Bidding Burden Must Come Down

A 2015 published survey of bidding costs among contractors and consultants makes for some worrying reading. That the costs are high and rising is widely appreciated within the industry but to see the extent of the problem spelled out will be a shock to some.

The survey from Marketing Works shows that contractors are spending sums equivalent to 2% or even 3% of their turnover on bidding for work on which many will be grateful to earn a 1% margin – if they can avoid a loss. Firms with a one in five success rate are spending as much as 22% of their own in-house operating turnover on bidding. Some costs on some bids can be met by the supply chain but this is obviously a heavy burden for any contractor to bear.

The problem of big dollar bid costs for projects regardless of the size is an issue of its own, but this survey shows the growing scale of a problem affecting an entire industry. Clearly something is wrong; and it is getting worse. A previous survey in 2003 found that contractors were spending some $2 million a year on bids, and costs look like having trebled since then. There has been an upsurge in consultants offering bidding advice, but little of this seems to have resulted in better outcomes across the industry, although individual firms might feel they are doing well.

Many industries complain about the high and rising costs of bidding, so construction might not be all that unusual. A survey from bid consultants Shipley in 2011 found that across a much wider range of industries than construction, mostly in professional services and telecommunications, sums equivalent to some 3% to 5% of the contract value were spent on bidding. For service industry companies this rose to between 6% and 13%. Only about half of companies knew with confidence what they were even spending on bidding.

So the problem is not confined to construction – but these industries do not earn the same low margins as construction, so their prize when they win is greater in percentage profit terms and there is a greater pool of past profits from which to draw to fund bids. Against this background the growth in popularity of frameworks – at least among those who win places on them – is understandable. Bid costs can still be high and there are still upfront costs, but they can be spread over a larger number of projects over the framework’s life.

One of the holy grails of contracting has always been to avoid the big loss making contracts; any fool can win work with an unrealistic bid, but making a profit has always been the hard nut. With more being spent on bidding than can be earned from delivering projects on time and on budget avoiding those loss makers is more crucial than ever.

With all of the consolidation that there has been in the industry over the past ten years or so, the costs of preparing bids that turn out to be abortive are becoming concentrated in fewer and fewer companies. When shareholders fully realize this there could be some senior management blood on the streets. To save their own skins contractors will have to either increase their margins – another holy grail – or get more efficient at the bidding process, in terms of bid costs and success rates.