Relatively few organisations procure construction projects but for those who do, the capital spend usually represents a significant investment for them. 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 to be counter intuitive. The phrase “you get what you pay for” springs to mind, but this is countered by the procurers, and their advisors, who say, “we only allow bidders to tender who we are confident can deliver”. So, tendering remains a key part of procuring projects and those bidding are left to make their own decision as to whether they are bidding against equally capable companies.
Because it is a significant investment, projects only occur when the economic cycle is right or there is a political will. There is a move to productise buildings using off site manufacture where the procurer may ascertain the “product” cost for part of a project. However, the variable costs of the “enabling works” and “transport to site” means that substantial costs are still unknown, and projects continue to be tendered.
As most projects are tendered, the organisation’s delivering them must be lean if they are going to win on the price they tender. In any sector, or type of work, those delivering require the necessary resources and capabilities to deliver. Anymore, and their price will be too high. Too few resources or capabilities and the procurers, who are contractually savvy, will impose contractual penalties if the winning bidder then fails to deliver. It follows that 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 difference in a tender should be what an organisation demands in terms of net profit. Unsuitable organisations will be excluded at the pre-qualification stage and others will choose not to bid, if they know they cannot be competitive for the project. Choosing the net profit to add to the delivery costs and overheads, is what turns the estimated figure into the tendered submission.
The net profit expectations of organisations range from aspirational, to imposed as part of a risk portfolio of a larger group. Whatever the expected net profit is, it should be automatically added to the direct costs and overheads to arrive at the organisations estimate. Included within the estimate should be an allowance for investment in the business to remain competitive in the future. Contractors who do not do this will ultimately fail as their business will not be sustainable. The estimate, including desired profit, is then adjusted at a meeting called an “adjudication, or settlement” meeting.
At the settlement meeting the net profit will be adjusted to take account of the organisation’s appetite for the work and the risks, and opportunities, involved in it. Among other things the adjustment is made taking account of the future market conditions, is the economy growing or shrinking? The relationship with the client, are they a good client and pay fairly or do they use the contract aggressively? Are the resources available to deliver the project if it was secured? Are there opportunities in the estimate which will deliver profits, and similarly are there risks which could wipe out the profit? Will the project provide enough additional turnover to reduce the overheads? The list is long and varied. It is only current at the time the discussion takes place as projects are being won and lost all the time.
By benchmarking, the 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. The direct costs plus overheads should be similar to the other bidders as those bidding are of equal standing. Which means the maximum profit achievable will generally correlate to activity in the market. If there is a lot of activity, profits will rise, if there is a scarcity, bidders will be willing to accept a lower profit on a project. So, 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. The difficult prediction is knowing when the market is changing direction. To do this you must stay in the market and keep your ear to the ground to detect changes at the earliest time.
Having adjusted for the market conditions the bidders can then make a further adjustment to the net profit to take account of their appetite for the project and the risks, and opportunities, identified as the bid was compiled.
If you would like assistance or guidance with:
· Clarifying your optimum target market(s)
· Deciding what is worth bidding
· Getting on appropriate tender lists
· Benchmarking your pricing against the market
· Converting estimates into winning tenders
Then please contact me: