Competition in the construction industry is tough and getting ahead of your competitors highly depends on the quality of your bids.
The first thing you need to do is to determine your overhead and profit margins.
Wondering just how to do that?
First things first – most contractors don’t know the difference between markup and margin. Or how much to add to their bids to break-even or make a profit at the end of the year. The difference between markup and margin is a simple concept to grasp and will help you earn more money. Here are the basics:
Mark-Up % = Percentage of money added to direct job costs to cover overhead AND profit.
Margin % = Difference between direct costs & sales price divided by the sales price.
Mark-Up % = Mark-Up / Cost = $300 / $1,000 = 30%
Margin % = Mark-Up / Sales = $300 / $1,300 = 23%
In the example above you are not making 30%. You are only making 23% on your sales. To earn 30% margin on your sales, you would have to markup your costs 42.8%.
And don’t forget…
When preparing a bid level estimate, care must be taken to identify not only labor and material cost items shown on the plans, but also labor and cost items that may not be reflected on the plans.
A construction bid proposal is the basis on which many construction companies are hired to serve as the primary contractor on a project. Without a construction bid proposal, there would be no way to establish the overall cost of a project, which would throw the project and the contractor-client relationship into chaos.
Tip #1: Maintain a bidding record
Successful companies maintain bidding records. These can be simplistic or sophisticated. On the simplistic side, the bidding records would indicate that if Competitor “X” is bidding the project then you should pass because “X” always has a lower price than you can bid. On the sophisticated end of construction bid analysis, the records should be analyzing labor, material, equipment indirect costs, and so on, along with profit. From the overall perspective, historical determinations can be made as to profit amounts. If you have similar cost basis to your competitors (which you should!), the profit of your competitors can be determined with a reasonably high degree of certainty after a project has been bid.
Tip #2: Find out the winning bid amount if you didn’t win
Find out, write it down and keep track! These numbers are extremely valuable to your company and will help you place your bids at just the perfect amount – not too high, not too low.
Something to watch out for while comparing your bid amount to the winning bid amount:
Sometimes a subcontractor will ‘buy’ a job by submitting a very low number (possibly a bid with absolutely no profit) in hopes to have the chance to show the project owner what he can do so that he’ll come back to him on the next project, but at a higher price. Definitely don’t do that.
Tip #3: Call and follow-up
Your bid is not just a monetary figure and with today’s financial demands, project complexities and tight schedules, project owners are looking for more than just a low bid. Following-up will make you stand out from the crowd. It will give you a chance to up-sale yourself and present your bid.
Knowing how to bid construction jobs makes the difference between success and bankruptcy for a construction contractor. If work in the construction industry and do not know how to bid construction jobs, you will have no chance at ever turning a profit.