The tender trap

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. 

Recognizing when you need help is the first step to breaking this cycle. However, finding the right support can be difficult. Accountants, marketing professionals, and estimators (or Quantity Surveyors, QS) each approach the problem differently. While all can help you build up your break-even price, it’s crucial that the business owner or director makes the final decision about how much profit to add. Submitting a price that’s too high may lose you the project, while bidding too low can cost you money. Research shows that successful tendering often relies on the intuition of experienced directors who understand contract risks and overheads. For those running businesses for the first time, this depth of knowledge is often missing. 

The Solution 

After more than 10 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: 

1. 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. 

2. Accurate Overhead Forecasting: Structure your accounts to provide reliable information about your overheads. Use this data to forecast future overheads that need to be covered. 

3. Benchmarking: Track your wins and losses against a set profit level. Adjust your profit mark-up based on market conditions and your benchmarking results. 

The project break-even point is made up of two calculated components: 

• Direct Costs: The actual costs of delivering the work, which should be similar to your competitors if you follow a bid-no-bid policy. 

• Forecast Overhead added as a Percentage: Calculated from your accounts and expected workload. 

Once you have these figures, the owner or director adds the profit mark-up. If the other elements are applied with care and consistency, the profit adjustment becomes small and easily controlled. 

Selecting Who to Bid For 

For experienced clients (serial procurers) or their advisors, selecting the right bidders is key to getting their project delivered optimally. Procurers who carefully choose their tender lists and make them attractive to a limited number of bidders achieve better outcomes than those who accept bids from anyone and simply pick the lowest price. Accepting bids from multiple unknown contractors encourages the “race to the bottom” and often leads to poor results and frustration for everyone involved. 

Contractors who use a bid-no-bid process gain an immediate advantage. They bid on real projects where all competitors are equally capable, leading to similar pricing approaches. 

Estimating the Cost of the Works 

When all bidders are equally capable, the cost of delivering the project should be similar across the board. Supervision levels, accreditations, and material & labour costs are usually determined by market rates and preselection criteria. 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. 

Adding Overheads and Profit (OH&P) 

From your accounts and expected workload, you can calculate the mark-up needed to cover overheads and reach your break-even point. The profit mark-up is then discretionary. For the client, the combined overheads and profit are the differentiators, as quality has already been addressed in preselection. For the contractor, profit is the differentiator, since direct costs and overheads are calculated using this method. 

By benchmarking project wins and losses against a standard OH&P, you can make minor adjustments to profit to secure projects, confident that overheads are covered. Never bid below your calculated overheads component. 

The key is to tender a price that will be profitable for you, aiming to win at the highest price the market will bear. 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. 

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. 

• Director review: 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 and adjust your profit margin accordingly, always aiming to win at the highest price. 

If you want to be confident about your pricing and learn more about benchmarking your mark-up to improve your strike rate and profit levels, please contact me at Peter.Searle@ba4cs.co.uk