Dear Jayme:
I hear about bid/hit ratios but don't really understand them. Are they important? What should mine be?
Larry
Dear Larry:
Yes, they're enormously important: They're a Key Performance Indicator (see last month's article on KPIs) of how your business is doing and an important guide to decision making. But a great bid/hit ratio can fool you into thinking all's well (or that a poor one means trouble) when it really isn't. The key is to look behind your overall ratio to see what's driving it.
Here's how to find and use your bid/hit ratio to help manage your business:
It's all about the data-Go back and look at all your completed jobs for the past month, quarter and year (more if available).
If you don't have this data in your system, recreate it or at the very least, start tracking it now. You shouldn't be running a business without it.
Compare to Standards-
Subs Private Bid: 4-6 to 1
Subs Negotiated: 3-4 to 1
Generals Private Bid: 4-6 to 1
Generals Negotiated: 2-3 to 1
There are national averages, not the gospel, but they're a place to start. The real answer to "What's the right ratio for me?" is whatever ratio produces the profitability you want.
Break into categories-Within each category, drill down to more specific groups such as residential vs. commercial, large vs. small, metro vs. rural and others as needed.
Track your trends-One month of data is okay, a quarter is better, but three years is better than that. Has a particular segment's ratio been steadily dropping over time or rising? Better find out and figure out why.
Profitability-This is the most important part! Your bid/hit ratio will tell you how often you won the job, but not whether you made any money doing it. Companies can go bankrupt even if their bid/hit ratio was the highest in town. Gather the profitability data for each job and see where you're making money.
This is job costing. It requires both careful tracking of labor and materials cost to each job, so you can see where you made (or didn't make) money, and is one of the most powerful management tools you can have.
Tune your bidding process-Compare your bid assumptions with the actual results. Did they match up? If not, you'll need to make adjustments on future bids. If you found that certain types of jobs were consistently unprofitable, develop a strategy to fix this.
A Few Tips:
- Qualify the bids-Don't waste time preparing bids for tire-kickers or flakes.
- Be very careful about low-balling bids just to get the business-There are reasons to take unprofitable jobs, but this requires a solid understanding of cash-flow management and profitability.
- Really understand your overhead and profit assumptions: Many contractors don't include nearly enough to cover fair profit. If you can't be competitive at decent profit, you need to look at your expense structure.
- Doing lots of bids isn't necessarily a good move: It may bring in more business to the top line but cost a lot in estimating costs that hurt profitability. Pick your targets.
If someone asks, "How'd your softball team do?" and you answer proudly, "We scored ten runs," the ten runs don't matter if the other team scored twelve and you lost the game. The real answer is whether you won or lost. Bid/hit ratios are important, but only in proper context. You want to have a strong ratio bidding on profitable jobs and that means understanding what's really going on in your business.
Cheers!
Jayme
Jayme Broudy is the founder and principal of Contractor's Business School® - a coaching, training and consulting firm specializing in helping contractors produce more profit in less time. Since 1993, Jayme has worked with hundreds of contractors in many specialty areas to build successful stand-alone businesses. Visit www.contractorsbusinessschool.com or call 800.527.7545 to get the FREE CD "10 Key Strategies to Build a Business that Works."
Construction Business Owner, July 2009
