Everything You Need to Know About Construction Bidding
Look behind any highly successful construction contracting business and you’ll likely find a business manager who not only thoroughly understands the bid construction process, but is regularly responding to bid solicitations and requests for proposals, and is regularly winning projects. Even the most highly experienced and skilled contracting team is going nowhere if they can’t bring in new projects and revenue.
The construction bidding process can be time-consuming and expensive but if done correctly, it can help stimulate any business not only by increasing profits but by strengthening its professional network of construction managers and other general contractors. In short, done well, the bidding process will ultimately lead to new future growth, one way or the other.
In this article, we’re going to provide a general overview of the construction bidding process here in the United States. We’ll look at bids versus estimates, the tender process and project delivery models, and then we’ll lay out several recommendations on submitting a winning construction bid. Next we’ll explore cost recovery and the general conditions, and we’ll walk you through calculating your mark-up and profit margins. Finally, we’ll provide some recommendations of things to do and things to definitely not do, and we’ll close off with what to do if you make a major mistake. Let’s get started!
What exactly is a Construction Bid?
Put simply, a construction bid is a proposal showing potential clients that your company has what it takes to get the job done. Based on project drawings, specifications, and material quantity takeoffs, your bid defines exactly how you will go about completing the project and the amount of money you’re willing to accept for doing it.
Often, several such proposals will be made at the same time by various competing companies of similar stature and type, and the price is generally the defining factor in whether or not a company is awarded the project. This is especially so for contracts sponsored by government agencies, where the project owner is often required by law to choose the lowest bid.
On private projects meanwhile, while price is still a factor, proposals are generally more focused on other elements such as qualifications and experience.
Is a Construction Bid an Estimate?
While often used interchangeably, bid and estimate are not completely synonymous and it’s important to understand the difference.
An estimate is a highly informed and experience-educated assessment of the specific spend required for materials, equipment, and labor for each of the various construction elements based on the material quantity takeoffs, detailed specifications, and architectural and construction build plans. Estimates are just one element used in construction bidding to define a bid.
A bid on the other hand is a final cost proposal based on a series of estimates of all the related project costs, from labor and materials to soft costs such as office and overhead plus the profit margin. The bid is the final price offered for a project. The preparation of a good bid requires substantial time and effort that entails reviewing everything to do with a project and producing a proposal that is as close to accurate as possible. Even the slightest error in a preliminary calculation can spell the difference between winning a project or not, or worse, winning and failing.
The Basic Construction Tender Process
Types Of Construction Bid Delivery Model
A major consideration that has enormous implications for any project is the Delivery Model. Also referred to as the Project Delivery Method, it is a system employed by an agency or project owner to establish a legal agreement with various parties to organize and finance the design, construction, operation, and maintenance of a building project.
Each of the different delivery models is intended to support owners in ensuring new construction occurs along the given timeline, within budget, and according to the latest quality standards, however each represents different levels of risk and responsibility for each of the key players involved
There are several different delivery models currently in use, each with its own set of variables. Here are the most common:
Design Award Build (DAB) aka Lump Sum
This is the most common method employed in public-sector projects. An owner works with an Engineer and an Architect to produce contract documents based on blueprints and detailed specifications. They then solicit bids from responsible contractors and award the one with the lowest bid. In this model, the bid covers the entire project cost including the GCs and subcontractors costs, overhead, and profit.
The benefit of DAB is that it simplifies implementation by giving the owner control of both design and construction. On the other hand, the owner takes on great risk for overall project management difficulties and design flaws. Before considering DAB as a delivery model, owners should have significant experience in construction execution.
Construction Manager at Risk (CMAR)
In this model, the owner hires a Construction Management agency to give them a guaranteed maximum price (GMP) which includes the CM's fee and contingencies, in addition to the costs of pre-construction and actual construction services. The GMP gives the owner assurances on where they’ll be at the end of the day, but since the CM is typically brought on early in the process when documents are still at the SD or DD level, this leaves them with risk on issues that the architect may not yet have covered.
