Tag Archives: Strategy

August 14, 2014

Bidding Philosophy

The various personalities that come together in the market have remarkably different philosophies when it comes to bidding. Broadly speaking I have found three prevalent schools of thought and some work considerably better than others.

Some firms are constantly pushing out bids for short notice, limited scope, high competition, and low profit work. They never seem to win anything so they attempt to make it up by bidding more often. I call such firms “bid mills” because it’s endless grinding out bids without any concern for winning or losing.

These bidders aren’t sophisticated, they do the same thing over and over again because survival is their only goal. This mindset carries beyond just mindlessly chasing whatever is in front of them.

Eddie chases things too, but he doesn’t win much work.

If you always do what you did, you’ll always get what you got.

Often they become hostile with subcontractors that are reluctant to bid to them. They adopt a mindset wherein opportunity is a top down proposition and can be lorded over those who work for you. It’s unfortunate because the opportunity only exists if they win. It never dawns on these folks to reply with “you may want to reconsider – we’ve won X amount of work last quarter and we’re gearing up for the summer rush”. They bid for survival so they view every invite as a lifeline. Essentially they have nothing to offer beyond shared survival.

Lots of firms start out with a similar mindset. They believe that it’s a simple matter to just “win whatever” then build it profitably with folks they hire once there is work for them. The “plan” relies entirely on luck and growth to return a profit.

They will likely discover that they need to include more overhead to deliver quality work AFTER they win a job. Then they will want to add more overhead to the next bid, so they’ll lose. They won’t be winning enough work so they will want to bid more jobs and so the bid mill is open for business!

These folks live in a state of constant disappointment going from week to week or job to job hoping for a big break. It’s depressing to think how long some companies have been doing this.

Bidding Philosophy

It ain’t gonna happen buddy…just let it go

Sow before you reap

There’s another group I call Farmers. These folks have a very short client list, sometimes only one or two. They tailor their operation to please their client(s) and they rely upon the work they’re given for their survival. Farmers are as good as their client. In most cases Farmers with good clients are relying on relationships built over long periods of time. Establishing those relationships is incredibly difficult. In most of the cases I’ve seen, it’s some combination of being in the right place at the right time and doing a good job. It’s pretty easy to know when you’ve found a farmer with a good client because they don’t try particularly hard to announce their existence. They get known for doing whatever they’re good at and subcontractors flock to them. Farmers like this are generally very risk averse so they’re not as focused on low bid as they are on perfect performance. They’re also some of the happiest people you’ll meet, it’s a good life if you can get it.

That’s not fertilizer I smell…

Farmers with bad clients are as pitiful and dangerous as an abused dog. They flinch every time their client rattles the chain, and they pass every abuse down the line. There’s a national grocery chain that used to conduct “reverse auctions” that’s a prime example of this. A reverse auction has all the bidding contractors submit their bid to a website by a deadline. A moment after the deadline, the website posts the current low bid amount along with a countdown timer for the amount of time you have to revise your number. It depends on the conditions set by the client but I’ve encountered such bids where you must cut a minimum percentage of the low number in order to revise your bid amount. Some display all the bidders, some just show the low number. If they only share the low number, you don’t necessarily know that you’ll stay the low bidder. Even worse, some of these systems keep updating the timer to prolong the bid for as long as people are cutting their bids (hurting themselves). Some go for hours.

There’s no pot of gold at the end of that particular rainbow…

It should go without saying that the countdowns don’t allow sufficient time to contact subcontractors to ask for better pricing, or to consult with anyone. GC’s have certainly cut beyond the lowest number they could achieve on bid day. Where’s that money going to come from? It will come out of the subcontractors pockets one way or the other because the farmer with a bad client can’t/won’t get work elsewhere.

Top Guns

The last group I’d identify are targeted bidders. These companies are very selective about what they will bid because they know that bidding less means winning more. They don’t chase low profit work, bad clients, or pick fights with farmers. Targeted bidders generally have more success and less relevant competition because they started by defining where the profitable work is in the marketplace. Next they establish a plan to become qualified bidders for that work. Essentially targeted bidders are “working backwards” in that they start by picking the best work they can find, then they lay a plan to address all the requirements to get there. They may very well have to start at the bottom like everyone else, but they don’t stay there for as long.

