By Mike Clancy
Many construction firms today face the daunting prospect of bidding on insufficiently defined plans and specifications against a large number of other firms. In 2008, the nonresidential market peaked at $715 billion put in place, with roughly one-third in areas where lump sum is the usual, or most frequent, delivery method. Firms that developed strong customer and subcontractor relationships to participate in this negotiated market may find themselves ill-equipped to be competitive in today’s bid environment. However, by refocusing on the “why” of hard bidding, firms can identify the strategic and tactical “how” actions that will allow for a greater level of confidence and success in procuring lump-sum work.
Why do we Bid?
It may seem obvious that contractors bid work in order to get work. When asking estimators, “What is your job?” the responses are most often focused on one of the inputs of their job, such as: to bid work or prepare quantity takeoffs, or manage the subcontractor outreach and communication efforts. However, the right answer is: to help his firm acquire profitable work.
This estimating mind-set drives behaviors that have a direct and obvious impact on the success of the bidding effort and, by extension, the overall success of the firm.
Estimators who believe their job in the organization is to bid work will do exactly that. The more jobs these estimators bid, the more work the firm will get. Therefore, why not bid every job? Estimators who believe their job is to get work will only bid those key opportunities where the firm receives an advantage. These estimators will seem less efficient than their bid-work colleagues because they will spend more time developing fewer bids. However, the get-work estimators will be much more successful in bringing profitable jobs to their firms. (See Exhibit 1.)
Bid-work estimators will submit a bid and, after seeing the results of the bid opening, will move on to the next one. These estimators will probably celebrate an apparent low result or may commiserate over one that got away, but will not spend much time looking back. Get-work estimators will be surprised and angry when their bid is not the lowest at opening. Get-work estimators will immediately start digging into all available information, looking into their assumptions, trying to identify the approach taken by the low bidder to ensure they do not lose the same way again.
If a company has bid-work estimators, the good news is that, as with most learned behaviors, this too can be changed through training and motivation; providing a best-practices estimating framework within which to operate is an important first step.
Best-in-Class: the 5-S Estimating Model
There are five key attributes and behaviors of top-performing construction companies. (See Exhibit 2.)
Strategy and Alignment
A best-of-breed firm will align its estimating strategy with its overall corporate strategic direction. The firm has a clearly defined marketing message, and it will not pursue work outside its area of strategic focus. A contractor with a best-practices approach to estimating will:
• have a structured project selection process that allows for effective deployment of estimating resources
• develop specific project-win strategies for key opportunities that define a competitive advantage
A project-win strategy can be as simple as identifying the critical trade contractor and ensuring that no other bidder is lower for that scope, or as complex as developing a schedule and staging plan that allows for one less mobilization and demobilization for certain trades, thereby driving down the cost.
Structure and People
Top firms will have skilled estimators working within a collaborative, team-based structure. The estimators will have a high level of business acumen, negotiating and selling skills, and technical knowledge about the divisions in which they specialize. Bear in mind that the goal should be the acquisition of profitable work --incentives that drive behaviors to acquire work without regard to profitability lead to disaster. The estimating manager has the ability to effectively motivate, lead and develop the team. The logistics of the department facilitate teamwork and allow for smooth transitions of work product between team members.
Best-in-class contractors will standardize estimating processes to build consistency and focus on value-adding activities. Estimators will conduct detailed takeoffs for all critical scope divisions, using an internally maintained and detailed cost-history database. The company will conduct a post-bid analysis on a mix of jobs to collect lessons learned. A contractor with a best-practices approach to estimating will have a clearly defined mark-up strategy based on risk, number of bidders, type of work, etc., and will conduct research on competing bidders to identify sources of advantage.
Systems and Technology
Companies with a first-class estimating function leverage existing technology resources to enhance the their effectiveness. All estimators use a consistent set of forms and spreadsheets and have a clear understanding of which functions need to integrate with estimating, and technology eases that integration.
The most common mistake contracting firms make is to over-purchase and under-implement. A strong tendency exists in this industry to expect a direct from-the-box solution, rather than one that requires extensive modification and training. As a rule, estimating software takes between 60 and 90 days to install, modify and build databases and assemblies. After installation, another 60 to 90 days is typically required for complete implementation. Shortening either the installation or implementation time leads to an estimating software package that is less effective and more difficult for the estimators to use.
Subcontractor and Vendor Relationships
Best-in-class contractors will use subcontractor and vendor relationships as a source of competitive advantage on bid day. The estimating department keeps a ranking of subcontractors by trade, based on price, field coordination and responsiveness. Estimators then consistently seek to upgrade the subcontractor corps using a defined outreach program to identify and add new industry partners. These estimators need to be skilled at negotiating subcontractor and vendor pricing, while maintaining high standards of ethics and avoiding even the appearance of bid shopping or other improprieties.
Subcontractor pricing is of high importance to all general contractors and construction managers. One $100 million general contractor saw the evidence of this truism when its bid day competitiveness was evaluated based on subcontractor participation. The old rule of thumb held that three bids per trade was sufficient subcontractor coverage. However, analysis found that, when this firm had more than six bidders per trade, its average bid was within 4.5% of the low bid. Conversely, when it had fewer than five bidders per trade, the firm averaged 19.2% variation from the low bid. (See Exhibit 3.) This expected correlation was consistent across project type and client, and led the firm to enhance its subcontractor outreach efforts.
Knowing the True Cost is Always an Advantage
Estimating at its core is about coming as close as possible to the true cost of the work in an effort to secure profitable projects. If a firm lacks a best-practices estimating approach, a thorough review of the estimating strategy, structure, people and processes will help identify areas for improvement. Investing the time and money to improve your estimating function will allow you to compete more effectively in today’s hypercompetitive bid market.
Mike Clancy is a principal with FMI. He works with companies across the country to help them leverage their unique organizational resources and capabilities to build competitive advantage. He can be reached by phone at 713.936.4945, or by email at email@example.com.