Bidding Tips for Construction Subcontractors
Posted February 20th, 2020
Your bid is a powerful tool. It’s like Thor’s hammer, knocking down the competition and winning you victory! But only if you know how to wield it. Submitting an ineffective bid, even one that wins you the job, is like swinging that hammer right at your own kneecaps. You’re probably going to go down, and it is probably going to hurt. We put together these bidding tips to keep you swinging superhero bids that protect your profit margins and grow your business!
We’ll start with a review of the tips we shared in 3 Bidding Mistakes that are Killing Your Profit Margin.
Know the Retainage Before You Bid.
You need to be as close to cash flow positive (more money coming in than costs going out) as possible with every pay app, but that’s tricky in the first month of the project or if you don’t know the retainage a GC plans to hold on the job. Don’t leave it up to chance, and please don’t tell yourself you’ll float on profit from other jobs while waiting on retainage. Counting on that is too risky and you can’t float, and your business can’t survive without a steady, positive cash flow.
Bidding Tip: Work with the GC to settle on retainage. It may be negotiable, or you may have to raise your bid. Perhaps the percentage of retainage is not negotiable to start but you can negotiate a smaller percentage once you reach a certain project milestone. Be honest — you are protecting your business AND your team’s ability to do the job.
Need an expert resource for estimating profit margin?
Download a free copy of our Margin vs. Markup guide.
Calculate Your Costs, and Include Them All.
This may seem like less of a bidding tip than a no-brainer, but many subcontractors miss an important detail when planning their project costs — overhead and the cost of borrowed money or debt payments.
From overhead to labor to equipment and fuel, your bid includes an accurate estimate of all the related project costs. But, does it account for how you are going to PAY for your employees that are not part of the project labor force, or your other general overhead like rent, office staff, your salary, insurance, debt payments, vehicle payments or other equipment costs?
And does it account for the debt payments or the money you borrowed to start or fund the project?
It better, or the cost of that funding will come straight out of your profit or worse; be more than the profit you estimated to realize in the first place. Lastly, to be most effective and safe, you should account for all of the cost and overhead net of retainage – meaning don’t even count on the retainage as part of the contract for cash flow purposes – you are not going to get it until the entire project is over in most cases and that cash will not help you while you are performing the project anyways.
Bidding Tip: Work with a trusted finance partner from the start to prepare a term sheet. Include the cost of your funding in your overhead or project costs.
Your funding plan should also be part of a conversation with the GC. Start by acknowledging the reality: Slow payments are part of the deal in our industry. Not a fan of that idea? Check out our blog, Why Subcontractors Need to Talk About Slow Payments with General Contractors to set yourself up for success.
Bid to Grow, Not Just to Win.
A subcontractor submitting a low bid to land a dream project or new GC relationship is like a farmer counting spring chicks before the eggs are even laid. For starters, you cannot guarantee that this project is the one that is going to unlock a treasure chest of larger, more profitable deals. Second, it will be hard to justify your much larger future bid given your first. Third, final, and MOST important, if you underbid and something goes wrong this dream job will quickly turn into a nightmare.
You should estimate and bid the budget needed to do great work and perform. Performance will make you stand out to a GC. If you want a general contractor to give you a chance to work on their project, talk to them about your ability to perform and maintain a project schedule, not price!
Bidding Tip: Remember that this bid is YOUR superpower to grow. Put in the details, show your work, prove what it will take to do the job right AND that you are the right company to do it. Making promises in bidding that you keep in execution is more likely to build your reputation with the GC than undercutting yourself and scrambling to do damage control later.
We mentioned “show your work” above – this is important. Why? Because the level of detail that you show will be very telling to the GC and can separate you from the others bidding the job. The details can show the GC that you know what you are doing, that you have been thorough, and that if they hire you that same level of detail will go into their project!
Consider the Project Method.
Design-Bid-Build (DBB), Design-Build (DB), or Construction Manager At Risk (CMAR) or Integrated Project Delivery, each project method has its own risks and variables for the General Contractor. If the project is CMAR, ask the General Contractor about the Guaranteed Maximum Price and expectations regarding Contingency Amounts, Allowances, and Change Orders.
Consider the Procurement Method.
Not all jobs are automatically awarded to the lowest bidder, though it may seem that way sometimes. Owners like Lowest Bid Procurement for obvious reasons, and a lot of government contracts require it, but it still isn’t the case on EVERY project. In Two-Step Bidding, your technical prowess is just as important (if not more) as your price, because it is your technical qualifications that are reviewed first. In Best Value Source Selection, the entire scope of your company — qualifications, management, staff, reputation, and price — are all under review.
Bidding Tip: If you’re looking to grow your company with a sustainable cash flow and project pipeline, don’t undercut your strategy with low-ball bids when you don’t have to. Invest in building a team of superhero laborers — training on-site and off, regular certification renewals, management training for you and the rest of your executive team. Be confident on the merits of your team and bid appropriately.
Bid on the RIGHT jobs.
It can be tempting, especially when you are trying to recover from debt or grow your business, to bid on every project that comes your way. Resist temptation! First, bid on jobs that you can successfully execute. Look for projects that will grow your network or raise your profile with your GC network. And again, most important, bid on projects that will allow you to make a profit.
An effective bid is a mighty weapon in the battle to win more work and GROW your business. Wield your power wisely. With these bidding tips, we know you will.
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