Construction bidding is among the most important project phases for many contractors in the industry. In this article, we’ll give you a detailed walkthrough of the construction bidding process, including how to actually go about submitting a bid.
What is construction bidding?
Construction bidding involves submitting a proposal to complete a job under a specific set of terms. Prior to bidding, contractors will typically conduct a cost estimate to ensure they’re providing accurate figures and protecting their bottom line.
It’s important to note, however, that construction bidding and estimating are indeed two separate stages. Estimating is generally for internal purposes while bidding represents a firm offer presented to the client. It relies on calculations made in the estimating stage but also includes the contractor’s markup (profit).
However, on smaller projects, the line between the estimating and bidding processes can get blurred.
Important construction bidding terminology
Here are some important bidding-related phrases every construction contractor should know.
During the solicitation process, clients contact various contractors and request bids for a project. As part of this contact, the client will typically include a package of specifications that would help the contractor get a better idea of what’s needed.
There are two main types of contractors in construction: subcontractors and general contractors.
General contractors submit bids to clients and then solicit (or otherwise receive) bids from subcontractors for various parts of the project.
When a client decides to proceed with a particular bid, they’ll enter the contract formation phase, during which the deal’s terms are finalized.
This is the entire package submitted to a client as part of the bidding process. In addition to financial figures, it may contain specifications, drawings, and other recommendations.
Bill of quantities
The bill of quantities provides a granular breakdown of each construction project component’s cost (i.e. a specific type of material).
A company’s bid-hit ratio represents the number of bids they submit per awarded contract. This can vary wildly depending on a company’s area of expertise, location, and other factors.
For example, some companies are able to achieve bid-hit ratios of 1.5:1 while others submit 35 unsuccessful bids for every one award.
You should always look into competitors and the construction industry in your area to determine an appropriate bid-hit ratio.
Typical construction bidding process
Now that you know about the basics of construction bidding as well as the various types of bids, let’s take a closer look at the typical process.
When a general contractor or owner is ready to undertake a project, they’ll typically solicit bids from various qualified parties. As part of this solicitation, they’ll send those parties a package containing details that will help with estimating and determining a fair price.
Solicitation can take many forms, including RFP, invitation to tender (ITT), and request for standing offer (RFSO).
Interested contractors may also contact the client and submit a bid if the project is publicly available.
When a contractor receives a solicitation, they’ll decide whether the project is of interest. If so, they’ll begin the estimating process to determine their expected material and labor costs.
If the project in question requires subcontractors, the contractor will also need to solicit bids from additional parties to get the best estimate.
Once the contractor has arrived at an accurate estimate, they’ll complete any necessary final reviews before submitting a formal bid to the client. There are two common types of construction bids to know about.
The first is what’s known as the design-build method. It entails a contractor offering to combine the architectural and general contractor services for the project.
There’s also the construction manager at-risk method, which separates the contractor and architect roles but places more responsibility on the former’s shoulders.
The design-build method is the more commonly used, generally speaking.
The client will then analyze all bids received and choose the best one. This may not necessarily be the cheapest offer, though.
Clients will typically outline their criteria for consideration in the request for proposals (RFPs). As Designing Buildings Wiki points out, these criteria can include things like:
which bid is the lowest
which is the most economically advantageous tender (MEAT); this looks at economic factors beyond price, including post-project service, quality, and time constraints
mean value; this awards the contract to the bid that lies closest to the mean value of all proposals
exclusion of the extremes; this eliminates abnormally high or low bids and evaluates the remaining ones based on the aforementioned criteria
Bidders who feel like the client breached popular procurement regulations can file what’s known as a bid protest depending on federal and local laws.
This dispute system is in place to ensure fairness during the construction bidding process, which is only appropriate given the amount of work that goes into preparing and submitting bids.
After a potential contractor has been selected, the client will typically engage them in a series of negotiations to iron out the contract’s details. In some cases, clients will have a preferred tenderer (the contractor they really want to work with) and a reserve tenderer, which acts as a backup in case negotiations fall through.
Once a suitable agreement has been reached, both parties will formalize it by creating and notarizing the necessary contracts. On that note, let’s take a closer look at the types of construction contracts.
Types of construction contracts
Contractors and clients typically decide on a type of contract during the negotiation stage.
If a project has very clearly-defined components, it’s not uncommon to use a lump-sum contract. This informs the client of what they’ll pay without getting too deeply into the weeds.
