In any construction project, the bidding process sets the course for how succesful the project can be. In the SMB space, where bids are highly competitive and profit margins are exceptionally tight, it carries even more weight.
In this article we’ll lay out what the bidding process looks like in terms of qualifying, soliciting, and selection of subcontractors, and we’ll show the impact of effectively executing these stages on your profit margins.
- The main types of bids include open, closed, and negotiated.
- Managing the subcontractor bidding process effectively is key to minimize the risk of scope gaps in the estimate.
- Building strong relationships with clients and subcontractors can provide advantages in the bidding process, like more negotiation flexibility and priority bid consideration.
In this Article
Bidding on Construction Jobs in the SMB Space
When it comes to bidding jobs, SMB contractors are often caught between a rock and a hard place. On one hand, providing detailed, comprehensive, and accurate numbers can differentiate your company from competitors by providing a high value and confidence the project will be completed on budget. On the other hand, a lean estimate is more competitive and will gain closer consideration.
As a contractor, you need to balance value and cost to keep your bids comprehensive and competitive without putting your profits at risk. When a bid is too lean, you might win the project but could be exposed to profit loss due to scope gaps and unrecoverable change orders. This is detrimental to company growth, as profit deterioration prevents your company from maximizing revenue and operating sustainably.
Even more, an inaccurate estimate can result in late stage change orders, which taints the ability to gain trust with a client. To set up a comprehensive bid, you need a thorough analysis of the project requirements. This helps in planning and executing the project effectively and also in understanding the project’s scope, including subcontractors, materials, labor, and timeline to deliver a successful project. Doing this right means a better chance at not only profitability but happy clients and repeat work.
Types of Bids
There are several bidding types you might encounter when going after a construction project, each with its own unique needs and challenges. Depending on the bid type, you will need to adapt the way you construct your proposal to stay profitable and competitive. Most often, construction requests for quotes (RFQ’s) fall into the following categories: open bidding, closed bidding, and negotiated bidding. Each of these categories demands comprehensive bids, but vary in terms of the level of competition needed to win a project.
This type of bid will always generate the most competition between contractors. In open bidding, a project’s RFQ is publicized, so any qualified contractor can submit a bid and has the opportunity to win the project. Oftentimes this means that a large number of contractors will submit proposals, which can lead to a longer, more drawn out bidding process. In this type of proposal, your main goal should be to submit the most competitive price, while also maintaining the quality of work. The winning bid will often be the one that provides the best value for the owner’s investment.
Price shouldn’t necessarily become the be-all-end-all though. There’s risk for owners in selecting contractors just because they submitted the lowest bid, as this can result in sub-par work and often leads to change orders later on in the project due to missed scope. If you’re the contractor performing the work and end up submitting scope gap change orders during construction, you’re less likely to win additional work with that client or be invited to a closed or negotiated bid on future projects. It’s best to make sure you can maintain the quality of the work while being as competitive as you can on the price.
Closed or Selective Bidding
That leads us to closed bidding — a slightly less but still highly competitive bid process for a general contractor. In this type of process, the project owner will invite you and a number of other contractors to bid on the project and they’ll send an RFQ with all project details. The goal of closed bidding is to give the owner more control over who they are receiving bids from and ensure that only capable and trusted contractors are considered. It is also often used to make the bidding process more manageable and limit the amount of bids to compare.
As a participating general contractor, you will experience the pressure of submitting a bid with high expectations for quality, professionalism, and competency, especially in going up against similarly qualified contractors who are delivering the same level of excellence. Winning one of these RFQ’s is an accomplishment that attests to the strong relationship you have formed and will continue to form with a specific client and can also lead to gaining additional opportunity for work solely based on reputation.
This bid type is the least competitive type of RFQ. To be considered for a negotiated bid, it means you have built a high level of trust with the client through your reputation on previous projects and past work and you’ve gained their full confidence to deliver a best in class quality project. This bid type allows for the greatest flexibility in pricing and leads to increased profit margins when executed correctly.
Over the course of the RFQ process, a client and contractor will negotiate the proper terms and conditions including price with a single contractor or small group of contractors. All parties have the opportunity to negotiate and agree upon different terms of the project delivery. It also allows you to be flexible throughout the process and make changes and adjustments as needed during the planning phase.
Usually, when this type of proposal is generated, the quality of work and the contractor’s ability to meet the project-specific requirement is more important in determining how much the project should cost rather than solely focusing on a lean price. This gives you the opportunity to make more money and maintain profit margins on these projects because the focus of the bid is not compromising price over quality. You’re able to ensure that all bases are covered to deliver the complete scope of work with the agreed upon price. Plus, the pressure to underbid in order to win the contract is eliminated, allowing you to submit a proposal that reflects the value you are able to provide without compromise.
The Construction Bidding Process
No matter which type of bid you participate in, all of them require the ability to effectively solicit, organize, select, and compile subcontractor quotes and proposals to deliver your comprehensive pricing package as a part of your proposal to win a project. You need the pricing you receive from subcontractors to be comprehensive so you can minimize the risk of scope gaps.
Scope gaps refer to a difference in the client’s expectations for a project’s requirements and what is actually defined in the contract’s scope of work and pricing provided. This difference poses risk to a contractor because it could result in delays, increased costs, and disputes later in the project. These types of scope gaps often originate at the subcontract bid level, meaning it is important to set up a bid package aimed at reducing the amount of risk exposed to scope gaps.
