilled crew to help you complete your project.
5. Pick a procurement method
After assessing the project type, the contractor is then faced with deciding how to procure construction services. Several factors affect procurement methods in a project. For government projects, some laws affect procurement methods. Other factors affect procurement types, such as the owner's experience, project complexity, expertise scope, and size. There are different types of construction procurement methods. These are low bid, the best value, sole-source, negotiated, and qualification-based procurement methods. The low-bid method considers cost alone and selects the lowest bid, while the best value method considers other factors other than cost. The negotiated method allows the contractor to negotiate contract terms after selection. The qualification method is two-tier to ensure the contractor has the best technical expertise. If a contractor knows the procurement method used, they are going to adjust their bids accordingly.
6. Also, pick a contract type
In business, you need to evaluate the best contract type that gives you the best returns. The different contract types available are guaranteed maximum price, cost plus fee, lumpsum contracts, target price, or unit price contracts. In guaranteed maximum price contracts, the price is set, and as a contractor, you cannot charge more if there are budget overruns. Lumpsum agreements have a fixed price from the beginning. A cost-plus fee has an agreed-upon contract sum and a payment to add the contractor's profit margins to the overall costs.
7. Do a construction estimate
The next step is a detailed cost estimate to check the project's feasibility, profitability, and capacity. Here, it would help determine direct and indirect costs, overheads, cushions for subcontractors whose bids fall below budget, and labor. It would be best if you accounted for all costs directly linked to the project. It is better to have consistently accurate bids than to have low offers every time. Consistent proposals improve your profit margins in the long run.
8. Make sure you cover all expenses
During cost estimation, it is easy to overlook some expenses. However, without considering these expenses, the project might be challenging to run. Some of these expenses include utilities, rent, marketing, and monthly vehicle expenses. There are very many expenses to consider, and they are necessary to keep your company running.
9. Ensure it's profitable
In the long run, you are in the business to make money. You, therefore, need to be sure that you are making profits. Profitable projects help a contractor deal with cost overruns in future projects. Do not fall into the trap many contractors fall into by underbidding projects. The profit margins tend to be so low and not worth it. A decent markup would be 15 to 25% of the construction costs.
10. Include testimonials, awards, and certifications
The most credible ambassador for your business is a satisfied customer. Even if you are good in your job, the client will be more comfortable when they see happy customers. The importance of these referrals cannot be overstated. Awards and certifications also build trust and credibility, showing that your artistry was recognized enough to win prizes. Clients want to work with such contractors, and this is one area you can leverage. This humanizes your company putting it to a level where the client can relate to it.
11. Monitor your success rate
Finally, you should carefully examine your proposal. It is easy to make mistakes in your proposal. With such a solid proposal, you can then monitor your results and assess your success rate. Within no time, your bid-hit ratio will go higher. Construction bidding is a process perfected with time.
Digital procurement and online bidding
With the digital migration taking place in the construction industry, digital procurement has had massive adoption. This boom in business procurement comes because the business-to-business models are moving away from the paper bids to accommodate millennial-age professionals. Digital bidding reduces costs on the bidding process; it is faster and more efficient.
Below are some of the answers to the frequently asked questions in the construction bidding process.
What are the main factors I should consider in bid decision-making?
There are many factors to consider in bid decision-making, but the primary factors are profitability, your company's capability, risk management, and your long-term strategy.
How long is the bidding process?
This varies with the type and complexity of a project. The bid process is anywhere between a day to a month. Sometimes it might extend to 90 days.
Since you now have a solid understanding of the bidding process, you will be better placed to compete against your competition successfully. Taking a data-driven approach for your bids will help you make wise and informed decisions for the future.