Responding to bid solicitations or requests for proposals and winning construction projects is an integral part of any successful contracting business. It is the way you acquire new work and brings revenue to your company. Of course, the construction bidding process can be costly and time-consuming. But done correctly, it's an excellent opportunity not only to increase your profits but to expand your network of owners, general contractors, and construction managers. Building a pipeline for future business.
While most contractors have years of experience in their trade, many enter the bidding process with little practical knowledge. To put your best foot forward, you must have a solid grasp on the methods and contracts that make up the construction bidding processes, as well as the common mistakes to avoid along the way.
What is the Construction Bidding Process?A construction bidding process involves the submission of a bid form or proposal to either the owner, construction manager or general contractor. Typically, construction managers or general contractors will solicit construction bids from subcontractors by sending out bid invitations: documents that detail the construction project and scope of work. Subcontractors can download the bid documents, review the project information to determine whether they will be a good fit, then submit a detailed bid to the general contractor. From that, the general contractor awards the bid to one subcontractor based on the best value, which in many cases is the lowest price, but can include other variables like past performance, bid capacity, and experience in the type of construction project. Long story short, the lowest bid price does not guarantee that you'll win the project. In many cases, the general contractors will disqualify the lowest price contractor and go with a middle number to reduce their risk.
Although the terms "bid" and "estimate" are often used interchangeably, they have some critical differences. An estimate is a ballpark number based on the scope of work and the estimated total costs to complete the project. A bid is a hard number that you agree to complete the job for and if selected during the competitive bidding process. By submitting a bid, you typically don't leave yourself room to negotiate, and there are sometimes punitive damages for pulling out. That's why it's crucial to thoroughly review the bid packages and accurately bid the project so that you don't underbid and leave yourself without profit margins — or overbid and risk losing construction projects. Keep in mind that requests for proposals can have different delivery methods like design-bid-build or design-build. You need to understand those methods and bid processes before submitting a proposal.
"The lowest bid price does not guarantee that you'll win the project"
Construction Contract TypesA construction contract is a vehicle by which the job gets done. It outlines the roles and responsibilities for each party as well as how you will be compensated. No two construction projects are the same, and the type of contract is usually decided based on the size of the project and the owners' tolerance for risk. The three most common types of contracts you will encounter are the firm fixed price (or lump sum) contract, cost plus contract, and time & material contract.
- Firm fixed price contract - Firm fixed price contracts are true to their name: in them, the contractor agrees to deliver a specific scope of work for a fixed price. This provides a barrier of risk for the project owner, but the contractor is usually compensated for taking on the risk. Some construction contracts are also written to provide extra incentives if you finish the project ahead of the deadline or under budget.
- Cost plus contract - Under a cost plus contract, the project owner agrees to pay for all of the contractor's expenses, as well as a percentage of profit. This contract type can appear under several names, including cost plus a fixed percentage, cost plus fixed fee, and cost plus with a guaranteed maximum price contract.
- Time and material contract - A time and material contract involves an hourly rate plus the actual unit price of materials. It is usually used for projects with a vague or small scope of work. The contractor bills using labor cost codes and material costs. This option poses less risk for the contractor and more risk for the project owner. To offset this, many contracts are written with a "not to exceed" clause, where the contractor has a certain number they cannot go above without requesting approval from the owner.
Top 4 Mistakes to Avoid in the Bidding ProcessFor public works projects in the construction industry, a contractor is likely to only win 1 project for every 11 bids they submit. That's a lot of estimating and increasing your overhead every time you respond to an RFP and lose. However, you can lower your bid-hit ratio by taking your time in the preparation process to avoid these common mistakes.
- Failing to review the bid package thoroughly - it can be tempting to rush through the bid process to meet a bid solicitation deadline. But you risk inaccuracy when you don't take the time to properly review all the construction documents included in the bid package. You should have a system of reviewing each request for proposal carefully. We suggest building a check-list of common items to look for in the project specifications and drawings and have someone on your team double-check your work.
- Bidding on a project that doesn't fit your organization's skill set - you should avoid bidding on construction projects where you have limited experience and are more likely to make mistakes during the bid process and the construction process should you win the project. There's a learning curve for construction estimators and your construction management team when taking on any new type of building construction that can eat into your profit and reputation if you make mistakes during the process.
- Not visiting the site before you submit a bid proposal - is the job located far away from where you usually work? If you don't visit the site, you may overlook the cost of travel or specialized equipment that you'll have to rent or assign to this project. In addition, if you don't attend pre-bid meetings or get your feet out on the project site, you'll miss out on face-to-face time which can help you establish a relationship with the general contractor. In some cases, it's outlined in the RFP and bid documents that you attend a pre-bid job walk.
- Making an inaccurate estimate - an inaccurate bid can cut into your profit margins or keep you out of the competition altogether. If you don't have an estimating system in place, it can be very difficult and complex to put together an estimate. And you risk repeating the same mistakes in future bids.