In the seventh part of our Bidding Insights series brought to you by Construction Data Company (www.cdcnews.com) in cooperation with the Stevens Construction Institute, (www.stevensci.com), we address the price proposal process.
There are three components of the price proposal process:
1. Bid/No-Bid Decision Making
2. Yearly Job Cost Budgeting
3. Applying the Correct Overhead Cost in a Bid
(Note: In order to assist our readers, we have provided supporting spreadsheets that may be accessed through in-text links. We recommend you save the spreadsheet locally before you close it to preserve any changes you decide to make.)
The first component – Bid/No-Bid Decision Making – is a thorough review in which the firm makes an assessment as to whether or not to submit a bid/proposal on a project. It takes many profitable projects to pay for one money-losing project. In addition, submitting a bid uses up a firm’s resources in terms of both time and energy. Firms need to eliminate low-value opportunities and focus their resources on opportunities with higher profit potential.
Subscribers to CDCNews’ online product, Lead Manager, have resources available to assist in making the Bid/No-Bid Decision.
The first resource, available to all Lead Manager subscribers regardless of their subscription area, is the project tracking function. This allows you to not only save projects to a Project Tracker folder, but also enter notes on the project. Estimators and business development managers can utilize this function to keep track of a project through the various stages of planning and into bidding. At the same time, they can notate various contacts with the project principals, as well as any internal notes they deem necessary. This information can be utilized in the Bid/No-Bid Decision making process.
The second resource, available to Lead Manager subscribers, is CDCNews’ Total Access Plans Online. Subscribers are able to view the plans from their desktop. By utilizing Total Access Plans Online, subscribers can save valuable time and make a more informed Bid/No-Bid Decision.
The second component in the price proposal process – Yearly Job Cost Budgeting – is a prediction of the costs of the projects the firm expects to complete during the next year. (See: Data Sort for Bid Strategy) This is critical for every contractor. If the firm forecasts a higher volume of work than what actually occurs, the firm will recover less overhead in each bid. If the firm forecasts a lower volume of work than what actually occurs, the firm will recover extra overhead in each bid. It is recommended that firms keep overhead costs as low as possible and their projections slightly pessimistic. This will help keep the overhead cost prediction within reason. After all, any surprises that develop throughout the year will most likely be negative toward a firm’s budgeting.
The third component, Apply the Correct Overhead Cost in a Bid requires the firm to predict or forecast for the future. In order to apply the correct overhead cost, the firm must first calculate the overhead costs incurred by the firm. (See: Budget Worksheet for Use in Creating Bids) This requires a firm to calculate the following:
The total amount of labor and equipment direct cost;
The total amount of material, subcontractor, and miscellaneous direct cost; and
The total amount of home office overhead cost needed.
Once this information is generated, the firm can utilize one of the following methods to determine overhead costs:
Daily Run Rate Method of Overhead Costing
Single Rate Method to Determine Overhead Cost
Dual Rate Method to Determine Overhead Cost
(See: Overhead Sizing Calculation)
Each of these methods has various advantages and disadvantages. The firm’s management team must decide which is best suited to their operating budget.