Creating accurate, timely bids is one of the most essential components for any contracting or construction business. Nonetheless, the construction bidding process is not as straightforward as it may seem. Calculating the numbers, sorting through piles of data, and making sense of it all can be a daunting task.
It’s no surprise that creating an accurate and fair bid is something all contractors have had difficulty with at some point in their career. Whether it’s your first year or you have decades of experience, bidding can be one of the trickiest parts of running a successful business. Bidding can often seem like a gamble. You crunch the numbers, send it off, and hope luck is on your side. The truth is it doesn’t have to be a gamble. You can be calculated and intentional with every bid to ensure you are bidding at the right time, on the right jobs, with accurate numbers, to reliably secure profitable jobs.
This article will explore how you can upgrade your bids to be faster, more accurate, and more profitable.
Only 31% of all projects
come within 10% of the original budget.
43% of construction firms
prioritize immediate financial goals over organizational resilience.
60% of all contractors
are putting in higher bids due to stresses on the industry resulting in a more competitive landscape.
14% of all construction rework
may have been caused by bad data creating $88.69 billion in avoidable rework across all industries.
How construction bidding works
The construction bidding process serves as the catalyst for most construction projects, kicking off negotiations between contractors and the project owner. The bid itself is an offer sent by a contractor to the project owner or general contractor to take on an entire project or specific work within a project. The bid will stipulate a specific timeline and price. Once a bid is submitted, project owners evaluate and compare all the options and eventually award a bid based on a particular set of criteria (more on this later). The winning bid then performs the work per a negotiated contract.
Bids are the foundation of all future contract negotiations, project planning, and eventual project execution. For this reason, they are vital documents in the construction industry that must be carefully crafted. If bids are missing details, have inaccurate numbers, are incomplete, or don’t feel as though they were professionally curated, they will more than likely fall short of the competition, resulting in a rejected bid and missed job opportunity.
On the contrary, an expertly crafted bid will stand out from the rest, improving the chances of winning the contract. Moreover, once the job is secured, the bid will have created a foundation for price, timeline, and execution, helping to propel the project forward; “well begun is half done”, as the saying goes.
At this point, it should be noted that there are slight differences between bidding, estimating, proposals, and quoting. While all the above terms are often used interchangeably, for the purposes of this article, it’s necessary to understand the difference between bidding and estimating.
Estimating is done behind the scenes to arrive at a fair and accurate bid price. First, the contractor will calculate internal costs for the given project; how much will this job cost my business in labor, equipment, and materials, and how fast can I get it done? Once these numbers are determined, the contractor will apply the appropriate amount of markup and profit margin to cover profit and additional expenses. That number is then incorporated into a final cost amount reflected in the bid price. It is this final bid price that is given to the project owner for review. While estimating costs is a vital component of bidding, the overall bidding process, as we will learn, involves much more than just calculating cost.
Types of construction bids
The differences in bids will come down to the project owner’s tendering method. Tendering is the owner’s process for soliciting, reviewing, and awarding bids. From a contractor’s perspective, the structure and contents of their bid may fluctuate to a certain degree depending on the tendering process they are working with. There are generally, but not limited to, four tendering methods:
Open bid tendering is one of, if not the most common type of bid solicitation and is probably what most contractors are used to. In this scenario, contractors or builders will submit their bid to the project owner without having had substantial or prolonged contact with the owner. Owners will then review each bid and select the one that meets their criteria.
Open bidding fosters a competitive bidding environment as contractors compete against each other for the job. If the owner follows a low-bid strategy common in government contracts, the job is almost guaranteed to be awarded to the lowest bidder. This pressures contractors to reduce costs as much as possible through an aggressively structured bid. However, it’s important to remember that not all owners strictly adhere to the lowest bid philosophy. While the lowest bid undoubtedly has increased odds of winning, some owners will choose to award the bid that offers the best value. Project owners will look at more than just price when determining which contractor can deliver the most value. This will include proven success and a positive industry reputation. The dollars and cents will always remain a determining factor, but many owners will want a team that is reliable and easy to work with; remember this when structuring bids. Be sure to include every piece of information you can to ensure you are demonstrating the full value you bring to a project.
