Bidding Strategy – Part 5 | How To Win a Construction Tender

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Last Updated on March 22, 2024 by admin

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Bidding Strategy

You invest time, money and effort in bidding for tenders but do you get the results you want and do you get value out of your investments? This is a question that you should ask if you are facing a perennial drought in significant tenders and jobs. Getting a significant tender can give you a financial break that you are looking for and you can stay afloat for longer periods without needing another job. Blind bidding for any tender is not a good strategy .It will demotivate you in the long run when all your efforts yield nothing tangible. In order to get positive results from your efforts, you have to plan and devise a strategy. To bid or not to bid is a decision that you have to make and it should be backed by facts and data within your company. You have to assess the risks of bidding against your company background – can your company manage the risks? Can you find a solution to mitigate the risks?

The following are some of the risks that you need to assess:

Performance Risk – This is a risk related to the contractor’s experience and capability in successfully carrying out a construction project. The performance factor depends on a lot of things. Actually, any risk you can think of can affect your ability to perform. One of the most important things that you should look at is the magnitude and scope of the project. Can you handle the project? Have you ever done such type of a project? Are there a lot of hindrances that you might face? Hindrances to performance will exist before and after the tender stage. This includes the requirements to fulfill the preliminaries. The question is how are you going to deal with them.

Reputational Risk – When you put in low quality work, make unnecessary delays or fail to carry out a project to successful completion, your reputation will be at risk. Reputation spreads like wildfire. Besides a tainted reputation that will ruin your marketability and tarnish your company name, you may run into other problems that are caused by your failure to perform. For example, you may run into financial problems and face litigation.

Credit Risk – A lot of banks and financial institutions will give you a financial guarantee when you win a tender. This guarantee is designed to help you perform i.e. execute the project successfully. However, when you fail to perform after loan money has been spent on the project, you will run into a credit risk, which is a failure to pay back. The same applies to other creditors such as suppliers of materials. You will be required to pay back the money used for buying construction materials on credit.

Legal and Compliance Risk – Construction tenders come with contract clauses that you have to abide with. Some of these clauses include penalties for delays and non-completion, defects in work, poor workmanship and failure to comply with Architect’s specifications. When a project manager applies monetary penalties on your construction firm, your retention (profit) may be forfeited, interim payments may be withheld and excess daily charges can be applied, leading to financial ruin.

Technical Risk – This is a risk resulting from lack of technical expertise and experience in carrying out specific tasks of a complicated project. Complicated ground conditions, terrain, building design, materials and the environment may require a specific construction technology that is often possessed by a few transnational construction firms.

Insurance Risk – This occurs when the losses incurred in a project exceeds the amount insured or when the premium rate is exceedingly higher during the occurrences.

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Now that we have covered some of the major risks encountered in carrying out construction projects, we should look at situations where it’s in the best interest of the firm to bid or not to bid.

When Not to Bid

It may be in your best interests not to bid when:

The Contract Value is Low

You are probably asking, how does a contractor know that the tender value is too low, besides are you not going to know the client’s pre-determined value until a tender evaluation is done? There are two types of estimates that you should make when you are preparing a tender document. After pricing a tender bill with updated company rates, you should find the market price of the building by doing a rough estimate based on the gross floor area of a similar type of building. The market value is assumed to be the client’s price if a budget is not revealed to bidders. If the market price is way below the tender value by over 7.5% then it will be hard for you to make a profit. It’s better not to bid.

The Project is Too Large or Complicated

When you obtain tender documents, you should study the details and drawings to determine the magnitude and scope of the project. Some projects may be too large or too complicated to be handled by your construction firm or they may simply be unfamiliar. If you have specialized in low-cost single-storey homes for the most part of your career, you might not be the best contractor to handle a 5 star multi-storey hotel and office complex, but of course you could handle a middle class home fairly well.

The Project Pays Late

It is common for construction projects run by the government and local authorities such as town councils to pay late, many months and even years after the project is complete. The late payment when it does come, may come in slow installments instead of one or two deposits. This is a situation that a financially struggling contractor would not want to find themselves in. Unless you have access to financiers that will cover you throughout the project, it may be in your best interests not to bid for a late-paying project. Even if you have financiers behind your back, by the time you get your payment (i.e. 12 months after the project), the interest rate costs will erode your income and reduce your net profit, unless there is a provision to file claims for late payments. Where the financier is a property developer in partnership or joint venture with a building firm, the financial burden on the contractor is eased. Contract and post-contract costs related to late payments are shared as well as future earnings when the property is operational.

You Don’t Have Access to Suppliers

You should secure a credit guarantee with suppliers of materials to ensure timely and smooth delivery of construction materials on site. Access to materials can affect your performance and ability to finish the project on time. Although some suppliers can give you a line of credit when you produce a tender award certificate, they may do a background check of your credit history to determine your eligibility.

You Don’t Have a Performance Guarantee

You can easily get a bank guarantee if you win a tender because the tender acts as security, but your credit history will come under scrutiny during tender evaluation. Tender evaluators may decide not to nominate or award you a project if you have a bad credit rating.

You Don’t Have Access to Equipment, Plant and Technology

You have to organize equipment and tools when you win a tender. Some projects, especially those which are large and complicated require specialist equipment and plant. Large projects require large setup and infrastructure, you also need to have enough equipment and it is often costly to procure the required items. When you are bidding, you should think about the construction technology that is required to excavate, deploy concrete and install elements. Otherwise, if sophisticated equipment is required or the plant hire rates are too high for your pockets, you should think twice about placing your bid.

You Don’t Have Access to Skilled Manpower and Labor

Construction projects will never take off if you don’t have the required human resources. It may take a long time to get the skilled labor and technical expertise for your project. You do not want to be in a situation where the project is stopped or delayed because of shortage of specialist and skilled workforce. Costs connected to stoppage and delays are borne by the contractor. Despite using recruitment services to outsource professionals and labor for you, you may not find the right people in your region or location. This would necessitate looking elsewhere – out of your city, state or country, which is very costly. By studying a tender and conversing with the client’s representatives, you should anticipate problems in recruiting required expertise and skilled resources earlier on before placing your bid.

You Have Not Done the Work

This boils down to experience. When it comes to major projects, evaluators will not take a risk of hiring an inexperienced contractor. Most building contractors are capable of executing a low cost housing project, but when it comes to first class hospitals, stadiums, hotels, commerce parks, shopping complexes, power plants and other specialized projects, they fall short. You should only bid for specialized projects when you have done similar work on a smaller scale or the best thing would be creating a partnership with an experienced party that agrees to a joint bid.

Project Details are Missing

Some tenders are advertised hurriedly and in this case, project details may be insufficient to come to a decision. If the project lacks fully developed drawings, bills of quantities and specifications, it will be subject to a lot of provisional items and sums. As any experienced contractor would testify, there is nothing as frustrating as numerous variation orders and changes. Projects executed with little or no planning are prone to multiple variation orders. A carefully planned project is one where ground conditions, terrain, access to site, site drainage, water supply, seasonal conditions, adjacent buildings, hazards and surroundings are thoroughly investigated to determine a suitable design with minimal compromises to client needs. Time invested in planning and investigation provides a payback in the form of post-tender efficiency and a smooth running project. An environmental impact assessment is done, discussions with stakeholders, local authorities and neighbours are done to solve any issues which might potentially affect the community. If uncertainty and multiple changes are not your cup of tea, you should avoid projects with little detail.

When To Bid

When you know when not to bid, it becomes easy to know when to bid. You may submit your bid when: