January 2004
By JAMES S. ANCHIN, CPA
Winning bids are at the heart of success in the construction industry. But a winning bid isn't merely a bid that wins a job. Rather, it is a properly structured bid that reflects what it costs you to do the job, with reasonable profit while offering a stepping-stone toward the company's future goals. These kinds of bids don't just happen. Savvy contractors know that they're the carefully orchestrated sum of several parts and are based on sound bidding strategies that are well thought out and constantly monitored.
The payback is high on a sound bidding strategy. Sound strategies give you the flexibility to compensate for variables between jobs up-front before any earth has been moved, thereby minimizing surprises in the field. They also work to improve on a company's overall financial health. Because all costs are carefully examined from the beginningÑparticularly those hard to nail down costs and those that vary from job-to-jobÑgood estimating strategies eliminate discrepancies between the money you pay out for a job and the money you take in. Good strategies actually help control costs once the job is won, and they give you the kind of information that is critical in making solid business decisions.
The key to achieving such a successful bidding strategy is to understand and carefully craft each part of the process. Good bids begin with good estimates. How much will it cost you to do the job in terms of labor, materials and equipment? For labor and machines, that generally means an hourly rate multiplied by the time it will take to complete the work, plus any anticipated overtime. Remember to factor in a cushion to compensate for unexpected costs. Don't neglect to consider general conditions, or the administrative costs associated with the particular job.
Once you've nailed down your direct job costs, figure out how much you should mark up the bid. Your mark up will often make or break the deal. What needs to be factored into the markup are taxes on any materials involved, as well as labor burden, i.e., payroll taxes, insurance and benefits paid to the labor force.
Another critical markup element is overhead recovery, with different overhead rates pertaining to labor, materials and equipment. Are your projected overhead costs too high? Can you do more work with the overhead you've budgeted, or is your overhead budget so tight it's compromising your ability to complete the job? If you are not winning bids-or are winning bids, but not making money Ñ this is one area worth revisiting. Successful contractors are always scrutinizing their budgeted vs. actual overhead costs and readjusting the figures to get a better fit.
How much profit should go into your markup? That depends. What's the market situation? Is there fierce competition for a few jobs, or is it a softer market, with more work to go around? Obviously, the tighter the market, the lower your profit margins will be.
In addition to market dynamics, you will need to factor in company dynamics. How hungry are you? If you don't have a lot of work in the pipeline, you may take the job at a lower profit than if you've got a multi-year backlog.
Also, consider risk in determining your profit margins. The biggest risk in a construction project is labor. If your labor to materials ratio is high, you are faced with a higher risk project that warrants a higher profit margin. Likewise, difficult site conditions Ñ poor soil, tight access and tough terrain Ñ mean higher risk and should command higher margins. Job size is another consideration.
Think future growth. Say the company's strategy is to ratchet itself upwards into a bigger league and a $10 million project comes along-twice the size of its usual jobs. Going lower with the profit may win the job that will take the company to a whole new level. By the same token, the same company may build a higher profit into a $2 million job on the grounds that, while it's a desirable job, it's not really where the company wants to be.
The best way to play the profit angle is to determine a range from the lowest acceptable profit to the highest profit that can be realistically expected. Select a figure within that range as profit for the job based on your considerations about the marketplace and your position in it. You can't afford to approach today's complex construction environment with anything less.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.