It’s not enough to win and build the work. To be a strategic move, those first projects must be the foundations of a reputation for excellence. To clients, this means doing the right thing without generating lots of “static” in the process. Smoothly run work is noteworthy work. To the subs, this means prompt and fair payment. Insulating the subs from unfair clients/design teams is a strategic investment in the GC’s reputation. Rewarding good work and constantly keeping an eye out for new talent is how a GC can keep their subcontractor bids low.

Once the GC has a reputation for winning – they can call in loyal subs and offer strategic partnerships in exchange for better pricing. Giving a sub no or limited competition (1 or 2 other bidders) greatly increases their odds of winning with that GC. Asking for better sub pricing in exchange for reducing their risk is a fair deal. Using this advantage to further their plan is how this GC works towards their goals. Until the GC has hit their target market, they use this pricing advantage to snag better work in line with their intended outcome rather than consume it as available profit. The very best work will have elite competition backed with extensive experience. Gaining a foothold in their market will not be easy. Long term commitments to staying “lean and mean” are necessary for success. However, once established, these firms are able to capitalize on their pricing advantages to an incredible extent.

How do you like me now?

A survey of the field…

I can tell you that there are very few target bidders on the market. Some of them do really small work but they’re always profitable. That’s an important point, it’s not about having huge capital behind you, it’s about knowing what you’re good at, scanning the field, picking a worthy target, and applying your resources to make it successful. Companies that do that are consistently at the top of their game.

Farmers are a little more common. A bad economy is especially tough on good farmers because they struggle with how to scale back their operation to compete profitably on the hard bid market. They’re also relatively unknown to the hardscrabble subs who are offering market pricing. They also fall into traps with bad clients because they’re entire mindset is on cherishing a single client rather than appraising them more critically. Farmers with bad clients in a recession are in a perfect storm of misery, subcontractors should beware. It’s not unheard of for such farmers to put one subcontractor out of business for each project they complete!

Know what your good at and go where it pays.

There’s never an end to the bid mills, they’re just the lowest common denominator wherever they reside. It’s really hard to tell someone at the bottom that they should be a picky bidder. These guy’s all believe the “big job” is going to come along and it’ll be a gold rush for them. Lots of gold prospectors died broke while grizzly’s got fat swatting salmon out of the same river.

“Prospector’s are tasty”

Stupid ideas

There is a pervasive and loathsome notion going around that I should address. The idea is to bid the first projects of the year with enough overhead to cover all work for the remainder of the year, after which bidding becomes “gravy” since any wins thereafter are presumably “all profit”. This is the sort of stupidity that can only come from collegiate isolation. In practice this can create an “unforced error” where 1st quarter projects can fail to materialize as expected leaving everything awarded through 2nd quarter bidding underfunded. Lots of companies have found themselves in dire straits because they failed to make every job pay for itself. Overpricing work is a great way to lose bids and very few Project Managers will run a padded job with the restraint they’d have on a tight budget.

Stupid actions

It seems like common sense but I’ll state it anyway. Overpricing work is not building relationships, honoring the client, or furthering the profession. Good value, honesty, integrity, and knowledge are all reasons a business will succeed. Getting away with harebrained schemes when clients are fat, dumb, and happy won’t count for much when times are tight. Whatever works during a recession will work in times of prosperity.

Stupid outcomes

The connections between the bidding and the corporate philosophies are important. There are firms with estimators who are bid milling and project managers who are farming. This “crop dusting” technique results in a lot of low-budget clients getting high level service at the cost of the GC and their subs. If the client is obligated to hard bid all their work (i.e. municipal work) then there is no chance of negotiated work in the future. Basically the farmer is planting weeds.

Jammed gears

Firms with misaligned priorities will find themselves in unpredictable situations. Estimators must be careful to observe what’s going on and advise to correct course accordingly. Strategic investments are only realistic when everyone understands the strategy. Many firms fail to properly develop and communicate their strategy in finite terms to everyone involved. General platitudes dissolve into messages like: “do this, for money” . Even small firms can fall into patterns of cloistered communication. If the person doing the takeoffs doesn’t know why this project is worth bidding it’s not realistic to expect their best effort when the work is thankless.