Under a negotiated bid, the project owner will contact a contractor directly rather than hold an open bid selection. An un-official agreement will be made while the exact details are sorted out. While negotiating contract terms, contractors will work to tailor their bid to match the specifications set out by the owner.
Selective bidding works similarly to negotiated tendering, only on a much larger scale. Instead of contacting a single contractor, the owner will invite a select group of several contractors. This creates more competition among potential builders and gives the owner more options to weigh. Again, contractors will work to structure their bids to meet the owner’s needs as much as possible. However, this is another scenario in which added value will be strongly considered. If one contractor can provide a superior team or has a strong track record of performing this type of project well, they stand a better chance of winning the bid, even if they don’t have the lowest price.
Project owners typically use serial tendering when conducting a large number of jobs that are identical in scope, such as building a housing development. Bids will be submitted in batches using the same pricing model at a predetermined arrangement. This method allows project owners to assess the performance of identical projects and reduces the burden of having to conduct multiple open-bid RFPs. Serial tendering can also be used when an owner has a regular schedule of repeatable work they would like completed by a single contractor.
Understanding the construction bidding process
Typically, there are five phases to the construction bidding process:
- Bid solicitation
- Bid submission
- Bid selection
- Contract negotiation
- Project delivery
As we have seen from the previous section, owners will initiate the bidding process by gathering contractor bids through a formal request for proposal (RFP); this can also be in the form of a request to tender (RTT) or a request for a quote (RFQ). The request for proposal will include a bid package of all relevant construction documents, drawings, specs, schedules, and additional project details that contractors will use to develop their estimates and eventual bids. At this stage, there may also be a pre-bid meeting for potential bidders to discuss project information and gain clarity around any issues or concerns they have.
After assessing project details, contractors and builders will craft their bids and submit them to the owner before the submission deadline. These bids will include all requested bid documents and information, such as cost and material breakdowns and timelines. In addition, some owners may incorporate a qualifying round in which the list of potential bidders is narrowed down for further evaluation.
After receiving bids, depending on the tendering method chosen (open, negotiated, selective, or serial), the owner will evaluate bids with the goal of finding a qualified contractor who meets the criteria for the project.
Once a bid is selected, the owner and winning contractor will enter contract negotiations to finalize the final cost and timeline guided by the project’s chosen contract type. At this stage, there should be multiple discussions to ensure that all parties involved are working under favorable conditions. As a subcontractor, you should bring up cash flow needs and timeline issues at this stage so terms can be adjusted as needed.
Common contract types will include:
- Lump sum/fixed price
- Cost plus
- Time & materials (T&M)
- Unit pricing
- Guaranteed maximum price (GMP)
Once construction estimating is done and confirmed, and contracts are signed, work can officially begin via the chosen project delivery method. The four most common project delivery methods are as follows:
- Construction management at risk
- Integrated project method
While the delivery method will be determined in conjunction with the contract negotiation phase, once a delivery method is solidified, the project will begin according to the scope of work.
What’s included in construction bidding?
Bidders are obliged to detail their bid in a series of documents. This packet of documents is known by many different names, such as a bid sheet, bid form, or bid template. However, they’ll all contain project details, schedules, responsibilities, scope of work, and cost breakdowns of labor, materials, and equipment. Owners will review this information and sign it off to lock in a price and timeline. Ensure the bid sheet includes the following:
- Bid price: Total cost of the construction project broken down by the major job cost categories (labor, materials, equipment, sub fees, additional expenses)
- Scope of work: The scope of work is a contractual agreement that defines the work the contractor is to perform, schedule of completion, and the specific methods, materials, and techniques to be used. This is a vital contract component as it allocates responsibilities and sets clear expectations.
- Schedule & payment terms: Schedules will detail what will be completed with associated deadlines and milestones; payment terms will work in conjunction with the schedule clarifying when payment will be invoiced for completed work.
- Contract terms: The bid should reflect the terms of the contract type that is chosen, including details on warranties, insurance requirements, permits required, and a thorough explanation of dispute resolution with clearly defined responsibilities.