Often, the CM participates in architect selection and then works hand in hand on the design process, ultimately transitioning into the general contractor role, bringing on board the subcontractors to get the work done. Because the GMP was set before the design was complete, it’s possible that subcontractor bids will come in at a higher rate, and if they do, the CM agency will have to bear the burden. On the other hand, in the event actual construction costs come in under the GMP, it’s common for the owner to share the difference with the CM. Generally speaking, the CMAR model is well-known for reducing costs.
Benefits of this model include enhanced project management and cost control, and reduced risk overall. Since the owner, architect, and CM are together during the design phase, they can ensure the project stays within budget and they can speed up the project by initiating construction as soon as initial elements have been designed.
Agency Construction Manager
In this case, the construction manager administers the management process but doesn't necessarily manage the contracts themselves. This is very common with municipalities where the owner holds the prime contract and the CM administers the management and bidding processes.
Integrated Project Delivery (IPD)
Also referred to as Integrated Team, this model was conceived on the same lines as the lean construction philosophy, and is intended to improve project efficiencies and reduce delivery waste. It does this by involving all stakeholders in project management, distributing risk evenly. In IPD, the owner, architect, and general contractor collaborate closely from the start, sharing accountability for all elements of the project. However, this model is well known for extending the overall length of a build.
Design-Build (aka Design Construct)
Similar to CMAR except that the architect now works directly for the contractor. This model works very well for fast-paced projects where you need to get in the ground before all the documents have been completed. DB is a good way to minimize cost risk for contractors while maintaining a level of reliability for owners. One of the major benefits of this model is that it inherently increases collaboration; while many project elements are farmed out, their management is the ultimate responsibility of the design-builder who works hand in hand with all participants. This promotes a better understanding across the board of project deliverables, leading to fewer change orders and disputes, better overall delivery, and finally, reduced cost.
On the flip side, this model can sometimes drive reduced quality when the owner pushes to reduce cost, and since the designer is no longer reporting directly to the owner, it’s not always clear where their priorities lay. Furthermore, design-builders take on significant cost risk given that construction documents are not yet complete and therefore, it is not possible to accurately estimate cost going in.
Building a Winning Bid
Once the Delivery Model has been established, and you have received the information package from the owner and completed your own on-site assessment, it is time to begin the crucial process of cost estimation.
Don’t Overlook the Front End
Often the first place contractors start in defining the skeleton of their estimate is with the plans, but in fact, that’s not necessarily a good idea. Instead, many contractors recommend opening a spreadsheet and beginning by laying out all the front end CSI codes from the specification book first for each of the elements to be constructed and/or installed. In plans, especially on larger projects, it can be easy to miss minor elements captured on single pages, whereas the specification book will have it all.
Indeed, some of the most common mistakes made at this step involve elements found in the first few pages of the spec book; minor things not found in the drawings that can really jack up the cost such as special waste removal requirements, or temporary office space for the Construction Manager and their team. Whether you’re a Subcontractor or a General Contractor, you need to take the time to read through the spec pages to uncover all the extra things you’re going to be accountable for on the project. Don’t forget to review the zero codes as well as these are the project general requirements.
Next, you’ll need to review the plans. Take the time to review not just your own, but those of the project in general. Also review the addendums to ensure your scope is fully laid out and defined. Share your plans and specs with the subcontractors and spend the time to ensure they are on the same page. The last thing you want is to have duplicated costs in your bid for tasks that will be taken care of by your subcontractor.
It’s a good idea to attend all of the pre-bid meetings to be sure you’re capturing every little relevant detail. These sessions are a good opportunity to call out any issues that appeared vague upon your review of the spec book and plans. Doing so will have two major benefits. First, you’ll get your answers in a contractual addendum that gives you the power to price it up as part of the scope, and second, you won’t get caught out mid-build for not having factored in the cost. One such important element you’ll want to clarify is that of permits and just who is accountable for paying them. As an example, tap-in permits for water and sewer access can run as high as a hundred thousand dollars for a major project and in some municipalities, the bill is the contractor’s to foot.
