Bidding is the lifeblood of construction companies. Many small to medium-sized general contractors are just one unprofitable job away from going out of business. The competition for work in the construction industry is fierce, and companies have to work hard to win a steady stream of profitable jobs.
Establishing a standardized bidding process helps companies prepare accurate estimates, reduce lost profit due to underestimating costs, and improve their bid-hit ratio.
Let’s walk through what it takes to develop an effective bid management process.
Key Takeaways
- Establishing a construction bidding process streamlines bidding and improves the accuracy and quality of your bids.
- Preparing responses to bid solicitations should be planned, just as you plan a construction project.
- Construction bids include direct construction costs (material, labor, equipment, and subcontractor), project overhead, and overhead and profit markups.
Why Use a Standard Bidding Process?
Preparing accurate construction estimates is critical to the success of your company. When items are left out of the bid, it reduces your profit. On the other hand, including extra items increases your bid, which makes you less competitive, and you win less work.
If your company’s bid-hit ratio (the number of bids you win compared to how many you bid on) is too low, it’ll increase your overhead costs, making you even less competitive in the market, or decrease your bottom-line profits.
By using a standard bidding process, you:
- Increase the accuracy of your cost estimates.
- Reduce the risk of missing items and winning bids you can’t profit from.
- Streamline the bidding process and reduce the time it takes to complete a bid.
- Improve the quality of your bids.
- Provide a paper trail documenting how the price was determined.
- Establish credibility with clients who review your bids and change orders.
The Four Stages of a Bid
All projects pass through four stages: initiation, planning, execution, and closeout, or as I like to refer to them: deciding to bid, planning the bid, preparing the bid, and finalizing and submitting the bid. Let’s walk through each of these stages and what you should be working to accomplish in each.
1. Deciding to Bid on a Construction Project
Often referred to as the initiation phase, the first step in the bidding process is deciding whether or not to bid on a construction project. You can’t bid every project, so you should consider your past performance and the likelihood of winning the bid at a reasonable profit. Consider the following questions as you make your decision:
- How many competitors are bidding?
- How often have we beaten them?
- How easy are the project owners and the design team to work with?
- Do we have the required expertise from past projects?
- Can we meet the project schedule?
- Do we have the financial resources?
- Can we get the required bonds?
- Do we have the labor capacity to complete the project, or can we obtain additional labor?
- Do we have the subs to complete the project?
- Do our labor, subcontractors, and material suppliers give us a cost advantage?
- Do we have experience with the project delivery method (design-bid-build, design-build)?
- Do we have experience with the procurement method (low bid, best value)?
- Are we comfortable with the contract type (fixed price, cost plus, guaranteed maximum price)?
- Does the potential profit justify the risk?
🔎 Dive Deeper: Learn how to navigate Invitations to Bid
2. Planning the Bid
Once you decide to bid on the construction project, you’ll enter the planning phase, where you start to plan out how to complete the bid on time. We recommend that, at a minimum, you include the following steps in the planning process:
Review the Bid Package
Carefully review the bid package to get a feel for the type of project and the project’s scope of work. Take a look at the plans and open up the project manual (often called the project specifications), note any unusual work that requires materials, labor, or subcontractors outside of what you usually do. These need to be addressed early in the bidding process to make sure you can get the required subcontractor bids to complete your bid proposal.
Visit the Site
Visit the site to make sure you understand the existing site conditions. This is particularly important when working on existing buildings and remodels. The site visit often uncovers conditions that weren’t shown in the construction documents that will affect the cost of completing the work and your bid. Make sure to take pictures during the site visit so that you can reference them as you prepare your bid.
Divide the Job into Work Packages
Once you clearly understand what is needed to complete the construction work, you can divide the job into work packages. The work packages should align with your job cost codes or divisions of work. Each work package should include one or more job cost codes, and each job cost code should be included in only one work package. You must make sure there are no overlaps between the work packages and gaps that leave items out of the bid.
Once you have developed the work packages, you need to decide whether you will:
- subcontract the entire work package,
- provide the materials and subcontract the labor, or
- provide the materials and the labor
You also need to determine if any equipment will be required.
Schedule the Bid
Once you have identified the work packages, prepare a schedule showing how you will complete the bid by the bid date.
