CONSTRUCTION Accounting ARTICLE - 4 Bidding Mistakes to Avoid

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

Construction markets in most regions remain very competitive. That means you’ve got to be at the top of your game throughout the building process. There are, of course, many places where a construction business could stumble during a long project, but one of the worst has to be at the very beginning — during bidding.

A misstep here could only be described as “tripping out of the gate.” Let’s look at four bidding mistakes to avoid and some ways to ensure you submit the best offer for both the job in question and your construction company.

1. Overlooking indirect costs

Like most contractors, you’re probably pretty good at identifying direct costs. Yet one problem that scuttles many bids is focusing solely on these amounts and ignoring or miscalculating indirect costs — those not directly attributable to the project at hand but still likely to be in play.

One example is the equipment you own. If you’ve fully paid off a piece of equipment, you may not see any current cash outflows associated with it. But if you’re not allocating an expense for the equipment, you may not be recovering costs on depreciation, repairs, property taxes, storage and insurance. You need to include all of these costs in a bid.

2. Undervaluing profitability

With jobs still in such short supply, it’s understandably tempting to jump at every one that comes along regardless of whether it will actually earn you a profit. That said, calculating profit margin is always tricky. Once the numbers start flying, it’s important to keep your wits and not end up undercutting your own profitability.

Say you’d like to bid on an $800,000 job. If the average gross profit that you strive for on your jobs is 20%, then estimated costs for the job can’t exceed $640,000. To arrive at this figure, take the sales price and multiply by your 20% profit goal ($800,000 × 20%). This will give you a $160,000 gross profit. Then subtract that gross profit from the project value ($800,000 – $160,000) and the result ($640,000) is the total estimated costs you’ll need to hit to meet your 20% gross profit margin.

3. Lagging behind technologically

Although technology has its dangers, it can sharpen your competitive edge. For example, where do bids begin? With estimates. And how can you improve your estimates? By upgrading your technology.

Today’s estimating software now offers 3-D capabilities that allow estimators to see their work from all angles and in vastly more detail than they could with previous software. For instance, an estimator can separate construction components from the overall structure to scrutinize them individually.

Of course, these applications come with substantial purchase and implementation costs. And you’ll likely need to provide training on the software for your estimators. But the benefits are there for the taking.

4. Ignoring the “other guys”

Don’t make the mistake of underestimating your competition. When working on a bid, it’s easy to be self-focused. After all, you’re assessing your company’s capabilities in light of the demands of a project to determine how much you should charge.

But the nature of the competition can seriously affect your bid. If two of your main competitors are notorious for bidding low, you may have to reduce your bid comparatively. Is the job still worth it? This is another good reason to be aware of who’s working in the same markets as you are.

Science meets art

Some contractors might say that bidding is a science — you crunch the numbers and stick to them. Others might say that it’s an art — when your gut says a project will be profitable and elevate your visibility in the marketplace, go for it.

The truth probably lies somewhere in between. Now more than ever, you’ve got to do the math and make sure your cash flow can handle the burden of every job. But, at the same time, no one knows your local market and construction company like you do. So your gut certainly deserves a say.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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