Get the Job Without Losing Your Shirt

Bid lists these days are longer, and estimators are “sharpening their pencils” like never before. What’s more, as contractors try to diversify into new, less recession-sensitive areas, many bidders may be new to a particular specialty or market, increasing the risk of a low bid that overlooks critical costs while freezing out more qualified competitors.

Worse still are those who are willing to forego any reasonable chance of profit, just to keep their crews occupied and the cash flowing, hoping they have adequate reserves or credit to survive until business picks up again.

How can you compete in this environment? How can you avoid being consistently underbid without becoming one of those contractors who wins the bid only to lose money on the job?

Precise knowledge of costs is the foundation of effective bidding. Rather than trying to match a competitor’s price structure, figure out what works best for your company.

Any job costing system must encompass all the major direct cost elements – materials, subcontractors, labor, equipment, fuel and other costs that can be attributed specifically to the job. It must also allocate an appropriate share of the company’s indirect costs, such as administrative salaries, rent, utilities, IT, taxes and other overhead.

Most job costing systems can estimate external costs such as subcontracting, material and equipment with a high degree of accuracy. The risks in these areas can be further mitigated by devices such as subcontractor bonds, binding supplier quotes, and escalator clauses for critical materials.

The greater uncertainty – and hence the greater risk – is found in internal costs, especially labor. The only useful guidance for labor costs is the contractor’s own historical experience, which is why measuring performance is so important. And when it comes to self-performed labor, there’s no sharing of risk. Every mistake comes out of the contractor’s pocket.

Your estimate should also include some contingency for the unexpected, and should return at least some profit. Don’t just add up costs and tack on a standard markup. Each job should be evaluated independently, and the markup and profit rationale should match the job at hand.

For instance, will this job take the company in a promising new direction? Will it open up a market, or cultivate a relationship that will deliver more work? These are legitimate questions that can affect your bid. But – as with all other elements of the bid – you should base your answers on your own company’s situation, experience and strategy rather than as a reaction to what your competitors are doing.

Remember to Ask "What If...?"

If your bid depends on everything happening exactly as planned, with no allowance for unforeseen problems, it could be a sign you’re cutting things too close.

Consider the case of a commercial builder who was eager to make inroads into public projects, and submitted the low bid on a school renovation project. Because of a combination of inexperience in the field and an eagerness to diversify, the contractor cut out every bit of contingency, and trimmed profit to virtually nothing.

Inevitably, the unexpected happened: materials were delayed, and a key subcontractor missed a deadline and threw the schedule into disarray. Because the company’s crews were unfamiliar with code requirements for public buildings, they had to rework several components that failed to comply. To top it all off, the project manager got sick and a less experienced substitute failed to document several critical change orders – so the contractor ended up absorbing the cost.

The result was not only a financial loss, but also an embarrassing deadline failure that eliminated the company from consideration for future work in this promising market.

Remember: the optimal situation rarely happens in construction. If your bid depends on it – or even worse, if your bid depends on you achieving productivity and efficiency levels that far exceed your historical performance – you would be wise to rethink your bid before you submit.

Q: I know my bid has to be competitive, but I’m more concerned that my job costing system might miss something. How can I be sure my bidding and estimating software is up to the challenge?

A: Before you can judge your job costing software, you must first look objectively at your company and how you operate. For example:

• How large is your organization? How many people will operate the software? If you’re a larger company with users at several locations, you will require added scalability and flexibility so you can add users as necessary.
• Do you work in more than one state or one country? Bidding on jobs in diverse locations introduces added variables related to taxes, labor, transportation and other costs. Be sure your job costing system can accommodate these variables.
• How technically proficient are your estimators, project managers and executives? Ease of use and an intuitive interface are key, especially in a smaller company with only limited time and budget for software training.

A good system will also allow you to easily define and execute customized job costing reports that alert you immediately when a project is falling behind schedule or heading over budget. Getting such information quickly, clearly and in sufficient detail will give you time to implement solutions before problems get out of hand.