Being able to accurately bid on construction jobs is one of the most critical skills you must have so your business will not only survive but thrive.
When compiling a strong bid you, you must:
- Determine your direct and indirect costs accurately
- Secure surety bonding
- Determine profit to calculate the overall bid
In addition, there are also a number of common mistakes to avoid as well as recommended steps that will ensure you are using the most accurate information to compile the best bid possible to secure profitable work.
Bidding Over the Years
The bidding process has come a long way over the last decade due to the creation of a handful of easy-to-use and relatively affordable programs that can help to simplify the estimating process. Gone are the days of applying rulers and scales to a set of plans, when human error could easily throw off calculations and your estimates. Now, specialized programs allow you to do takeoffs far more quickly and accurately, without the “guesstimating” of yesteryear. Most programs allow you to easily organize vendor and inventory quotes with side-by-side comparisons to more effectively compare quotes, and they can complete area and volume calculations quickly and easily, eliminating the chance of math mistakes. Unfortunately, knowing the specifications of a proposed project and organizing vendor quotes is only part of the battle.
Before considering a project, you’ll need to have a thorough understanding of the scope of work, with a detailed review of the plan documents, a site visit and participation in pre-construction conferences. Once you have a solid understanding of the project, you’ll need to determine your costs, which are comprised of the direct and indirect expenses needed to complete the job.
Calculating Direct Costs
Direct costs are primarily direct labor, materials and subcontractors. For your employees, you need to be sure that you have current hourly rates for all levels, as these can change at various points during the year. This is a critical first step to making a profit and bidding competitively. You should also be aware if there is a specific set of minimum wages required, such as Bacon-Davis regulations for some federal government contracts.
If the work requires subcontractors, you should scrutinize their experience and reputation as well as their quote. It should be based on past experience with a similar type of work. An unknown or inexperienced subcontractor may give the lowest bid. While it may seem tempting, it’s likely you’ll need to add more supervision, which can negate the original savings.
Materials are the other major component of your direct costs. Similar to subcontractors, working with known and experienced vendors is critical. You must have confidence that the pricing you receive will be honored as well as the timing of delivery. One without the other is not acceptable. If the actual price exceeds your quote, you will obviously be over budget and unlikely to be allowed to pass this cost along. However, if the product cannot be delivered on time, this can throw your entire work schedule off and create many unanticipated problems. Material procurement is an often overlooked part of any successful bid—don’t let it happen to you.
Indirect Costs Are Not Insignificant
Indirect costs, as opposed to direct expenses, can be more complex and easily miscalculated. They include significant expenses such as equipment costs, labor burden, insurance, bonding and fuel.
Equipment costs are a major variable with construction estimating, since they can vary greatly depending on the size of the job and the types of equipment being used. Competing construction companies may have significantly different internal rental charges, that is, the cost they bill their own equipment out at, but what’s most important is that you bill your equipment accurately. Most companies use average rates for machines in a given class in order to simplify the process and ensure that the rates themselves, as well as the estimates and job costs based on these rates, are directly related to their real costs. If you estimate an equipment’s rental rate too low, your bid will be too low, reducing your profit. If they’re too high, you won’t be competitive with your more accurate counterparts. Rates should be regularly reviewed and equipment audits should be conducted periodically to be sure that your internal rates adequately cover the expenses of maintaining each piece of machinery.
Labor burden, which encompasses fringe benefits like health insurance, payroll taxes and worker’s compensation insurance, is another overhead cost that can vary significantly and have a major effect on the accuracy of your bids. It’s important to know your current insurance premiums, which most often change annually, as well as accurate figures for payroll taxes and other benefits, which add to your overhead. These figures, along with all of your other indirect costs, should be evaluated at least annually by an accountant so that you can be sure you are using accurate numbers to maximize your profit. Surety bonding is the last but perhaps most important component of indirect costs. Obtaining bonding may not be as easy as it was a few years ago, but quality financial reporting, sound fiscal practices and open lines of communication go a long way toward building a good surety relationship. A surety’s primary concern is whether you have the financial resources to complete the job. Therefore, you and your accountant should review your financial statements from the surety’s perspective. And if you know your balance sheet needs work, formulate a plan to improve it, and be ready to discuss it with the underwriter.
Top Three Mistakes Made During the Bidding Process:
- The number one mistake made when bidding a job is not accurately estimating your overhead. These numbers should be scrutinized, at least annually, by an accountant to ensure that your overhead costs are accurate and realistic to the current economic conditions, so your bids can be as competitive—and profitable—as possible.
- Don’t expand your scope of work outside of your expertise. It’s tempting when work is slow to bid on jobs you wouldn’t otherwise consider, but if you’re not up-to-date on current material costs and processes, your customer may get a substandard product, you may not make a profit and your reputation may get soured during the process.
- Don’t always take the low subcontractor bid. The saying, “If it looks too good to be true, it probably is,” exists for a reason. You need to be able to effectively weigh the experience, materials, costs and supervision needed of subcontractors before determining which to choose.
The Bottom Line
Once you have bonding, and have accurately calculated all of your direct and indirect costs, you are left with the “bottom line”—profit. There’s really no rule of thumb in determining what the right profit margin should be. A number of factors such as the type of work, economic conditions, competition, risk involved and timelines should all be considered. It all comes down to what feels right to you as the construction business owner. You may adjust the profit margin slightly for a project that will benefit the company, but you need to determine a minimum profit margin that will be sufficient for the company's long-term success. Good luck.
Construction Business Owner, December 2007