Why we’re all here

There’s an old parable about a Bishop inspecting a Cathedral under construction. The Bishop asked a Mason what he was doing – “Laying out this archway” replied the Mason. The Bishop asked an Architect what he was doing – “Designing this buttress” replied the Architect. Finally the Bishop asked a laborer pushing a wheelbarrow loaded with trash what he was doing – “Building a cathedral” he replied.

Bid with purpose and professionalism so that others will follow.

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13 Comments | tags: Bid mills, Clients, Farmers, GC, Strategy, Targeted bidders | posted in Uncategorized

August 13, 2014

Estimate Tracking

By Anton Takken

Tracking your progress

As an estimator there are typically more bids going than there is time to chase them all. It’s critical to develop a strategy for winning and that all starts with making the initial decision on whether to pursue a lead.

Some firms use a Go / no-go decision tree arrangement to allow for estimator level discretion on bid opportunities. These can also take the shape of graded appraisals which generally output an integer value correlated to the odds of winning.

Other firms won’t use any sort of culling, it’s just whatever “the boss” dumps into your inbox.

No matter what your situation is, it’s critical that you accept that your firm will be excellent at some things, OK at others, and generally terrible at the rest. It damages a lot of egos to point this out but it’s true nonetheless.

Cheer up buckaroo, thing’s get better from here.

It’s been my experience that many firms are broadly optimistic in lieu of accurately assessing their performance. These firms also tend to relentlessly chase the same kinds of work when they’re in a rut, often going so far as to double or triple the amount they’re bidding to snag more work in a slump.

I would say this is like digging for water in a desert. The land may all look roughly the same but some areas will have water and others will not. Your survival depends on finding the water with the least amount of digging.

The goal of an estimator should be to bid less and win more. This is much easier when the economy is with you. However whatever works during a recession will still work in prosperity.

If you are serious about improving your odds, you’ve got to actually know the odds. Everything you bid adds to your repository of knowledge about your performance in your market. Making that information work for you is what this is all about.

Bid tracking

To that end, you’re going to need to keep track of what you’re doing. I’m consistently impressed at how often I meet estimators who are very detailed and studious about preparing proposals but they don’t have any precise data on how their efforts stack up in the bidding environment.

Much like building practices for efficient take offs, it’s important to start by asking yourself what you need to get out of the effort to track this data. For starters, you’ll need to know what you’re doing right. It’s a success when you’re winning profitable work with a minimum of wasted effort. That’s not enough on its own because you’ve also got to keep your company busy.

To do that, you’ll need to know where your profitable work is coming from. That means knowing which clients are bringing profitable work through the door. It also means knowing what your company is good at in terms of value and scope.

Good bid tracking will generate a concise record to use as a feedback loop. Knowing your odds of success on each opportunity will help pick the likely winners and losers.

To be truly useful bid tracking should also reveal what you’re doing wrong. Like everything in estimating, it’s important to reach a balance point in terms of tracking enough data to be useful but not cumbersome. There’s little utility in over-analyzing a loss. Depending on traditions in your market it may be very difficult to get bid results from your clients. Even then, it can be difficult to get any assurance of accuracy in terms of what you are being told. In my experience if you win, you won’t receive any bid results to know by how much (or little) you secured your victory.

You only get half the story.

The tracking system is a way to be accountable for your actions as an estimator. If properly done it can serve as a means to show higher-ups the outcome of their actions as well. I encourage you to track not only past bids, but current bids on the same spreadsheet. This provides a single file that’s constantly updated.

I typically lock a header row that displays annual summaries for all tracked data points so that it’s obvious at a glance how things are going. Many companies have separate people who are making decisions on marketing, what to bid and who’s going to bid some project. Putting the entire pre-construction process on a single file helps to keep their individual goals in line with the bigger picture.

Each of these parties are looking for feedback that’s concise, impartial, accurate, and timely. Giving them access to your records removes unnecessary obstacles and increases the odds that you’ll be successful. Companies with cloistered and secretive departments rarely perform to their potential. Be advised that some managers will take any opportunity to push accounting duties onto other departments. Don’t allow yourself to become the appeals court for interdepartmental conflict.

Getting specific

I will have an estimate template posted in the future. It has several features you can choose to customize your output. The template will automatically summarize the bid data into four arrays; Client, Region, Project description, and Common link. The “Common link” would be used for situations where projects are connected via a commonality like an Architect, Engineer, Association, or Group that would otherwise go unnoticed. Be sure to correlate this terminology with marketing so that they can see how their leads are developing. For simplicity’s sake I will hereafter refer to all tracking in terms of the client array.

Each array get’s tracked in two dimensions; counts and values. The “Counts” dimension is tracking entirely based on the number of bids. The “Values” dimension is tracking based on dollar values of the bids.

Each dimension calculates the following :Bids, Wins, Hit rate, % of annual bids, and % of annual wins.

Subcontractors can face a situation where they are low bidder to their client (the GC) however the client doesn’t win. I track this as “Low” since it’s not accurate to call it a loss or a win. If your client can’t win with your low bid, they’re squandering your efforts.

The most important data points so far are the hit rates. The higher the ratio of wins to bids – the more likely you are to win future projects with that client.

If you ask five industry experts what is an acceptable hit rate, you’ll likely get five different answers. I think this is more a factor of average bid value than anything else. Companies with wildly varying project values are more likely to expect a lower hit rate. Companies with very consistent project values will tend to expect a higher hit rate. Overall market conditions carry great weight,as does the experience of your team. Anyone who was successful during a recession on the hard bid market will have valuable insight.

Thus far, all the tracking and calculations have gone on without consideration for the cost of bidding. Hit rates alone are insufficient to reveal the actual business relationship you have with this client.

I like to calculate the Return On Investment (ROI) of the clients. This is the profit of the awarded work divided by the cost of bidding to that client. After all, you’re bidding to make money so it’s important to show how your efforts generate that income.

I should mention again that just like hit rate, you must to calculate the ROI in both the counts and values dimensions. In the case of bid counts, I take the annual estimating costs divided by the number of bids per annum, times the bid count for that client. For the lone estimator, that cost is the estimator’s total annual compensation + reimbursements for company expenses like parking fees for job walks and the like. In most cases this information is confidential so I would advocate hiding and locking the cells holding your estimators compensation. I don’t expect accounting to track hours on each bid but feel free to use that information if your firm does.

So what does it all mean?

A ROI of 1 means you are breaking even on the cost of bidding to that client. A ROI less than one means you are losing money by bidding to them even if you won some work. The higher the ROI, the better investment that client is to your firm.

The average of the Value and Count ROI’s gives a better perspective on each client. Some companies will have a negative ROI for bid count but a positive ROI for bid value. This can signify a client with many projects that are too small for your firm to win but still has a few larger jobs that your firm wins and completes profitably. A positive average ROI indicates that they’re still worth your time to bid to however you might consider declining the smaller stuff to make better use of your time.

It’s also possible to have the opposite situation where you’re winning the smaller work profitably but you’re spending too much time chasing bigger jobs you can’t win with that client. Ambition is admirable but without traction, you won’t climb that mountain. It’s wiser to build on profitable wins than to let pride lead you to losses.

Sad to say, I have encountered situations where ownership was very wrong about which clients were good investments. A client with a negative ROI over a long span of time is draining resources. A “Sunk cost fallacy” where some process is costing more money than would be logical to continue. The person spending the money continues their course thinking that they’ve already sunk so much money into the effort, they can’t turn back now. Losing bids is NOT AN INVESTMENT!

Estimate Tracking

Archie lost a lot of bids too, now he’s free to focus on his other interests.

In my experience the best way to break this cycle is to demonstrate the difference between a positive ROI and a negative ROI company. The money spent on the negative ROI firms represents potential marketing efforts to work with new and better clientele.

The output of the bid tracking should be able to illustrate where you’re finding success in descending order. As new opportunities come through the door, compare them to the “ideal” project. A project that is well aligned with previous failures has a low probability of being worthwhile. In a tight market, it’s often difficult to find “ideal” jobs. In that case, make a concerted effort to find substantially different opportunities to widen your field of view.

If you’re no more certain of losing than winning, it may be worth a shot. If you’re certain of a loss you should not bid. Familiarity with lost causes is endemic in our industry so worry less about upsetting a client that never awards jobs to you and focus more on where else you can go.

If you’re having serious trouble landing work, it may be time to appraise where things are going wrong. Targeting a market involves a hefty amount of hard-won knowledge. What are the companies that are winning doing differently than you? How can you land this work profitably? If you find a way to cut the percentage of previous losses while retaining profitability you should be on the right track assuming a fair bid.

A few warnings

Estimate tracking is a long-term tool that becomes more useful with an extensive data set. Be very conservative about drawing any conclusions on short-term data. Missing bid results reduces the reliability of the dataset as well.

The tracking needs to amortize the cost of the estimators wages over the year to keep from skewing early results. This brings up a significant series of inter-related factors.

The more frequently you bid, the lower your individual investment per project bid. This is diversifying your estimating investment IF you’re bidding to a variety of clients. It’s not uncommon to find that a few clients represent the bulk of your wasted time so be wary of that happening.

The less frequently you bid, the less data you have to work on and the less secure you can be of your conclusions. Unless you’re consistently winning, it’s time to pick up the pace. Whenever possible you should seek out the “next big thing” to define where your target markets exist. It’s very common for companies to restrict their bid lists when times are good. When times get tough, (and they will) these companies are forced to play catch up.

The less commonality between your bids, the less cohesive your data will be. Companies with no criteria for what they’re looking for suffer this condition. Data driven by wild speculation tends to be very inconsistent and unreliable. Strike a balance by making a plan to target specific leads over a predetermined amount of time. Don’t be afraid to move on if things don’t pan out. Be aware that invitations to bid with little or no barrier to entry bring different competition than more restricted opportunities.

So to apply this to estimating, it’s very important that you see the connection between bidding less and winning more. The cost and effort to produce a bid can be considerable. Losing a bid means you’ve got to pay for that effort out of your wins.

Aim at what you can hit, hit what you’re aiming at, and don’t forget to keep score!

If you’re looking at a huge variety of work, there’s very little historical precedent to be had for identifying good versus bad opportunities. Luck isn’t a business plan. You need to know what you’re good at and why. To that end, opportunities that are similar to successful past projects should jump out as good choices.

Regular client, doesn’t mean they’re good clients…

Next should be repeat clients that are good clients. Devotion to a customer who’s never been profitable is rampant in this industry. Dysfunctional working relationships like these generally have key words to watch for “it keeps us busy”, or “we make up for lost profit in volume”. If the work isn’t profitable to start with, doing more only digs a hole. Every project is a risk and reward proposition. Until the job is done and paid, everything is risk. Whatever’s left is the reward. Keeping people busy by taking on risk for no profit is ignoring how often projects aren’t profitable. It would be less risk to pay them to sit at home.

It’s really critical that you know if the work you bid was profitable on its own. Lots of times companies don’t bother to track the change orders separately from the original contract scope. This leads to distortions in perception. A job with a hefty change order might appear more profitable than it really was. The opposite is possible as well. I’ve encountered folks who chase clients because they had really profitable change orders. The truth is, they didn’t actually profit on the main work and fortune may not smile on them twice.

Sure, rub it in why don’t you?

So chase work that’s similar to profitable stuff you’ve done and give special focus to good clients, that’s pretty obvious stuff.

Competition

I’ve heard folks get wound up about how “there’s only three companies bidding this project!”. Are those companies market equals or is someone an obvious outlier?

I’ve won jobs against twenty competitors and lost jobs against only one. I’ve seen enough chest thumping nonsense. So if you don’t have a unique strategy to beat someone who’s consistently outbidding you, you’re just lining up another loss. There can be profound differences between companies that dramatically affect how they price work.

If you’re not chasing work that lands within your company’s key efficiency you’re forced into a bad decision. Work that’s too small for your firm won’t be profitable at market prices. Work that’s too big for you will expose your firm to greater risk. Adequately covering that risk tends to exceed market prices.

For example, let’s say you’re chasing a project that would require hiring people to adequately staff the project. You would need to bid with your future overhead as well as the additional labor. Depending on the labor market, that could be a hugely variable issue. A larger firm with existing staff goes into that bid knowing their overhead figures are firm. Subcontractors routinely get pinched by shortages of qualified tradesman. Low supply and high demand pushes the wage rates up. It’s a bad situation for those firms.

All of that being said,the entrepreneurial nature is to chase bigger and better work. People go broke on “big jobs” they won, not jobs they lost. Humble and profitable is far superior to big and broke. It is important to ensure that there’s enough work that it’s just a little uncomfortable for Project Management to keep up.

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1 Comment | tags: hit rates, Return On Investment, Strategy, Tracking | posted in Uncategorized