How to decide what jobs to bid for
The ideal procedure for deciding what jobs to bid on will start with a highly accurate estimate of costs that allows you to craft a bid that will allow you to be the lowest bidder of all competition while still remaining profitable.
Following this game plan is a great place to start, but as we have seen, each project has a considerable amount of nuance that needs to be considered as you craft a bid. The lowest price isn’t always guaranteed to win the job, nor will it guarantee a profitable venture for you as a contractor. Below we will look at a few tips contractors can use to ensure they are bidding on the right jobs.
Analyze the job
Before putting in the time and effort required to craft a winning bid, contractors should start by assessing past jobs similar to the job at hand. Has this type of job been profitable in the past? Use historical job costing data to help determine this. When doing so, consider your performance, timelines, execution, and overall experience with this type of job.
With past performances in mind, ask yourself: Can you perform this job faster than others? Is there an opportunity to be more cost-effective this time? Or perhaps one of your best crew members recently retired; will this affect how you perform this job? View the project from as many different angles as possible to ensure you are not leaving out any factors that may influence profitability. Ultimately, don’t give in to temptation by taking a job with unfavorable terms or scopes of work outside your wheelhouse.
This decision can be tricky, especially if contractors need immediate work for cash flow reasons. Don’t let this drive you to take a job that isn’t the right fit for your business. It will only lead to more cash flow issues down the line and may hurt your reputation in the long run.
Research the client & competition
When assessing jobs, don’t just focus on the scope or dollars and cents of the job. As important as the financial side is, you should take the time to understand who you will be working for. Do some research to understand the reputation and financial stability of the client. Do they have a solid track record for paying on time? Are they notoriously difficult to work with? See if you can talk with other contractors who have worked with them to gauge their experience. Not only will this help you with your evaluation, but if you are awarded the job, this prior information can give you a leg up for building a solid relationship with the owner.
In addition to researching the owner, take time to see what other contractors or construction companies are in consideration. If you confidently feel you can perform the job faster or more efficiently than the competition, bid aggressively. If you can’t submit the lowest bid, but your team has superior experience or skill with this type of job, bid aggressively. However, if you feel that the list of potential bidders outpaces you in any of these categories, you may want to take a second look at your intent to bid. Or maybe you are up against a large company with a pre-established client relationship. This doesn’t mean you should always be deterred from bidding, but you should think carefully about putting in the time and work needed to pursue a job. Especially if it means you are holding off on other projects.
Estimate, estimate, estimate
Suppose you’ve evaluated the job, client, and competition and feel good about pursuing it. In that case, the next step is to put serious time into accurately estimating the cost for every aspect of the job. Detail is everything here. Don’t just estimate a large lump sum of what you think a job will cost. Instead, break down the cost for labor, materials, equipment, sub fees, and additional costs for every phase of the job. The more granular you can get, the better. This detail will show that you are organized and prepared to tackle the job efficiently. It also gives you a basis for a strict budget that you can use to ensure profitability. Just remember that you’ll need to speak confidently about every cent you show the client. Owners will be just as concerned with their bottom line as you are, so be prepared to back up your estimates with hard data, including historical cost data and details from past projects that can be used to support your estimates.
When reviewing this information with the owner, be transparent and honest with your needs as a contractor. Remember that they hired you for a reason. With this in mind, be open about any cash flow needs or issues you may have. Cash flow issues can cause various issues, and owners should be aware and willing to help ensure you are set up for success. Have these discussions upfront by working out a plan to safeguard your financial health throughout the project. Again, come prepared with supporting evidence and hard numbers to back up any requests you may have.
How to read a construction RFP
Understanding the RFP, or request for proposal, is essential for crafting a winning bid. For one, they are a clear indication of the exact needs of the project owner. If your bid blatantly diverges from their requirements, you are essentially taking yourself out of the running.
An RFP will typically include:
- General project information
- Contract type & details
- Submission requirements
Ensure you fully comprehend each category to place yourself in the best position to create your bid. Project information, for example, will provide essential information, including who the client is, a rough budget and timeline, and an early version of the scope of work. This is crucial for evaluating the job and preparing yourself and your team for the job ahead. In addition, contract details should help contractors understand the delivery and payment methods for the project.