Bill of Quantities
Accurate bidding requires painstaking analysis of plans and specifications. The higher the detail and quality of the information you use to prepare, the more accurate your bid will be. The first step in this process is the Bill of Quantities (BoQ).
The BoQ is an itemized list of all the materials and work needed to complete the project. You can create one in four steps:
The General Conditions
Once you’ve compiled the BoQ which lays out the direct costs of construction, you will need to consider the General Conditions. Also referred to as back page cost or soft cost, these are the secondary costs of construction which include site management, material handling, and project management, and can vary depending on the delivery method. For example, in the case of a CM type job, it’s likely the owner will hold on to the money to cover the additional costs, but if you’re doing an Agency CM, then the GC is the owner’s representative and it will be up to him/her to monitor and cover all these costs. The same holds true for DAB, where the contractor is fully accountable for any extra costs.
To define the General Conditions costs, you need to build out a schedule and site logistics plan. The schedule will give you a better understanding of the project run time which can help define the potential cost of long-run expenses, such as in the example of office space for the Construction Manager. In the case that your delivery method is lump sum, a shortened run time can help you chop some dollars off your bid.
Some typical costs included in General Conditions include:
Nuances to Keep in Mind
There are also a number of nuances specific to construction that need to be considered when thinking of soft costs:
In addition to the BoQ and General Conditions, every estimate should include home office cost recovery, general business cost recovery, and of course, the profit margin. But there are also a number of hiding costs that cannot be overlooked:
What exactly is the cost of materials? If you need a truckload of drywall for a job that costs $5000, you also need to consider the cost to deliver, unload, unpack, and get the materials to the floor where you need them. Additionally, you need to consider what to do with discarded packaging - have you ordered a dumpster? There is much more to consider than just unit price.
And just what exactly is the cost of labor? A common error new estimators make is factoring in only the prevailing hourly rate but in fact, labor burden is much more than that. You also need to consider fringe benefits such as health insurance, worker’s compensation insurance, pension, retirement savings plans, vacation and time off allotments, and of course payroll taxes. In addition, you need to consider the cost of worker liability insurance. In some cases, the true hourly cost of one worker can be as high as 50% over their base rate.
Home office costs are everything that goes into managing the business on a day to day basis. This includes administrative staff and management positions like the project manager and executives, and support staff. In addition, it includes daily business costs like phone and computer systems to manage calls and emails, public utilities for the office area, and rent.
General business costs are all those that are required to run the company, not connected to any single project. These include the costs of managing the permanent fleet of vehicles and equipment, fuel, obtaining registrations and licenses, maintaining the legal and accounting teams, marketing, taking out all sorts of insurance policies, and finally, covering company taxes. Also included here are projected capital costs (if funds are being borrowed to complete the project), along with any bonding premiums, All of these must be included in the bid. Often companies will factor home office and general business costs as a percentage of a project amount, tacking it on top.
Determining Your Profit Margins
The last item to include in your costs estimate is the amount of money you hope to take home once the project has completed. It’s a tough decision for most people, especially those new in the business. Especially at the beginning, there is a strong urge to keep the bid as low as possible to ensure you win the contract, but that can be extremely counter-productive.
The first step in defining your margin is to determine the industry average. CSIMarket.com is a good source for up to date metrics on the industry. Accordingly, from the end of the fourth quarter of 2020 to the middle of 2021, the commercial industry has risen 4.2% to 21.8%. On the other hand, rates for residential services can land anywhere from single digits to as high as 40%. Regionality is also key as both materials and labor rates can fluctuate greatly.
Mark-up versus Margin
Some contractors set their profit margin with the “10 and 10” method, including 10% for overhead and 10% for profit, while others simply tack on an extra third. Others just “guestimate” and accept the inherent risk. How you decide to calculate it is up to you but there are two elements you need to understand clearly; margin and mark-up. According to industry expert George Hedley, most contractors don’t know the difference between the two or how much to include in their bids to ensure they break even or better yet, turn a profit.
