As a general contractor, builder or erector, having a constant supply of work is important for keeping your company operating. While it would be wonderful to be in a position where all of your jobs come from clients you have worked with in the past, usually that is not an option. It’s hard to grow a company if you only work for past customers. Regardless of the type of project delivery your company does, the bidding process is an important element.
Bidding for work is an essential aspect of any company’s business plan
Project Delivery Methods
Each of the common project delivery methods—design-build, design-bid-build or construction management—have benefits for both the project owner and the companies involved. Design-build provides a combined design and construction contract, and a single point of responsibility for the entire process. In design-bid-build, the owner contracts separately with the design team and the construction team for the project. And, in the construction management model, the owner forms the project team early on, allowing the team to work through all of the project details together from the start.
Scott William Libbe, executive vice president of the Rudolph Libbe Group, Walbridge, Ohio, says that when he entered the construction industry 45 years ago, 98 percent of the company’s business was design-bid-build. “That has changed dramatically,” he says. “For the last five years, only 13 percent of our business has been design-bid-build.”
Today, Libbe says about 72 percent of the company’s business is evenly split between design-build and construction management delivery methods. Another 15 percent are hybrids of design-build and construction management.
Brian D. Gaudino, vice president of Fairchance Construction Co., Fairchance, Pa., says the company is a very diverse contractor by design. “We try to keep our portfolio diverse so we can weather any economic changes,” he says. “Currently, a large portion of our work is multifamily, mixed-use office/retail and car dealerships.”
“Project delivery methods have evolved to accommodate the needs of individual projects and customers,” Libbe explains. “We’ve seen design-build become the project delivery method of chose for many clients. These more sophisticated project delivery methods offer greater advantages for schedule, budget and value.”
While Libbe says his company still sees some design-bid-build projects, it is seldom a customer’s top choice as they become more informed about the variety of delivery methods available. “We spend a lot of time educating our customers about all project delivery methods—and having them educate us about every aspect of their project so we can recommend the delivery method that will best serve their goals,” he explains. “Choosing a project delivery method is the first and most important business decision, and it will definitely impact the final project outcome.”
Competitive and Negotiated Bidding
There are two main strategies in bidding for jobs. In competitive bids, contractors are invited to provide their best possible price for a defined scope of work. Once all of the bids have been submitted, the lowest bid in typically chosen. Also known as a hard bid, competitive bidding allows the project owner to compare prices and select contractors based solely on price.
Construction business owner and professional business speaker George Hedley says the advantages of competitive bidding include not having to make marketing or sales calls, as the company waits for the customers to call them about projects. The disadvantages include that if there’s too many competitors, it can equate to low margins. And, since a bid list is open to all companies to bid, there’s no real competitive advantage. “Doing good work or your reputation doesn’t matter, only money,” he says. “The low price is the only determining factor in competitive bidding situations.”
In negotiated bid situations, an owner selects the contractor he wants to work with, and together they negotiate a price for services rendered. There is no real competition between contractors, and owners are not selecting contractors based on competitive pricing. Negotiated bids allow the owners to pick the company that provides the best value for the money.
As Hedley explains, negotiated contracts allow companies to be proactive in their sales efforts by targeting loyal customers who prefer to use your company for their projects. It also allows companies to develop loyal, long-term relationships with customers who trust you, while allowing you to know what jobs may be coming down the pipeline. On the flip side, negotiated contracts require pre-construction effort and services, and it can be hard to get to know new customers. Negotiated contracts also require companies to do on-going marketing and sales efforts to stay top-of-mind for their customers when it comes to new projects they may have.
“We very rarely publicly bid projects,” Gaudino says. “The majority of our work is private, invitation-only, negotiated contract, and about 40 percent of it is design-build.”
Pat Munger Construction Co. Inc. in Branford, Conn., is a design-build firm that does a combination of both negotiated and competitive bids for commercial and industrial projects. Stephen A. Mansfield, vice president of estimating at Pat Munger Construction, says, “We always prefer negotiated work and have had good success in developing repeat customers who want to work with and negotiate only with us. We bid on competitive projects to keep our work level where it needs to be with the hopes of developing more repeat customers after a successful project.”
In his monthly Profit Building columns, Hedley often discusses the best way to win more bids and become a more profitable construction company. Before starting the bidding process, he recommends deciding if the job you’re looking at is within your company’s goals and sales targets. Hedley calls this “Bid-Grid-Sieve” and some key things to consider include the profit potential for the job, the potential of your company to win the job, the right size to be competitive, the ability to perform the job, who is your competition and how many competitors are there for the specific job, and whether the client will give you the chance to negotiate.
According to Gaudino, one benefit of doing private, invitation-only, negotiated contract design-build jobs is a smaller bidder list with less competition. “Also, the playing field is more level because the contractors we bid against are typically similar in size and capability to us,” he adds.
In Gaudino’s experience, one of the biggest challenges in private bid work is that the process can be longer than public bidding. “Many private projects will undergo several rounds of bidding to get down to the final negotiation with the owner and selected contractor.”
“The challenge on design-build projects,” Gaudino adds, “is the lack of design data and, many times, the information related to what the owner truly wants. Also, a big challenge is the owner comparing proposals that many times is like comparing apples to oranges. Each contractor may plan to accomplish things very differently from one another.”
Mansfield notes that the amount of competition in bidding for projects means the company needs to be more thorough and competitive than ever before. Adds Libbe, “Our experience has shown that the earlier we can get involved in a project, the more time we have to thoroughly plan quality, efficiency and value into the project before construction begins.”
As with everything else in this world, even the ways companies complete job bids have changed over the years. Gaudino says the bidding process is ever evolving, and technology has had a huge impact. “We do a lot of estimating on screen now in lieu of printing a set of drawings,” he says. “On-screen take-off tools can really make anyone that has CAD experience a valuable asset in completing take offs. We also use several different programs to acquire bidders in different regions and also get leads on projects.”
Hedley recommends using a subcontractor and supplier bid solicitation software to request and track bids. And when it comes to bidding, Hedley says accuracy is key. Always compare the actual costs to bid costs, and track cost history to create bid production rates.
“Track your bid-hit-win ratio to focus on the right jobs and right customers to win more work,” Hedley adds. Instead of hoping for customers to call, hoping your bid is low enough, hoping for work, hoping for the phone to ring, Hedley says to be proactive to make high margins. This includes calling on customers, and spending time developing good customers by investing in these relationships.