Bidding Strategy
Bidding Strategy
Bidding Strategy
Presented to
DTIC by
F I-ECE1 E
APR 19 19WO Ronald S. Barr
March, 1990
Presented to
by
Ronald S. Barr
In Partial Fulfillment
of the Requirements for the Degree of
Master of Science in Civil Engineering
Approved:
Faculty Advisor/Date
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AB STRACT
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T'ABLE OF CONTENT'S
PAGE
REFERENCES .................................................. 35
ii
APPENDIX ........................... 36
Contractor Interview Form............................ 37
Cover Letter to Contractor ............................ 40
CHAPTER I
I NTRO]DUCT~IOcN AND OBJECT IVES
1.1 Introduction
4. Location of project
5. Number of competitors
1
6. Duration of project
7. Workload
9. Size of bid
inflation, etc.)
1.2 Objectives
when devising their bidding strategies and determine how they vary
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CHAPTER 2
IDATA CCLL 3 .C_- I C) Nr
articles by [Ahmad 88] and [Tavakoli 89] and a book by [Berger 77]
are fewer layers of markup and they can better control the
3
work.[ENR 84]
estimates.[Berger 77]
time efficiency for both the author and the contractor (compared
4
or a branch office in the Atlanta, Georgia, area. The companies
told the purpose of the survey and assured that all reporting would
05
this question was superfluous because there was not sufficient data
gross revenue.
system that helps the contractor determine the correct overhead and
overhead and a base fee in the usual manner. The expert system then
provides a correction multiplier for overhead and one for fee based
rates each factor) for each factor that applies. These factors
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bidding strategy models.
However, these tools are not widely used. Concerning the use
2.4.3 Factors
conditions are and to tell how he varies his bidding strategy based
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2.4.5 Predicting the Future
The fifth question asks the contractor how far out into the
construction industry bust period will occur during that two years.
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0
CHAPTER 3
SLRVEY R:ZIESJLT S
3.1 Introduction
factor in the order found on the survey form. Each contractor has
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FACTORS
A B C D E F G H I
CONTRACTOR 1 2 1 2 3_______
1 (N) X X X X X
2
2(N) X X
3 (A) X X X X X X X
6 (Q X X XX
9 (S) X X X X
10 (S) X X X X X X X X
11 (S) X X X
12 (S) X X X X
13 (S) X X X X X X X
S14 (A,Q) X X X X X
15 (Q,S) x X X X X X X
16 (A,Q,S) X X X X X X X X X
517 (A,Q,S) X X X X X X X
Table 1 Survey Results - An "X" indicates the contractor
01
3.2 Fundamental BiddingqStrateqy
mostly strategic, and four (Contractors 14, 15, 16, 17) use two or
more of these strategies. Of those who said they use two or more,
strategies.
strategies are:
they will bid work but only on a selected bidders list basis.
will charge the least for his services (e.g., fee, general
conditions.
11
available, they will bid on jobs. Contractor 6 stated that all
labor costs and he does not reduce his fee or unit costs to be more
fee, overhead, and unit prices when he has a reason to bid a job
If he does not think he can win a bid with that standard fee
included he will not bid the job. He must include overall company
smaller jobs (i.e., less than $20 million) so he does not usually
bid those jobs. When he varies his bid price he only adjusts his
his unit prices. If he wants a job badly he will use lower unit
12
prices than he would use if he was not as anxious to get the job.
job. He looks for low competition but sometimes bids volume when
has had success and jobs where he knows the owner and has had a
Only two contractors (12%) stated that they use any analytical
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the size of the job), his own labor force (he will not take a job
that requires his own labor cost to exceed his fee), and general
wants in that time period he will tighten his bid (use a lower fee
14
2. If there is less work available, Contractors 3, 7, 8,
and 12 use lower overhead and fee in their estimates to try to win
during lean times, Contractor 8 performs some of the work with his
the volume of work he wants. He may put less fee in a bid but he
a lean year and bids more aggressively in the early part of the
up on work to carry him through that period. He looks for jobs that
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anticipated lean period.
when work is less available he will bid on jobs outside the Atlanta
3.6 Competition
All but one of the contractors said that who and/or how many
competitors there are for the job plays a role in their bidding
are too many competitors (Contractor 3 said about ten is too many;
Contractor 13 said between six and eight is too many); but if they
the competition.
pretty select.
are too great that at least one of them needs the job badly and
against "home town favorites" and contractors who routinely bid low
on jobs.
