Construction Bidding Basics
Bids are the lifeline of a general contractor’s business, Won bids, or awarded contracts, in particular are what provides sales to the businesses, and a pipeline full of bids ensures that cash flow is stable for the short-medium term timeframe for a construction firm.
Bids that are won (specifically when it becomes an awarded contract) create circulating revenue ensuring the firm’s financial stability and continued business operations. In the construction sector, a bid (also known as tenders) is defined as a formal proposal sent by a general contractor in response to a new project requirement made by a client through a solicitation.
These solicitations, either private or public, can be published through different mediums such as newsprint, websites, advertisements or circulars.
These are the two major types of solicitations when procuring for a bid:
- Request for Proposal (RFP) or Request for Offer (RFO) - Clients typically send out these notices to general contractors in order to obtain a bid. Solicitations of this nature are competitive, with quality and price being major determinants of selection. For public projects, price usually takes precedence over quality, this is to ensure that public interest is upheld. A detailed technical plan of how to achieve the objectives and pertinent information must be provided in the proposal.
- Request for Quotation (RFQ) or Invitation for Bid (IFB) - this type of solicitation typically includes a copy of the contract specifications, instructions for bidding, and the terms and conditions of purchase, delivery, and payment details. The IFB or RFQ is utilized when a client or government agency already has a well defined scope of works, knows exactly what it needs and the quantities required thereof. A general contractor must then compute and estimate its cost based on the details provided, with less emphasis on technical details since the majority of it has been provided by the client. A contract is then awarded on a competitive basis as well.
Both of these must provide necessary information such as project scope, background information about the company and project, deliverables, requirements, timelines, milestones, and questions that potential contractors must answer, such as technical specifications, previous related projects, current leadership and experience.
The process of overseeing and handling all the bids from start to finish in the pipeline of a construction firm is called bid management.
The Bid Process
To better appreciate the importance of bidding management it is crucial to understand what are the steps of the bidding process.
1. Bid Solicitation: A client requests bids and provides an information package with drawings, specifications, and other specification documents.
2. Bid Submission: General contractors and builders are then required to submit their duly accomplished bids that include the information relevant to their business once bidding has opened. The provider should provide a list of past projects, plans for management, and their track record of staying on schedule and under budget.
3. Bid Evaluation: At a specified time, bids are announced or opened for review. If the solicitation procedure involves negotiation, the bids may be negotiated after it is submitted or the winner might be determined strictly based on the bids received.
4. Contract Finalization: After negotiations and/or discussions between the two parties, a legally binding contract is finalized during this phase.
5. Project Delivery: Construction of the project commences on the stipulated start date. Delivery of the project includes starting the construction task and as well as a proper handover afterwards.
The Importance of Bid Management
Winning bids or contracts is the single most important factor in securing new business for a construction firm, a pipeline full of awarded contracts means that cash flow stability has been achieved and there is sufficient revenue to continue profitable operations.
It is a well known fact amongst general contractors that creating compelling and timely bids is a laborious and tedious task, and to make things worse, a construction firm has to deal with many competing and concurrent time-sensitive priorities that makes bid management stressful and challenging. An estimated 1 out 7 bids are won and with bid-hit ratios working against general contractors, the priority then shifts to a volume-based approach where more bids sent increases odds of success. The problem with a volume-based approach on winning bids is that it can be difficult to track, maintain and organize these bids when there are dozens or hundreds of them being created at a time additionally, projects are contingent on timelines and its whole operation is built around tight deadlines thus an effective bid management system is essential for contractors to streamline bid operations, improve workflow efficiency which ultimately leads to greater financial productivity for a general contractor.
Common Bid Management Challenges
Different factors such as qualification, technical requirements, procurement method, material prices, subcontractor negotiations and estimates are all carefully considered when writing bids and each aspect consumes precious time and resources - every hour spent on a task has a ripple effect on the overall success of a bid.
These factors contribute to challenges in bid management that are detrimental to a general contractor’s business because these can reduce the odds of successfully winning bids.
Common challenges encountered in Bid Management are the following:
1. Bidding on the wrong projects - some general contractors, out of a volume-based approach, will send out bids to numerous construction projects that they encounter and hastily put together a bid without due diligence in an attempt to improve the odds of winning more bids. Unfit projects have serious ramifications if a contract was awarded and only to find out that the estimates and costs are inaccurate resulting in negative profits and/or damaged reputations.
2. Failure to thoroughly study the RFP - Failure to comply with basic requirements such as business paperwork, company documentation, bid bonds, pre-qualification status and bid forms will result in guaranteed disqualification of a bid and will negate all precious resources used in creating the bid.
3. Inaccurate takeoffs - Inaccurate estimates are the leading cause of cost overruns. Over-budget construction projects are detrimental to a general contractor on several fronts such as reputation, project quality, legal liability and financial loss. Estimates that cause a vid to be high can lose a project while bidding too low can result in diminished profit margins.
