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Contractor's Bidding Strategy
Undergraduate 1

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What is the Contractor's Dilemma when bidding on a project?

A contractor needs to Bid High enough to make the profit, but low enough to get the job


What is the objective of Strategic bidding?

To produce "optimum bid" or "best bid" that will result in the highest possible profit

Identify optimum markup for the bid (before spending time and money to prepare a cost estimate

What are some of the benefits of Strategic bidding?
  • Identify the jobs which have greatest potential of profit generation
  • Decide if a given job is worth bidding based on anticipated profit
  • Decide on the appropriate markup for a job to reach the 'optimum bid' amount
What is the 'Fair' profit for contractor?

Typically general contractor should earn a minimum of 4%-5% on contract value

20%-25% on the capital investment

What are the groups of factors which impact the decision to bid or not to bid on a project?
  1. Project characteristics
  2. Business Benefits
  3. Client Characteristics
  4. The Contract
  5. Project Finance
  6. Company Characteristics
  7. Firm's previous experience
  8. Bidding situation
  9. Economic Situation 
  10. Competition
List some characteristics of each factor group that impact a bid or no bid decision?
  1. Project characteristics
    1. Size, type, location of project
    2. Duration, resource requirements, time of construction
    3. Quality of design and documentation, safety hazards
    4. Public exposure, stakeholders, public objection etc.
  2. Business Benefits
    1. Reputation
    2. Continuity of work for key personnel
    3. Potential of long term relationship with client
  3. Client Characteristics
    1. Relationship with Owner
    2. Private vs. Public
    3. Client's financial Capability
    4. Client's reputation in market
  4. The Contract
    1. Type of Contract
    2. Clarity of Contract documentation
    3. Ability of modify contract
    4. Ability to subcontract
    5. Contract Terms & Conditions
    6. Modification to standard contract forms
    7. Involvement in the design
  5. Project Finance
    1. Contract Price
    2. Capital requirements to start job
    3. Project Cash Flow
    4. Insurance and Bonding
    5. Liquidated damages
    6. Degree of difficulty to obtain external financing (Banks etc)
  6. Company Characteristics
    1. Availability of the resources to perform the job (Labour and Equipment)
    2. Need to get the work
    3. General Overhead
    4. Alignment with future vision and the core competencies
    5. Availability of sub-contractors
  7. Previous Experience
    1. Past experience in similar projects
    2. Past profit in similar jobs
    3. Past experience with subs
  8. Bidding Situation
    1. Bonding Capacity
    2. Bidding timeline
    3. Prequalification requirements
    4. Documentation requirements
    5. Cost of Biddding
  9. Economic Situation
    1. Labour Market
    2. Economic Conditions
    3. Risks in labour market and materials
    4. Risk on investment
  10. Competition
    1. Who else is bidding for this job
    2. Expected number of bidders
    3. Future projects
    4. Market condition (supply vs. demand of work)
What is Bid Efficiency?
  • Measures the effectiveness of bidding strategy
  • A typical contractor (bidding out of gut feel) can have a bid efficiency in the range of 20%-30%
  • Using simple bidding strategy, bid efficiency can be increased to 50% and profit can be doubled as compared to intuitive bidding
  • =Actual Profit (estimated) / Maximum Profit Potential¬†
  • Maximum Profit Potential is the difference between Estimated (Construction) Cost and the lowest competitor's bid
What does Bid Efficiency tells you?
  • How efficient are you right now?
  • Are you becoming more (or less) efficient with time?
  • How consciously deciding the markup rate will change your bid efficiency and profit?
What is Competitive Strategy?
  • A technique to reach the optimum Mark-up based on historicl bid data and Project Attributes
  • Information needed: Variables of Interest (or Project Attributes), such as:
    • Project Size (Cost)
    • Number of Bidders
    • Lowest Bidder Mark up (based on your Estimated Cost) etc.
    • Output: Matrix indicating optimum percentage markups based on Variables of Interest
Other Common Methods for Competitive Strategy.
  • Multiple Regression analysis
    • Predict a dependent variable (markup) based on one or more independent predictor variables (project size, number of competitors)
    • Requires statistics software (SPSS, SAS etc.)
    • Limitations: Relies on a linear relationship between variable
  • Correlation analysis
  • Firedman's Model
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