Starting a contracting business is challenging, and winning work is often the top priority. Most contractors price projects based on their current knowledge and experience. If their bids aren’t successful, they may feel pressured to lower their prices, leading to a “race to the bottom” — where prices keep dropping and the contractor’s earnings suffer. In many cases, owners find themselves earning less than they would working for someone else.
After more than ten years of settling tenders, a method was developed to minimise guesswork and maximise profit. This approach helps you optimise your profit on each project by following a structured process.
Bid-No-Bid Policy
Select projects that match your business’s capabilities and only bid on those. This ensures you’re competing for work you’re well-suited to deliver. Segmentation criteria include location, type of client, value range of projects, type of work, duration, and any specific accreditations required. The closer the match to your ideal segment, the more likely you are to win.
Accurate Overhead Forecasting
Many SME businesses are not clear what their actual overheads are. Recasting your accounts to reflect the true cost of running the business with market-rate salaries, when a project is live, is the first step in sorting your pricing. Every business has different overheads, but they are a key component of calculating your tender price. Never bid below your calculated overheads component.
Estimating the Cost of the Works
When all bidders are equally capable, the cost of delivering the project should be similar across the board. Pricing differences at this stage only arise if a bidder has an innovative solution, makes a pricing error, or was selected in error. Therefore, the only real difference in price comes from what is added for overheads and profit.
Benchmarking: The Key to Getting Profit Right
By keeping records of tenders submitted, won and lost, it is possible to predict what the market will bear and adjust the profit you add. Benchmarking wins and losses against a standard OH&P allows you to make minor adjustments to profit to secure projects, confident that overheads are covered.
With practice, small adjustments — as little as 0.25% — can be made to profit to win or lose a project, based on market knowledge from benchmarking. This is far more effective than adding a flat percentage to every project and hoping for the best.
Key Take-Aways
- Adopt a bid-no-bid policy: only bid on suitable projects.
- Forecast your overheads: don’t rely on last year’s figures — use accurate, up-to-date data.
- A director should review every tender and decide on profit adjustments based on benchmarking.
- Track and adjust: monitor wins and losses against your benchmarked profit, always aiming to win at the highest price.
