Construction

The Construction Industry Advisor

<< Return to contents


How to keep money in your pocket by bidding for profit

Construction contractors know the basics of business: To stay afloat you must be competitive while offering reasonably priced quality service. Easier said than done, right?

The difficulty lies in being aggressive enough to win work without accepting an irresponsible level of risk against the business should something go wrong during the job.

It's all in the details

How much do you charge for your work? Is your pricing too aggressive? Are you losing jobs because your bids are too high? Before you can determine how much you'll charge for your work, you need to review three areas:

1. Costs. There are two categories of costs: direct and indirect. Direct costs are those that relate to the actual hands-on construction, such as labor, materials and taxes. Indirect costs are associated with running your business, including overhead, bonding and insurance.

Many contractors fail to get a handle on their true costs. If you're too busy to give your costs the attention they deserve, talk with your CPA. Contractors who don't properly allocate costs to their projects are missing out on opportunities to recoup expenses and submit accurate bids.

2. Market. Who are your customers? Where are they located? How much can they afford to spend? Knowing the answers to these questions will help you set prices appropriately. For example, if you're a custom home builder, you may decide to build houses targeting customers with incomes in the middle- to upper-middle-class range. You need to look at how much the market will bear for new home prices, and what customers expect for that price.

Conversely, if you're a commercial builder, you might look at what major employers are moving into or out of your area and what tax incentives may be available to build certain types of projects. If you're in a very competitive market, avoid incorporating in your bid a lot of high-end finishes, fixtures and other expensive features that can price you out of jobs.

For you to understand the market, you must also know who your competitors are and how many of them are bidding for the same work you're going after. Some contractors decline to bid if they think the number of competitors is excessive. Owners may believe that the best way to get a low price is to have a lot of bidders. When there are too many, however, there's less incentive for contractors to submit bids and work up their lowest prices. That's because no one wants to be the lowest bidder among 20 contenders.

3. Profit margin. Obviously, you want to offer a good price to keep in the running for a job. But you're in business to make money, so one of the most important elements of a successful bid is for it to be profitable.

Carefully consider the profit margin of each job, taking into account direct and indirect costs. The greater the perceived job risk, the higher you need to place the profit margin to accommodate possible losses. Experience helps here. If you bid work in which you're experienced, your profit margin can be lower and the bid will be more competitive.

Is lowballing ever a good idea?

There are times when underpricing a job may make sense. You could offer a lowball bid to get a foothold in a new market or account, for example, or to build a relationship with a customer who might provide more business down the line.

But before you give away your services, make sure you've hit your "sweet spot" for the year. That is, make sure your business is close to or has already reached its ideal profit margin. It's only then that you should consider lowballing a bid to bring in more business.

Selling the job

The price you charge for your services can have a huge impact on your business's success -- or failure. Charge too much and you may lose customers. Charge too little and your profits will be too low for long-term survival. The key is to know your costs, your market and your profit margin.