Guide To Bidding

January 2010

By Steven E. Moore - Irrisoft, Inc.

Your crew is on the job. The purchasing agent has begun buying materials to be installed. You are spending money. When the job is done and your customer makes the final payment, do you hope and pray there is enough money to pay your crew, suppliers and keep your business running, or do you know you will have the money to meet your obligations, with money left over as profit for your labors? Estimating procedures separate contractors scrambling on a hope and a prayer versus confident successful companies with sound business practices.

When you bid a job, there are three possible outcomes:
  1. You don't get the job.
  2. You get the job, but bid too low and loose money.
  3. You get the job, cover costs and make a profit.
Of these three potential outcomes, only one of them is good news.

As a contractor, your source of revenue is construction. You set the price for your work. Your customer decides whether to accept the proposal. If your bid is too high you will most likely loose the sale. Too low, you probably get the job, but you will most likely loose money. You need to find the sweet spot. To do that consistently it is essential that you know how much it will cost you to do the work. Each job will cost you in materials, equipment, labor, and business expenses; you may also need to hire a subcontractor.

Often at bid openings, we've heard the same thing for years. The high bidder complains about the low bidder, saying; "He can never do it for that price." Often the low bidder has that sick feeling in the stomach, wondering "What did I forget?" Some of those companies do go out of business, but some do very well. So what is the difference? Why is there a range in prices? Each estimator sees the job differently. Are differences in bids due to materials? Was there a simple mistake in getting a right price for the right item? Or was there a mistake in estimating the quantity? Perhaps the low bidder has better equipment and more productive crews. Perhaps the high bidder has a top-heavy organization so the overhead recovery rate is too high.

Typically the difference between bids is a combination of the estimate for materials, installation time, crew and equipment cost, overhead and profit.

Magic Multiplier
Some contractors use the "magic multiplier" approach to bidding; they simply take the cost of materials and multiply it by some number that will hopefully make sure the bid is competitive and still profitable. Unfortunately, this simple method has real problems.

To demonstrate the weakness in the "magic multiplier", let's see how two contactors prepare a bid to install a toilet. The customer can't decide which toilet, so they want a bid on three styles. It will take the same amount of time to install the toilet, so the installation cost would be the same.

"Contractor One", looking for a shortcut, uses the magic multiplier. Here is how he bid the job:

Magic Multiplier - Material Cost x 2
Toilet
Style
Material Cost Multiplier Bid
A $45.00 X 2 $90.00
B $70.00 X 2 $140.00
C $120.00 X 2 $240.00


"Contractor Two" uses a cost based approach. We will assume both contractors run an efficient operation and the cost to install is the same; let's use a one-hour installation time, at a cost of $50.00. "Contractor Two" takes a little more time to prepare the bid; looking at the material cost and installation cost. Here is the worksheet:

Cost Method
Toilet
Style
Material
Cost
Labor
Cost
Cost 15% Profit Bid
A $45.00 $50.00 $95.00 $14.25 $109.25
B $70.00 $50.00 $120.00 $18.00 $138.00
C $120.00 $50.00 $170.00 $25.50 $195.50


How will the customer react?
  1. He may get very excited and tell "Contractor One" to install toilet A. What happens to the contractor? He looses money.
  2. The customer may feel uncomfortable about difference in the bid spread and question the honesty of “Contractor One” and give the bid to "Contractor Two".
  3. If all the customer is looking at is price, the time “Contractor Two” took to prepare the bid has a better chance of paying off, as he is the low bidder on style B & C.
Price Per
Another approach that is commonly used to prepare a bid is the "price per" method. A unit price list can be used to quickly prepare a bid. If a cost based approach is used to generate the unit price, this can be a useful approach. But, this approach also is filled with pitfalls; there are many variables that affect cost. You must keep in mind that job conditions and material requirements may not be the same as the original assumptions used to prepare the unit price. Accounting for those differences using the price per method can be challenging.

Know ALL Your Costs to do a Job
The cost to do a job is different for every company. You need to know YOUR cost to do a job. Your crew has a unique skill set; they may be very proficient at some things, but lack talent in other areas. You’ve tailored your compensation package to your management style. You don’t have the same equipment as your competition. You may have negotiated better pricing on some materials. No two organizations are the same, so overhead costs will be different and the volume of work that can be supported by the organization will be different. Your cost is your cost, not your competitors. Your bid should be based on your cost to do a job, not what it costs your competition.

The cost to put a man on a job is much more than his wage. Just because the tractor is paid for does not mean there is not a cost associated with it. You need to know how much it costs to keep an employee on the job and how much it costs to have a piece of equipment working on a project. In addition to employee wages, there are taxes, insurance, down time, training and benefits. Maintenance, fuel and other related costs must be added to the purchase price for a piece of machinery. An office staff, which is part of your overhead expenses, supports your crews.

Visualize your company as two parts. One part of your company produces; they complete the work you’ve contracted for. The other part of your company exists to support production. You have facilities, salesmen, estimators, accountants, trucks, supervisors and many business expenses that exist to keep your production team working. This is your overhead.

Below is a list of a few of the basic things that must be considered to know all your costs:

    Employees
       Overhead (support) or Field Labor (production)
       Wages & Overtime
       Benefits (insurance etc.)
       Taxes
       Productive Hours

    Equipment
       Overhead or Field Equipment
       Own or Lease
       Purchase Price or Lease rate
       Taxes & Insurance
       Maintenance

    Overhead
       Facilities
       Utilities
       Furnishings
       Computers, printers, etc
       Advertising
       Cell Phones
       Insurance

    Production Capabilities
       Production rates for each task

    Materials
       Quantities
       Price
       Taxes
       Waste

Computers are wonderful tools. They provide us with a way to organize and access vast amounts of information and execute complex calculations. Commonly used materials can be stored in computer databases. Information regarding your employees and equipment can be recorded to calculate the cost for these resources. Standard production operations can be broken down into tasks; production rates can be used to allocate the needed resources to complete the task. The process we will cover for bidding & estimating is based on the approach used by Quik-Irr Estimating Software developed and offered by Irrisoft, Inc. This process can be implemented manually, but the software simplifies the process.