Bidding Strategy of Construction Companies

Introduction

This report aims to assess the value to construction companies of having a defined bidding strategy that is complied with when tendering for new work. The majority of construction companies have a bidding strategy of some form whether it is specified or not, in the instance that a company does not engage in a process of selection when approaching new work then they will offer little value as they would be pricing every job available regardless of the contract value, location, programme or their previous experience of that type of work.

At the time of writing the UK economy (in particular the construction industry) remains gripped by the instability and uncertainty created by the financial market turmoil that occurred throughout 2007 & 2008 leading to the greatest economic crisis and subsequent recession since the Great Depression of the 1930’s (Brunnermeier, Markus K., 2009). As such construction companies are faced with a market place as competitive as any in living memory, for most turnover and profits have dropped significantly and this subsequently applies extra emphasis to the importance of the tendering process.

The report will firstly review the literature available on bidding strategies in the construction industry with a brief review of the effects of the recession on contractors bidding prices. The literature review will then be advanced upon by conducting an assessment of the bidding strategy utilised by Dawn Construction Ltd, a main contractor operating in the central belt of Scotland.

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2.0 – Bidding Strategy

2.1 – Definition

A bidding strategy can be described as a wide range of applied techniques and timing in order to achieve predetermined objectives. Brook (2008) offers the following analogy “It is interesting to note that in military terms, the word ‘strategy’ means the skilful management of an army in such a way as to deceive the enemy and win a campaign. In business the stated objectives can sometimes be achieved by deceiving the opposition but principally the specified objective is to be successful in winning contracts at prices which would allow the organisation to carry out the work profitably” In effect a bidding strategy is the decision by a company on which work to price for and the level of profit to incorporate in order to successfully secure the project and maintain the businesses financial security.

2.2 – The Tender Process

Under traditional circumstances the tender process for a contractor commences with the clients ‘invitation to tender’. Upon receipt the contractor’s response will be shaped by several factors, ultimately though the volume of available work will determine the eagerness of the contractor to price the tender. Very few contractors will actually outright decline the opportunity to price work for a reputable client, in the instance where the contractor does not want to price a tender for whatever reason it is more likely that he will price the work using uncompetitive rates in order to ensure they do not win the contract.(Smith, 1995) This practice is commonly referred to as “cover pricing” and the primary objective of it is for the contractor to avoid work that he does not want to undertake without insulting the client and being removed from his future tender lists. Although cover pricing was made illegal in 2000, it is still regularly employed by contractors who differentiate between submitting a price that is non-competitive and the act of colluding with others in a “bid-rigging” process. (Bingham, 2009)

2.3 – Decision to Tender

Prior to committing to pricing a project a contractor must carefully consider his decision to tender as every job he prices costs the company money and reduces the resources available to price other work. Some contractors engage in a grading system when they receive a tender (i.e. a grading range of 1-4), this is in order to prioritise enquiries and put emphasis on winning the types of projects best suited to the company. Others prefer to approach each tender with the aspiration of winning the contract, allowing their price to be influenced only by perceived risk and relevant market factors. Where circumstances change during the bidding process – perhaps the contractor wins another contract unexpectedly – this can be taken into account at adjudication stage. (Cook & Williams, 2004)

Cooke & Williams (2004) cite the following as key factors in influencing a contractor’s decision to tender:

General

• Is it our kind of work?
• What is the current workload?

Working Capital

• Is there sufficient working capital to fund the project?
• What will be the effect on company financial resources?

Availability of Resources

• Do we have the resources available to price?
• Do we have the site labour available to undertake?
• Are suitable subcontractors available?

Location

• Is the project located within our trading area?
• What management and control problems will there be with a contract located some miles from head office?

Size & Type of Work

• What is the monetary value of the project?
• Is the contract too big for the company to undertake?
• How did the company perform on similar types of work in the past?

Subcontract element

• What is the extent and value of the contractors work in the project compared with the subcontract element?
• Is the main contractor simply being asked to manage a number of subcontractors?
• Is a reasonable mark-up on subcontractors likely?

General

• Is it our kind of work – does it fit into strategic plan?
• What is the current workload in both the contracts division and the estimating section?
• Do we have the financial and management resources to undertake the work?

Working Capital

• Is sufficient working capital available to fund the project?
• What will be the effect on company financial resources?
• The working capital required to fund a £500,000.00 project will be approximately 15-20% of the monetary value at the peak funding month (say £100,000-£150,000)

Availability of Resources

• General management personnel (e.g. contracts managers, planning engineers, quantity surveyors)
• Site management (e.g. site agents, foremen/gangers, site engineers)
• Labour and plant
• Subcontractors – are suitable subcontractors available and what is their resource situation?

Location

• Is the project located within our trading area?
• What management and control problems will there be with a contract located some miles from head office?

Size & Type of Work

• What is the monetary value of the project?
• Is the contract too big for the company to undertake?
• Taking on a project which is too big could be damaging to future planning and growth
• What impact will there be on the viability of the business if the contract fails to make an adequate margin?
• If a contractor with an annual turnover of £10 million wins a £4 million contract and this project makes a loss, the whole business could be put at risk.
• A major project could give the company severe liquidity problems
• How did the company perform on similar types of work in the past?

Bibliography

Construction planning programming & Control

Brian Cooke & Peter Williams

Finance & Control for Construction

Chris March