Mark-up is the % of money that is added to your direct job costs to cover both overhead and profit. Your Margin on the other hand is the percent difference between direct costs and your sales price, divided by the sales price. It’s quite confusing. Let’s take a moment and look at the difference using an example:
If you’re bidding on a job that has a direct cost of $1000 and that represents 77% of your sales, and you add a 30% mark-up ($300), your margin will be 23%. Your final sales price will be $1300, but that doesn’t mean you’re making 30% extra - your margin is only 23%. The difference, (7%) goes towards your overhead. If you wanted to take home 30%, you would have to mark-up your costs by 42.8%
To calculate your margin to hit the profit and overhead you want, we need to define the Job Sales Price and factor in the Margin Conversion Rate (MCR). The Job Sales Price is obtained by dividing your direct job costs by the MCR. The MCR is 1.0 minus the margin percentage.
So using the example above, to define the amount we must charge to obtain a 30% margin, we must first define the MCR and then divide direct job costs by the MCR amount.
1. MCR = (1.0 - Margin%) = (1.0 - .30) = .70
2. Job Sales Price = Direct Job Costs / MCR = $1,000 / .70 = $1,428
So in summary, if the job has a direct cost of $1,000, you will need to charge $1,428 to obtain a 30% margin. It’s extremely important to understand this concept along with several others. If finance isn’t your thing, you might consider enrolling in an online construction accounting course or at the very least, recruiting someone who can help guide you along. It’s extremely easy to make a mistake and end up losing money in the end.
Eight Steps to Success
Here are eight steps you can take to ensure your bid has a great shot at winning.
Things To Look Out For
Unfortunately the construction bidding process isn’t the simplest of things - there are many potential pitfalls that can catch you up and easily put your company into bankruptcy. Before even considering bidding on a job, make sure you are absolutely certain about your estimates, and your ability to see the project through to completion. One way you can mitigate some of the risk is by avoiding the errors of others.
To help you along that track, we’ve compiled a list of the most common mistakes contractors make when bidding on a job:
Imagine this situation if you will; you found out about a new project happening in your area that perfectly matched your company's abilities so you poured two weeks of time into building the perfect bid. You met with the owner and the architect, you attended the pre-bid briefings, ran your takeoffs, got bids from subcontractors, met with suppliers to confirm pricing and stock availability and just overall put your heart into it. In the end, you submitted a bid with just a 10% profit margin, hoping to secure the contract as the lowest bidder, and guess what? You won!
But then you found out the second lowest bidder bid 40% higher than you and everyone else averaged 50% higher. Either everyone else is greedy (unlikely) or you made a serious mistake in calculation. What do you do? Can you back out of the competition? Are you going to be forced to go through with the build and eat the loss?
Surprisingly, this sort of thing happens more often than you might think but luckily, depending on the type of mistake, most agencies will allow you to back out without consequence. The key determiner is whether the error was clerical or due to poor judgement.
While each state and county has their own laws governing construction bidding, most will permit a contractor to back out of a bid if it can be proven that, a) a clerical error led to a mistake of fact that negatively impacted the bid, and the contractor alerted the agency as soon as they realized an error had been made. Typical clerical errors are mathematical typos or incorrect number transposition, or even misplacing a decimal.
Unfortunately, if you failed to grasp the full scope of the project, didn’t adequately plan for risks, didn’t properly assess the amount of materials or equipment needed, or didn’t do any other of a thousand things when creating your bid, there is no backing out once the bid deadline has passed. Or at the very least, there will be a stiff penalty. Often contractors who find themselves in this situation are forced to pay the difference between their bid and that of the next lowest builder. Depending on the size of the project, such a move can easily put you out of business.
Always submitting perfect bids is easier said than done but if you put a check system in place, a set of procedures that you can follow with every estimate, you’ll likely be much more successful. On top of that, get in the habit of reviewing the CSI codes and specifications up front, attending all the pre-bid meetings, doing site visits, and getting clarification wherever there’s doubt. Also be sure to add sufficient time in your schedule for unexpected situations, and above all, always get a second pair of eyes to check your work.
We hope you found this information useful - The SINC Team