Unbalanced Bidding - A Situational Bid Strategy

We believe strongly that a contractor makes the most money in the field. Building work on time and on budget is the hallmark of great contractors and also, profitable ones. However, it is not the only place that a construction firm makes money. The bid table is also. There are many ways that a contractor adds margin to his bottom line by using "work smart" strategies when proposing profitable work. Examples such as the use of the Gates Model, Dual Overhead Rate Recovery, and Job Sizing are winning methods to keep risk lower and profit higher while estimating, pricing and bidding work.

Unbalanced Bidding is another process that helps construction firms make extra margin on certain types of bids.

With the advent of Job Order Contracts and other Unit Price Contracting Methods, opportunities arise. Owners have attempted to further control costs by creating these contract terms. Business minded contractors know that for every change, there is some chance to profit from it.

For owners to use Job Order Contracts and other Unit Price methods, they must first have a count or quantity take off of the work. Said differently, they have to know the amount of work so they can compare total cost of contractor A versus contractor B. (versus contractor C, etc)

The count is performed by someone working for the owner. It is maybe the engineer, the architect or an outside firm. As we contractors know, the count is sometimes inaccurate. Sometimes, it is not meticulously taken off hence, an inexact take off.

Unbalance bidding is a method to approach an inaccurate count by the owner or client. Here is the basic approach.

1. On under counts, use a higher than market unit price
2. On correct counts, use a average market unit price
3. On over counts,  use a lower than market unit price

Let's take under counts and over counts. These are the two areas that unbalanced bidding applies. This project has both undercounts and over counts.

Under counts:

• Owner thinks that there is a quantity of 100 units.
• Contractor A knows that there is "X" work of 50 units.
• Contractor bids $9 a unit while others bid $10 (the market price). The bid margin is cut to 18%. Makes sense since we aren't going to do much of this work.
• Owner sees Contractor A bid at $900 – others at $1,000. Contractor A's price is low.

Over counts:

• Owner thinks that there is a quantity of 100 units.
• Contractor A knows that there is a quantity "Z" work of 150 units.
• Contractor bids $10.90 a unit while others bid $10 (the market price). The margin is raised to 22%. Makes sense since, we are going to do a lot of this work.
• Owner sees Contractor A bid at $1,090 – others at $1,000. Contractor A's price is high. However, when you combine the total bid, Contractor A is lower that the other bidder. $1990 versus $2,000.

At the end of the job is where this strategy makes sense:

• Quantity of "X" work installed is 50 units at a bid price of $9 = $450 revenue at a margin of 18%
• Quantity of "Z" work installed is 150 units at a bid price of $10.90 = $1635 revenue at a margin of 22% 
• Total revenue is $2085 at 21% margin. This is a more profitable job than if we bid it "balanced"

Unbalanced Bidding is an effective way to benefit from careful estimating of actual quantities. Thoughtful site review and / or good quantity take-off are essential. The job cost of the work is the same for both contractors but, you have taken an entrepreneurial approach and profited greatly.

We are being compensated for our careful, thoughtful takeoff. We work in the second riskiest industry in the United States and we are underpaid for it. 3% is the approximate average of net profit for construction firms. Not a lucrative business in the least.

Using a business approach to contracting is a rational choice. Unbalanced bidding is one of those business approaches that make sense to unit price contracting methods.

For more information on this critical subject, purchase a copy of my McGraw-Hill book, Managing a Construction Firm on Just 24 Hours a Day. We offer a bundle with Excel templates that are featured in the book and 5 on-line courses to help teach construction business concepts. Go to www.stevensci.com and click on the book link

Our workbook companion with 10 case studies is titled, The Business Managment Workbook for Construction with Case Studies is now available.This text is focused as an assist for Colleges, Associations and Contractor Training Programs that teach the business of construction.

My next book, The New Business Model of Construction Contracting is planned for December 2007. Its focus concerns the changing construction environment and what processes address those changes.

Matt Stevens is President of Stevens Construction Institute, Inc. A management consulting firm which works only with construction contractors. Learn more at www.stevensci.com. Take a free course at www.constructioncbt.com and sign in as a new student.