by Tim Ayler, CPA and Alicia Rader, CPA | Team Members of the Construction Services Group
Many contractors equate success to winning bids. While that certainly is partially true, there are several other factors which determine how successful the bidding process really is. As of late, many contractors are putting less markup in their bids in order to be more competitive and to increase their chances of winning the work. Others are struggling to win bids so they are expanding their geographic boundaries or bidding on types of work that they have not successfully completed in the past. Whatever your construction company is doing to win bids, we hope it has contributed to your company’s profitability.
Construction companies do have to bid work–there is no question about that. Given that, what determines whether the contractor is being successful in their bidding process? The tracking of bid-hit ratios, if calculated and analyzed, can be a tool to determine a contractor’s bidding success. In order to bid jobs, staff, (and many times the owners) spend time learning about the project, getting plans, sitting in meetings and preparing estimates. All of this takes time, which costs the company money. To make sure that the time and efforts are not wasted, tracking the bid-hit ratio is a useful tool. If you bid on 8 jobs and get 1 of them, then your bid-hit ratio would be 8:1. Depending on your company’s job size, this ratio may be most useful when tracked monthly, quarterly or annually to determine how the bidding success is going.
To better understand the bid-hit ratio, it can be broken down into job types, public vs. private, profit margin estimated, person that prepared the estimate, and/or contract size. This can provide a further understanding of where the company has success in winning jobs and where it may be best to focus efforts in the future. You could learn that there are certain types of projects that are never won, and therefore it may not be worth spending the time bidding them in the future. You may find a certain “sweet spot” in your bidding opportunities and continue to focus efforts on those types of jobs. The key to the bid-hit ratio is that the lower it is, the better.
Just because you have a great bid-hit ratio does not mean your construction company will be successful. Once completed, job profitability should be added to the analysis to ensure that the bids are not simply being won because there is not enough profit built into them. Other factors that can be analyzed may include the project manager and the length of the contract. For further analysis, bid spreads on public work can be tracked to determine how much a contract was won or lost by.
Although many owners do not feel they have time to analyze the company’s bidding success and track it all the way through the completed contract, such information obtained can be useful for growing the company and making it more profitable in the future.