Most importantly, the RFP will include submission requirements. These may state how the bid should be structured and delivered; a hard deadline to submit; necessary qualifications such as experience, licenses, or certifications; or steps that must be completed before submission. Read these requirements very carefully. It could make or break your chances of winning the bid. It doesn’t matter how well-suited you are for the job if you omit critical information or miss a submission deadline.
How to create a winning bid
When determining how to bid on a construction job, every contractor runs through the balancing act of bidding high or low. If you bid too high, you may not get the job. In contrast, if you bid too low, you can put yourself in a position where you are not making enough money to stay afloat, or you may even be losing money. Creating an accurate bid priced reasonably but lucratively is an art form all its own.
If you have historical data available from similar jobs in the past, it’s essential to review this data regularly. Did you underperform? If so, why? Did you overperform? If so, you need to determine precisely where you were able to improve efficiency or cost-effectiveness to apply that approach to future jobs.
Once you know your numbers and can speak confidently about the performance of past jobs, it’s time to evaluate the job site. Take the time to assess the overall condition and try to identify any potential problems that could arise so that you can factor those in and adjust your pricing and estimates accordingly. For example, will the site be challenging to work in? Will it be hard to access? Will other crews be working on the site? Depending on the answers to these questions, your costs and bid could change drastically.
Above anything else, make sure to over-communicate and seek clarification whenever possible. Assumptions always lead to disputes and lost revenue. If something isn’t clear on the project or expectations, it’s your job to step up and get the information needed.
Gather as much information as possible and channel that into a well-thought-out proposal summary that includes a scope of work, any plans or permits needed, expectations, roles and responsibilities, and an evaluation/inspection summary. Again it’s critical to be honest, and transparent here.
From here, ensure you are taking meticulous measurements as being inaccurate here can throw off your materials and labor estimates and, in turn, will cause your job costing to be off. This will cause future bids to be over or underestimated.
Consider using takeoff software to ensure that correct measurements are taken to further strengthen your evaluation and bid. Using takeoff software will help calculate precise quantities, dimensions, and materials needed for a project helping build a more robust proposal with accurate numbers to back it up. Traditionally a laborious task, the days of performing a takeoff by hand with pencils are over.
For more on how to bid on a construction job refer to our complete step-by-step guide on developing a properly vetted proposal to ensure you stand out from the competition and win more jobs.
Tracking bids & following up
Once a bid is developed and submitted, you should continue to keep an eye on it. A process for following up and tracking your proposals can help you stand out as a professional and may just win you the job.
Use a follow-up process to increase visibility and communication. It can help you differentiate yourself and shows that you care. Following up can reveal valuable feedback and help you make revisions or changes to make yourself more competitive. If you didn’t get the job, following up will allow you the opportunity to gain a better understanding of why.
Tracking all bids and setting reminders to reach back out will go a long way in keeping a steady stream of business and helps you to be able to calculate and evaluate your bid-hit ratio. The bid-hit ratio is the number of bids won compared to the number of bids submitted and can be used to determine how effective your bids are.
You can gain valuable insights from evaluating your win rate. Gain a better understanding of which projects have the highest success rate, how many bids you should have at any given time, and what clients are awarding the most construction contracts. This can help you determine and refine who your target market is so you can improve marketing and promotional efforts and will help segment which clients you should be pursuing. You can bid more effectively from this information and increase your chances of winning more jobs.
If you want to start bidding more effectively incorporate the following factors into your bidding process:
- Use good data
- Consistently job cost
- Track & follow up on bids
- Utilize software
It’s imperative that you have good data and have a system in place for acquiring, tracking, and evaluating that data. When taking the time to figure out how to bid on a construction job, you need to know your numbers and use them to make honest bids on jobs you are equipped to handle. Be transparent and honest, and remember to never sell yourself short.
Taking the time to be accurate and honest with your bids will transform your bidding process. Software like Knowify exists to reduce repetitive tasks and increase efficiency in all areas of the construction bid proposal and project management process.