Competitive bidding in today’s electrical construction market is one of the most frustrating and challenging tasks the electrical estimator faces. Fewer projects to bid coupled with more competitors makes preparing a profitable bid price seem impossible at times. In fact, in many cases, the lowest bid on a project is from a contractor that made a costly error in the estimate.
In this extremely competitive market, it is common for an estimator to lose sight of the most important objective of the estimate: determining the true cost of a project. After bidding several projects unsuccessfully, some estimators begin to think that having the lowest bid is the most important objective. The pressure of needing to provide a backlog of work for the company and having to rely on obtaining this backlog from an increasingly competitive bid market distorts the estimator’s focus.
The results can be disastrous if the estimator becomes fixated on simply being the lowest bidder on the next project without proper regard for specific job requirements, company capabilities, manpower availability and other actual costs to perform the contract.
When the estimator chooses to bid the project at a dangerously low price with the intent of making up losses through additional work or change orders, a sad day of reckoning for the company may lie ahead. Most project specifications precisely outline the responsibilities of the electrical contractor. Moreover, many specifications contain clauses that assign the responsibility of correcting electrical design mistakes or omissions to the electrical contractor without additional compensation.
In addition, most specifications today limit the percentage of overhead and profit that can be added to the cost of change order work, and these limited percentages cannot overcome the consequences of a dangerously low bid or sustain a company in today’s economy. Submitting a low bid with the intent of making up losses with extra work may actually result in the contractor losing money on the base contract, while, at the same time, losing an even greater amount on extra work and change orders.
Today, estimators face the dilemma of preparing an extremely competitive bid that still covers all costs required to perform the contract. The estimated costs used to calculate a bid price should be the actual costs the contractor incurs without regard to the costs the competition may incur. One example of differing actual costs is renting versus owning a piece of equipment necessary to perform the contract. If company A must rent a piece of equipment to perform a contract and company B owns the equipment, the estimator for company A may be tempted to eliminate the rental rate from his/her company’s bid in an effort to be more competitive. This approach is unwise and can result in company A being the lowest bidder on a project that ultimately loses money.
Each company submitting a bid has its own menu of cost inequalities for a project; therefore, it is critical that the estimators preparing the bids must not only know these actual costs that are unique to their company but also must apply these actual costs to their company’s bid without regard to the competitor’s actual costs.
Like most realities in life, there is no quick fix or easy path to being profitable and competitive at the same time. The estimator must match the best qualities of his company with those needed to profitably complete potential projects. A careful analysis of the company’s most profitable past projects and those that lost money or broke even will indicate the strengths and weaknesses that existed in these projects’ performances. If most of the past successful projects were in the light industrial market, it strongly indicates the estimator should aggressively pursue this type of project to bid. This observation does not restrict the estimator from pursuing other bid opportunities and types of work, but it means estimates that fall outside his/her company’s previous “success parameters” must be carefully prepared to include all actual costs that are incurred with this new type of work.
Because of the current trend to bid any and all projects, the next article will explore the factors that must be carefully considered to establish the true cost of a project that falls outside a company’s previous “success parameters.”
MOOTY is the estimating management consultant for NECA’s Management Education Institute. He began working for an electrical construction firm in 1973 as an apprentice electrician and eventually became president of the firm. You can contact him at email@example.com.