One of the most common opportunities to improve a construction contractor’s profitability is in the area of bidding discipline.
Bidding discipline means having specific rules about which projects your company will bid on. These rules can include a number of important parameters such as the size of the project; the number of other bidders; the type of contract, owner, or work; and the geographic location of the job. It takes a significant effort to consciously decide what not to bid on. This can be difficult because most contractors need to maintain a sufficient backlog.
Due to the lack of recurring revenue in construction, the importance of maintaining a backlog causes many contractors to compromise their bidding discipline for the sake of putting volume in the backlog. This leads many companies to simply focus on getting work. However, the focus needs to be on getting the right work. The right work must be defined by your company’s strategy and implies the kind of jobs that you will successfully complete and that will have an appropriate level of margin.
Having clarity on bidding is ultimately a reflection of your company’s strategy. Contractors that do not have a well-defined strategy often do not have well-defined bidding parameters and policies. Most contractors know the types of projects they execute well and those they make money on. However, many have not formalized their definition of a good project and have not ingrained that definition in their team when it comes to pursuing new work.
Analyzing completed projects is an easy way to determine which projects to pursue and which to avoid. We suggest collecting data on final price, costs, and margins on all completed jobs for the last two years. Then, sort the projects based on parameters such as size, location, type of work, etc. Usually, segmenting projects like this will be revealing in terms of showing the types of projects your company is making and losing money on.
One sign that a company does not have proper bidding parameters in place is excessive bidding. Excessive bidding carries a significant cost in that it creates a lot of activity that does not yield a return. It also causes companies to overstaff in the estimating area or pressure their estimators to produce a volume of bids instead of allowing those resources to be allocated to projects that will generate profits for the firm. The cost of excessive bidding is a drain on profit. It also increases the negative impact to your margins from taking on jobs that do not fit the “right work” profile.
Properly defining what business your company is in and what projects you should pursue, and then communicating the strategy to the rest of your company, is critical. More importantly, translating that strategy into bidding discipline will make it easier for you to say no to certain projects and add dollars to the bottom line.
Mario O. Vicari can be reached at Email or 215.441.4600.