Relatively few organisations procure construction projects, but for those who do, the capital spend usually represents a significant investment. Despite it being a significant investment, in most cases the procuring organisation will choose to tender the work and select the bidder with the lowest price. This appears counter-intuitive, but procurers argue that they “only allow bidders to tender who we are confident can deliver”.
Why Direct Costs Are Similar Across Bidders
As most projects are tendered, organisations delivering them must be lean if they are going to win on price. In any sector, those delivering require the necessary resources and capabilities to deliver — no more, or their price will be too high. Market forces ensure that the combined delivery cost and overheads should be very similar for any project, unless one of the bidders has an innovative solution, makes an error in the pricing, or has been selected in error.
In theory, the only real difference in a tender should be what an organisation demands in terms of net profit. Unsuitable organisations are excluded at pre-qualification; others choose not to bid if they know they cannot be competitive.
The Adjudication (Settlement) Meeting
The estimate, including desired profit, is adjusted at a meeting called an adjudication or settlement meeting. At this meeting the net profit is adjusted to take account of the organisation’s appetite for the work and the risks and opportunities involved. Key considerations include: future market conditions; the relationship with the client; availability of resources to deliver; opportunities in the estimate which will deliver profits; and risks which could wipe out the profit.
Benchmarking to Know the Market
By benchmarking your direct anticipated costs plus overhead plus your standard net profit against the market, you can determine what the market will bear in terms of profit relative to your desired profit. If there is a lot of activity, profits will rise; if there is scarcity, bidders will accept a lower profit. Keep a record of where the market is in relation to your standard net profit benchmark and you will soon have enough information to know the market direction and use it to your advantage.
Having adjusted for market conditions, bidders can then make a further adjustment to take account of their appetite for the project and the risks and opportunities identified as the bid was compiled. Getting this right is what separates contractors who consistently win at the right price from those who either lose work or win it unprofitably.