This happened on one of my previous projects. We submitted a proposal in which neither my drywall subcontractor nor my HVAC subcontractor included the price of access panels to conceal utility valves. It may seem like a small miss, but ended up costing us $3,500 directly out of our profit. When these small scope gaps occur multiple times within different scopes, the cost compounds and can be detrimental to maintaining profitability in your projects.
The best way to avoid scope gaps is to set up infrastructure to organize the subcontractor bid process effectively and control as much of the proposal as you can by being explicit in the way you engage subcontractors through the bid management process. Here’s a typical process for managing subcontractor bids.
1. Bidder Qualification
This is the initial step in managing subcontractor bids. The main goal is to determine which subcontractors are qualified to perform the scope of work on a project. During qualification, you will want to evaluate previous work experience, financial stability, manpower allocation/ resources, safety records, and reputation, among other things. This is especially important for vetting out subcontractors you haven’t worked with previously, as you want to ensure the subcontractor has the capacity and experience to effectively deliver the level of complexity the project demands.
To gather and assess this information – utilize a pre-qualification form sent out to all subcontractors in order to streamline the process of vetting for future work. Repeat this process for your subs regularly to maintain up to date information on their qualifications and reduce the risk of awarding a project to an unqualified sub. Additionally, keeping up to date records on your subs will speed up the bid process and avoid bottlenecks with last minute qualifications- especially when there is a tight deadline for deliverables.
2. Bid Solicitation
Once you’ve been able to identify qualified bidders, the next step is to solicit bids from your subs with an RFQ process and an organized method for collecting and reviewing those bids. You will need to send out a comprehensive bid package. This will include project and design documents, proposed schedules, an outlined scope of work, terms and conditions, and key project information. Creating a very specific document outlining inclusions and exclusions will reduce the changes of scope gaps and result in more complete quotes from your subs. It will also help to break out scopes in several line items, which will make comparing and leveling bids easier and more organized
3. Bid Submission and Selection
After reviewing all provided information, subcontractors will prepare and submit their bids with a detailed breakdown of cost of the scope of work they are performing. It will also specifically outline any scope of work or services the subcontractor does not provide to make it clear where there may be gaps. Additionally, you should ensure that the subcontractors are including up to date financial and insurance information, again to ensure qualification to perform the work at hand. After collecting all of the quotes from subs, you are responsible for comparing and selecting the right subcontractor to perform the work – which means making sure you pick the most economical quote that will also be able to deliver a quality and complete scope.
This brings us to bid leveling — the ability to accurately review and analyze varying subcontractor bids. It includes the process of normalizing bids so they can be compared. For example, if one subcontractor includes the cost of a specific scope that was excluded by another, you can add in the cost of those materials to the missing bid to better compare them. The goal of this step is to allow yourself to make an informed decision about which subcontractor should be awarded the project.
👉🏼 For more insight on how bid selection fits into the overall procurement process, check out our resource on construction procurement.
How to Win in the Bidding Process
While establishing a process for organizing, reviewing, and selecting bids is important, success in the bidding process is all about your ability to build and maintain relationships.
Relationships with Subcontractors – When you form positive relationships with your subs, you get a leg up in the bidding process because subcontractors are more willing to negotiate with you on price and scope, and will prioritize your projects when bidding future jobs. That means you’ll be able to get pricing faster and have more time to be proactive in making adjustments to your project estimate.
Relationships with Clients – Maintaining good relationships with clients gives you the same edge. Clients are more likely to award projects to contractors they trust in the bidding process. The more complete and transparent you are about pricing, the easier it will be for a client to choose you as their selection – especially if you have a proven track record of bid accuracy on past projects.
Stay Professional – Maintain professionalism to support your relationships. This includes: consistent and prompt communication with clients and subs, following up with clients post bid, and detailed organization of the estimate and backup. By showing professionalism, you are showing the client you are taking them seriously to deliver a best in class project.
While we all want to win bids, we do not want to win at the expense of putting our contruction company at risk. That comes down to emphasizing value over cost in your bids. If you are always looking for ways to cut corners and submit the lowest price, unforeseen costs are likely to bleed into your profits later down the road in change orders or scope gaps.
To avoid this, you need to able to identify red flags up front. For example, identify subcontractors that may be submitting rushed, incomplete, or low bids, as this could mean they are missing key information and may indicate a lack of understanding of the project’s complexities. Additionally, look out for subcontractors whose track record of projects of similar size and scope is sparse, as well as subs with a small reference base. Depending on the complexity of the project, you want to ensure the subcontractor has the resources and experience to complete the project effectively within the budget and schedule.
Winning a project bid begins with the ability to effectively execute a bid solicitation process with your subcontractors and put together a concise and comprehensive package that will not only support your ability to be selected, but also your ability to maintain profitability when the project actually comes to fruition.
The most important quality for a GC is their ability to create long lasting trust with clients and subcontractors. To build trust, it’s important to set up the right infrastructure to support the organization and collect and review the right information to submit a comprehensive and meticulous bid package. By prioritizing value instead of just focusing on low cost, you’re able to provide a better quality project and a more complete estimate, which will protect you from financial risk and future change orders. Plus it helps you build lasting positive relationships with clients and gain more bid opportunities.
The CrewCost Team consists of men and women who have worked in the construction industry as project managers, general contractors, sub contractors and more. They share their decades of experience on our blog as a way to help other contractors grow healthier and more profitable businesses.