Prudent Project Bidding. Key Ingredients of Good Contract Bidding. How to Create a Smart Bidding Strategy.

November 19, 2009 by kutenk
Filed under: Project Management 

CREATING A SMART BIDDING STRATEGY

There’s probably nothing more critical to your business success than how you estimate and bid on projects. Your profitability hinges to an overwhelming degree on your ability to understand the details of the scope of work and anticipate costs accurately; errors can lead to project losses and even business failure.
And yet, bidding is not an exact science; it is a combination of hard numbers developed from historic costs and real price quotes, and subjective numbers based on “gut feelings” about the risks of a project. Getting it right requires that you have bidding expertise in-house, an in-depth knowledge of the market, and sound practices and procedures that your team follows closely. It also requires that you have a thorough understanding of all your obligations under your contract documents.

Here are the key ingredients of good bidding:
    No matter how busy you may be, take time out to scrutinize each bid opportunity in detail to determine whether the project makes sense given your experience, capabilities, financial resources, and the overall direction of your company. You’re far better off bidding selectively than responding to every opportunity that comes in the door.

    Before doing the takeoff, carefully review the contract documents (i.e, plans, specifications, construction contract) and determine whether there’s a match with your capabilities. Is the project size within your range of experience? Are you familiar with or have you worked in that geographic area? Have you done that type of work before? Do you have the required bonding and insurance? Are the project budget and schedule reasonable? Can you live with the contract provisions? Can you meet the labor requirements? Are there especially risky aspects of the project that require intense scrutiny, planning, and supervision? By answering these essential questions up front, you can assess the risk and decide how to handle it—do you refrain from bidding or do you put a price on your perceived risk and see what happens? At the end of this section is a Bid Decision worksheet that you can use as a guide every time you bid.

    Prudent bidding requires strong in-house cost-estimating capabilities and skills in contract interpretation. I frequently receive calls from contractors looking for someone to bid for them because “We’re too busy.” Contractors who outsource this part of their business are playing with fire. They often get into trouble once they’re awarded the job because they don’t know the details of their scope of work, have no strategy for execution, and are held hostage by a budget they didn’t create.

    Establish detailed estimating procedures so that you and your team don’t miss an important step in conducting the due diligence required. These include reviewing the plans, specifications, and general conditions; scoping out the work thoroughly; sending out bid information to subcontractors and vendors for pricing; preparing a detailed estimate of materials and equipment costs based on your quantity takeoffs, historic cost information, and fresh price quotations from vendors and trade contractors; forecasting your manpower needs and calculating supervisory and labor costs; and allocating costs for job site and general office overhead. If you skip a beat and neglect to include an item (e.g., concrete), you will be in trouble even before the project gets off the ground.

    Use a consistent cost-estimate spreadsheet format that is organized properly according to construction Standards Institute (CSI) industry cost codes and facilitates calculations. You can either create your own spreadsheet on Excel or purchase estimating software that also provides productivity and price databases. In addition to materials, labor, and equipment, be sure that your spreadsheet includes line items for general conditions, overhead, profit, and contingency. Also, don’t forget taxes, materials delivery charges, permits and other fees, interest expense, and indirect costs such as general maintenance of tools and equipment.

    Ideally, obtain price quotations from subcontractors and vendors that you’re prequalified based on their capabilities and track records with you. Pass on all pertinent project details and any changes that are communicated to you during the bidding process so that you can feel comfortable that they’re providing you with up-to-date, accurate, and reasonable pricing. Try to avoid taking the low bid from a subcontractor or vendor you never heard of!

    Don’t wait until the last minute before the bid date to put your final price on your bid. Give yourself adequate time to assess various factors that will impact your performance on the project, including availability and costs of materials and labor, the quality of the design documents, the size of the supervisory team required, work-quality expectations, schedule constraints, conditions on the site, and the reasonableness of the contract provisions. Allow for a contingency amount for unforeseen or unknown elements.

    Your profit margin should be based on your company targets and on the level of risk being taken relevant to your other projects. You’re not doing yourself any favors if you add on an insufficient profit percentage to win a job; you’re squeezing project cash flow and putting your company’s capitalization at risk.

    You can expand your cost estimate to become a bid tabulation form that will show the original budget and subsequent buyout amounts. Final pricing for each line item can then be rolled into the project budget.

    Create a complete bid file with the details of your bid so that you can develop historic information to assist you on future bids.

    Know contractually what you are bidding on. Besides scoping out the plans, specifications, and general conditions, carefully review all the terms of your construction contract. Take particular notice of bonding and insurance requirements, payment terms, schedule requirements change to the work, default provisions, a documentation, and notice requirements. Create a contract summary for easy reference by your project team.
    Don’t bid on the job if you:
o    Don’t completely understand the plans and specifications.
o    Haven’t had time to analyze the opportunity and risks thoroughly.
o    Complete the Bid Decision exercise that follows and realize the project will overextend your staff and financial resources.

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