Assign Bidding Tasks
If more than one person is working on the bid, assign the tasks to a team member so everyone knows who is responsible for what task. This reduces duplication of efforts and ensures that someone works on every task. We recommend that only one person be accountable for each task to avoid confusion about who is over each task.
3. Preparing the Bid
Once you have planned the bid, you’re ready to prepare the bid which can be referred to as the execution phase. You’ll prepare bid documents and price each work package and the project overhead. Pricing the work packages requires getting pricing from subcontractors, materials suppliers, and/or equipment rental companies and determining in-house labor costs. At a minimum, you should include the following steps in your process for preparing the bid:
Preparing the Bid Documents
Ordering the bond is one of the first things you should do. You want to make sure that you can obtain the needed bonds and that they will be ready on time before spending time bidding on the project.
Other than final pricing, which you’ll fill in just before the bid is submitted, you’ll need to get the rest of your documents ready to submit. This includes gathering and completing any supporting documents that must be submitted with the bid, such as affidavits and certificates of compliance.
Obtaining Subcontractor Quotes
Once you’ve identified the work packages to be subcontracted, you’ll need to write a scope of work for each one and identify potential subcontractors for each package. We recommend that you prequalify potential subcontractors to ensure that they are qualified to do the work and will be good team members.
Once you’ve identified potential subcontractors, send them your request for proposal (RFP) and get a commitment from them to bid on the work package. The RFP includes the scope of work you want them to bid on and other pertinent information they need to complete the bid.
When you receive the bids from the subcontractors, carefully review them to make sure they match the scope of work and include everything needed to complete the work package. Just as you level the material quotes, you need to level the subcontractor bids, adjusting for any differences, before selecting the subcontractor to include in your estimate.
🔎 Dive Deeper: Subcontractor Bid Management Process: The Key to Getting Better Bids
Pro Tip: Today, there are plenty of inexpensive, but powerful online bid management tools to streamline your bidding process. These tools can not only be leveraged for sending out an invitation for bid (IFB) to your list of subcontractors but also allow you to build a bid template that includes bid documents like construction drawings, specifications, and contract types (i.e. lump sum or unit price). Most have a bid leveling tool to identify the lowest bid, best value, and ensure there aren’t scope gaps, plus track responses from the initial outreach through contract formation with subcontractors.
Preparing Materials Estimates
For work packages that require you to provide materials, the first step in preparing material estimates is determining the quantity of materials needed for each work package. You determine the quantities by performing a quantity takeoff using the drawings.
Once you have the quantities, you can select the suppliers you want to bid on the package and send them the list of materials for pricing. Even when the suppliers perform their own material takeoff and provide you with a list of materials, you should prepare your own takeoff and check their quantities because suppliers often do not guarantee their quantities.
After receiving the material bids, check to see if the supplier has included everything needed to complete the work package and provide an accurate bid. If materials are missing, you will need to add in their cost. Make sure that sales tax and freight to the job site are included in the bids. If not, you will need to add them. This process is known as bid leveling.
Once you have checked and leveled the bids, you can select the lowest price to include in your bid. In addition to the material cost, you need to include an allowance for material waste to cover the additional materials needed due to construction errors or damaged and lost materials. This is a common setting in most estimating software packages today, or you can add a column with a waste percentage to your estimating spreadsheet.
Preparing Labor Estimates
As with your materials estimates, you need to estimate the quantity of work to be performed by the labor for work packages that are to be performed by your crews. This quantity often comes from the material takeoff quantities and your experience working on similar projects. For example, if you’re providing flooring you would multiply the area square footage captured during the takeoff by the labor rate (in labor hours) per square foot to arrive at the total labor for the task.
You also need to determine the labor difficulty factor of the task, which means you need to understand project details like working heights, weather conditions, distance to supply and tool storage areas, other trades as these can increase the labor time required to complete the task.
Most labor on a construction job is performed by a crew with various labor classes. You need to select the crew size and the mix of craft labor that will be used to construct the work package most efficiently.
Next, you need to determine the total cost of the crew. The crew’s cost should include all labor burdens, including Social Security, Medicare, unemployment taxes, workers’ compensation and liability insurance, employee benefits, paid time off, and other costs associated with employing the labor. We recommend working with your payroll accountant to identify all the labor burden costs.