Lump-sum contracts (also known as stipulated-sum contracts) are very common in the industry, owing to their simplicity. However, there are downsides on either side of the contract.
Contractors take on a greater deal of risk since cost overruns or changes in project scope can jeopardize the project’s financial viability. This often translates into higher costs for the owner since contractors tend to include a markup for the added risk.
Dishonest contractors may also misrepresent their profit knowing they won’t have to deliver an itemized invoice to the client.
Still, lump-sum contracts are a staple of the construction industry, especially among specialty contractors.
Time and materials
If a project’s scope is somewhat undefined, contractors will typically use this type of construction contract. The owner will reimburse the contractor for material costs and also pay an agreed-upon hourly or daily wage for labor.
This type of contract simplifies negotiations, especially if contractors have accurate construction labor cost calculations.
The downside, however, is that a time and materials agreement does not inherently incentivize the contractor to finish their work as quickly as possible. Many clients remedy this by offering a bonus if the contractor completes their work ahead of schedule.
Under a cost-plus agreement, the client will reimburse the contractor for their material and labor expenses and then pay an additional amount for profit.
This offers a reasonable amount of flexibility for both parties. Underestimating the project’s cost won’t be as devastating to the contractor’s bottom line since the client will be reimbursing them for costs anyway.
Depending on the contract’s exact nature, a client also typically has some room for negotiating unreasonable costs, which reduces the likelihood of malicious contractors taking advantage of them.
Under this legal structure, contractors need to manage their cash flow effectively. Otherwise, they may find themselves in a bind as a result of having to front costs.
Unit price contracts are popular on projects that are somewhat modular in nature. Work is divided into units (i.e. time, phases, length of highway, etc) with a cost attached to each component.
This allows the project to scale easily; if more work is needed, the client will simply continue to pay for it at the agreed-upon rate per unit.
The downside to unit pricing is that the total project’s cost can be unpredictable if nobody knows the exact number of units required.
Guaranteed maximum price
With a guaranteed maximum price, the contractor agrees not to charge in excess of a specific amount unless the client changes the project’s scope substantially.
This type of construction contract is popular on clearly-defined projects with little expected deviation from the plan.
Consequently, it’s also the most dangerous type of agreement for contractors with poor estimating capabilities. They’ll be forced to absorb any costs exceeding the maximum price unless the excess meets specific criteria laid out in the contract (typically limited to scope changes on the client’s part).
How to bid on construction jobs
There are other ways to bid on construction jobs than simply waiting around for prospective clients to solicit your company.
Clients increasingly upload their projects to construction bidding websites. As a contractor, you can use these websites to download relevant documents and submit an offer.
These websites include:
GovernmentBids.com (hosts government RFPs, as the name suggests)
Individual states also commonly have procurement websites. Here’s New York’s, for example. It lists various available jobs for tender throughout the state.
Tips for success with construction bidding
Here are some tips for ensuring success when bidding on construction jobs.
Choose projects wisely
There’s no point in bidding on construction projects your company is unsuitable for anyway. You’ll simply waste time and money that could be spent pursuing better opportunities.
Ideally, you’ll want to weed out poor matches early in the process. If at any point when preparing the bid you realize the project is beyond your scope or simply not worth it in some other regard, consider cutting your losses.
Clarify uncertainties early on
If you’re unsure about a particular aspect of the project, clarify things sooner rather than later. This is especially important if the item in question is a potential dealbreaker.
Carefully review your resource management system
When bidding on a project, don’t just assume you have the resources to complete it successfully. Take a close look at your construction resource management software to make sure you’re not misjudging the availability of a particular worker or resource.
Complete forms properly
It’s not uncommon for workers to get so caught up in the complexities of bidding on a construction job that they miss out on simpler things like filling out paperwork correctly.
This sort of thing signals poor attention to detail, which is not how you want to start off a project. Make a good first impression by reviewing things very carefully for potential mistakes.
Calculate and address risks
Things often go wrong on construction projects. This is a fact of life. During the estimating and bidding processes, you need to account for these risks and address them (either directly in your bid or in other aspects of your business).
Visit the site if possible
If a construction project’s feasibility rests heavily on the job site’s condition, you should try to actually assess the location for yourself. You can often do this by attending a pre-bid meeting, which may be followed by a visit to the site.
Construction bidding can be a complicated process. In this article, we reviewed the basics, including how to bid on construction jobs as well as the types of bids and contracts out there.
For more useful information about construction project management, visit our blog here.