4. Incomplete bid coverage - When a general contractors finds a project to bid on, part of the due diligence is to carefully all scope of works included in the RFP and ensure that they have the ability to procure subcontractors, incomplete bid coverages occur when there is a failure to procure the necessary labor or resources required to complete a work.
5. Failure to account for risks - Risk mitigation is a crucial factor that is often underestimated in the submission of bids. When risks are not properly identified and addressed, this can expose a general contractor to liabilities and unnecessary costs.
Bid Management Best Practices
Efforts in improving different aspects of a bid management system should be every general contractor’s goal as this positively influences its overall success. Below are some of the construction industry’s best practices adopted by growth-driven builders.
1. Carefully assess a project’s feasibility - Determining a project’s feasibility will help save a GC from significant financial losses and also preserve resources that could otherwise have been allocated towards other bids. Reviewing past projects of similar nature also helps bid writers determine if a project is feasible and worthy of pursuing a bid.
2. Thoroughly evaluate RFPs - Although it may sound basic, oftentimes, minute details can fall through the cracks and eventually cause unforeseen consequences that can affect a construction project’s progress. Every detail has to be scrutinized and when necessary, further clarification on the RFP can be sought proactively in order to eliminate gray areas, even the smallest deviations can be grounds for disqualification.
3. Improve takeoff process - Part of the estimation process before a bid is submitted is the takeoff. Tremendous amounts of time and resources are used when creating detailed take-offs, and with bids being time sensitive, it then makes sense to improve efficiency and turnaround times for takeoffs. Traditional methods of estimation and takeoffs take hours and even weeks, but with time-saving construction technology such as Togal.AI, accurate takeoffs can be done in a matter of minutes through AI-enabled technology.
4. Maintain a network of subcontractors - Part of a successful general contractor’s arsenal is its reliable roster of subcontractors. Not having backups to take on work can be a major limiting factor for a builder and will affect its ability to win bids simply because it cannot perform additional work without the help of its subcontractor network.
5. Conduct risk analysis - identifying risks early in the bidding process helps prevent costly unforeseen scenarios that otherwise could have been prevented. Once potential risks are identified and categorized, a risk mitigation plan should address all of these. Consideration of the costs and resources required in tackling these risks should be part of the pricing computation, when too many risks have been identified, this may also be a red flag to not proceed with a bid.
6. Utilize bid libraries - RFQs or ITBs include questionnaires that general contractors must answer, having a bid library is an extremely efficient way of reducing bid response time by centralizing all information into a central repository. Company information, accounts, previous work, insurance details, compliance, accreditations and common query templates are incorporated into the bid library.
7. Improve bid-hit ratio - Increasing the odds of winning bids are a crucial part of an effective bid management plan. Some of the best practices are having a clear & unique selling proposition, writing personalized bids, increasing the number of bids, highlighting expertise through social proof and accreditations and the adoption of technology for increased productivity.
Read more about bid-hit ratio improvement here.
8. Leverage construction technology - According to a 2021 survey, 53% of general contractors are increasingly adopting construction-specific software tools that improve efficiency, reduce errors and increase productivity. Furthermore, traditional pen & paper approaches have been a barrier to growth in the construction industry, it is only fitting that this archaic and outdated industry is refreshed by the adoption of construction technology.
Below are useful construction technology software that help boost overall productivity in bid management.
1. Procore - Procore is a construction management software that helps streamline and effectively centralize all project management work into a single source. It manages construction projects, resources and financials from planning to closeout. Monitoring the status of hundreds of bids can easily be accomplished via its Tender Management feature.
2. SmartBid - SmartBid is bid management software. GCs can access a web-based and mobile platform to streamline their bid project data, documents and subcontractor communications during preconstruction.
3. Tread - Tread’s subcontractor management software saves construction companies money during demand swings, gives dispatchers full visibility into subcontractor location, improves communication, and stores information electronically for all vendors to access in real-time.
4. Autodesk Construction Cloud - Autodesk Construction Cloud brings together best-of-breed solutions to unite office and field teams from design to planning, construction to operations to help make construction more predictable, safe and sustainable.
5. Togal.AI - Togal is an AI-powered web platform that automates the takeoff process through powerful deep learning. Using this AI estimating software results in 80% faster takeoffs and a 97% accuracy rate that helps general contractors produce more quality bids, reduce costly miscalculations and decrease manpower costs. Book a virtual demo to learn more.
Putting together a construction bid proposal is time-consuming and laborious. A competitive and winning bid proposal requires a lot of time and attention to detail - the best practices discussed in this article help address operational challenges in bid management and construction technology software offer extremely effective solutions that boost overall productivity in the bid management value chain.
Successful bidding management is contingent on accuracy and efficiency of bidding processes therefore general contractors should embrace best practices and tech solutions in order to maximize profits and spur increased productivity.