In addition to the crew cost, you need to estimate the crew’s productivity, which is the amount of work the crew can perform during a specified period. The productivity will vary based on the crew selected. You then use this productivity and quantity of work to determine the number of crew or labor hours needed to complete the work. Can the work be performed during normal working hours, or will you be working overtime to meet an aggressive project timeline?
Finally, combine the crew costs with the labor hours to get total labor costs and incorporate them into the estimate.
Preparing Equipment Estimates
Next, for work packages that require you to provide equipment, determine the equipment required to complete the work package and how long it will be needed. Some equipment is needed for the entire time the crew is working. Other pieces of equipment may only be required for a portion of the work package.
Once you have identified the required equipment, you can get pricing from rental companies. You need to include operational costs (fuel, oil, and maintenance) and wear items (blades, bits, and teeth) not included in the rental agreement to capture all the costs in your estimate.
If you’re using the equipment your company owns, include the cost of owning and operating that equipment. This includes recouping the purchase costs and setting aside reserves for major repairs. We recommend that you work with your accountant to determine these costs.
Estimating Project Overhead Costs
On top of the direct construction costs (materials, labor, equipment, and subcontractors), you need to include the indirect or project overhead costs in the estimate. The project overhead costs include those costs not associated with completing a physical component of the project. This includes:
- The project management team and other project stakeholders, such as the superintendent and project engineer.
- General labor that cannot be allocated to a specific task, such as general cleanup.
- Temporary facilities, such as office and storage trailers.
- Temporary utilities, including set-up costs and utility bills.
- General equipment used by multiple trades on the project, such as tower cranes.
- The cost of the project’s bonds, insurance, and permits.
Make sure to estimate project overhead costs with the same care and accuracy as you used to estimate the direct construction costs.
Many of these costs are a function of time. If the contract documents set the duration, you can use it to determine these overhead costs. Otherwise, you need to develop a preliminary, high-level schedule to determine the project’s duration.
4. Finalizing and Submitting the Bid
Now for the closeout phase, where you’re ready to finalize the bid. You’re ready for this stage once you have included all the direct construction and project overhead costs in the estimate to meet the project requirements. One of the most important things to do here is to review your final bid for errors. In addition to a careful review by those who prepared the bid, have it reviewed by someone outside the bid team, as a second set of eyes will often catch mistakes overlooked by those who have been staring at it for weeks already.
Next, add the general overhead and profit markups to the bid. These markups are often percentages added to the project costs.
- The general overhead markup covers the main office costs allocated to the job. (Check out our rundown of how to calculate overhead.)
- The profit markup gives the company’s owners a return on their investment. The project’s risk, competition, and market conditions should be considered when establishing the profit margin.
Next, add the final pricing to the bid form and the schedule of values and submit the bid. Make sure that all the required documents are included in the bid submission and follow all the bidding procedures, as most government projects, public projects, and some private projects require incomplete bids and bids with procedural errors to be disqualified from the bid selection process.
How to Use Project Data to Improve Profits
When you have a standard process for bidding and creating estimates, you can start to leverage that data to improve your estimates in the future, which improves the consistency of your profit margins.
The very start of this is making sure you have a good cost code structure in place so you can evaluate your actuals vs. your estimates and start to understand where things need to be adjusted. This is a process called job costing. You can do a deep dive into setting up a process and systems for job costing with our guide.
Secondly, you need your cost data to be integrated with your accounting functions, so you can make informed decisions based on data that's always up to date. That's where CrewCost comes in. CrewCost brings accounting, job costing and time tracking into one application so you can easily track cost data from the bid all the way to project completion. Plus, it's 100% cloud based, so you can access your data from anywhere — the office, the jobsite or when you're working from home — all without the pain of VPNs and the maintenance of on-prem software.
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Final Thoughts
A construction company can only survive in a competitive bidding market by winning jobs. The more jobs you win, the higher your bid-hit ratio and the more efficient your construction management team is from an overhead perspective. Establishing a bidding process that ensures your company produces competitive, accurate estimates efficiently helps your company pursue more bid opportunities and win more construction contracts with better profit margins.