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bidders. If he decides to bid against a lot of competitors he will
too many, Contractor 17 said more than six is too many because the
need the work and will underbid to get the job. If Contractor 8
a small job but will bid against a lot (unless there are an
competitor may cause him not to bid (e.g., a competitor who bids
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3.7 Economic Conditions
contractors are:
projected inflation when they are bidding on a job that has a work
to predict the materials he will buy each year and escalates those
than one year by adding a lump sum to eacrh cost category (e.g.,
a factor are:
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pretty much the same way so this is not a determining factor in
Ten contractors stated that their own labor force was a factor
win a bid if they need the job to keep their supervisors working.
people varies with the geographical area and he accounts for these
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employed.
people employed.
Contractors 4 and 14, who said they do not consider their own
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inflated wages to get: the people he needs and he thinks this will
union wages without paying the union benefits he will bid on jobs
work in areas with weak unions he must consider the national force
of the unions. His treatment of the unions in one area could lead
he has with the unions, the unions must beat the open shop price
or Contractor 10 can use open shop labor. In some cases the unions
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progress to reduce the profitability of the job to the
subcontractor.
necessarily avoid jobs in strong union areas but he does stay away
3.11 Subcontractors
receive bids from when he is negotiating for work and takes open
owners who negotiate to get their work done typically are more
concerned about getting a quality job than getting a 1nw cost job.
to reduce his bid even though he realizes that his competitors may.
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4. Contractor 5 will only use bondable, reputable
account for the risk he is taking that the low bid subcontractor
good work for him previously. If he really needs the work he will
the bid but will try to get a better subcontractor to do the work
that he works with regularly and he generally lets all three give
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unsolicited bids from subcontractors and when he gets a low ball
the low ball estimate and the other bids that are usually grouped
fairly close together and takes the chance that he may have to use
him bids for work that he is negotiating with the owner. When he
bids on public work, where the lowest bidder usually wins, he takes
a chance and uses the subcontractor who offers the lowest bid.
good subcontractors when they are hungry for work but he will not
bid from among those he feels can do the work. Contractor 17 will
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them.
comments are:
and sometimes avoid bidding on a job that they expect will have
poor cash flow. Contractor 1 does not have to finance jobs because
25
owner is able to pay on time.
submittal.
tries to avoid jobs with low cash flow but to stay competitive he
because they have gone to zero percent retainage and provide money
of poor cash flow but he would not bid on a job more aggressively
loans to his bid when cash flow is low and he must finance the job.
intention to pay for thf work, he will ask the owner to provide a
set-aside letter from his lender. The set-aside letter must state
that financing has been approved for the job. The contractor then
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inspectors verify the work is completed as billed. Contractor 15
aside letter.
3.14 Overhead
Six contractors said overhead is a consideration in their
overhead.
by reducing the fee and overhead in his estimate when he needs work
to cover his overhead. He also shops around for better prices from
suppliers and subcontractors and may ask them to give him special
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3.15 Other Considerations
contractors bidding.
his bidding strategy. He said that when the job is negotiated, the
job and the general contractor has the money he needs to hire the
competitors are and that they all generally use similar bidding
strategies so there will not be any low ball bids. In this case he
uses subcontractors that he knows will do good work and who give
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thinks will be too difficult.
he doubts the owner's ability to pay for the work he will not bid
on the job.
determine the market conditions are as follows (how far into the
selected bidders lists. He does not use the Dodge Report because
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4. Contractor 4 asks the owner who the competition is before
Data. (Varies)
Data. The number of bids from, and the unit prices used by (lower
the Dodge Report and talks to owners to determine what their long
range needs are and who the competition will be. (One to two years)
30
one year)
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CHAPTER 4
CNONLUSICNS AND FUTURLE RESEARCH
4.1 Conclusions
simply that he has not previously but might under different market
conditions.
competition for a job is a factor for most contractors and (b) the
there was usually wide variation in how they change their bidding
32
strategies based on that factor.
that one might try to make from this information. The contractors'
companies.
Chapter 3 offers into the wide range of ways that contractors vary
the owner is able to pay, might benefit from using the set-aside
surveyed for this paper do work nationally, most of them work only
33
that were not reflected here.
these jobs the same way that they manage the jobs they obtain by
negotiation?
34
RE FERENCE S
35
0
APPEN]D I )~
0
36
0
CONTRACTOR INTERVIEW FORM
Date:
Contractor:
Address:
Telephone:
Point of contact:
37
0
diversify to respond to market changes, competition changes,
clients needs)
1) Seasonal
D. Labor environment
38
3) Strong union area or not
I. Others
5. How far in the future does contractor look when making a bid on
a current job?
6. Remarks:
39
Date
Mr. John Doe
XYZ Construction Company
Any Street
Atlanta, Georgia 12345
Dear Sir:
Per our telephone conversation today, I have enclosed a copy of
the survey form I have been using to collect information from local
general construction contractors about how they vary their bidding
strategies depending on market conditions. My report will not
identify companies or individuals. I will use this information to
write a research paper for my Master of Science Degree in Civil
Engineering from Georgia Tech. I have enclosed a return envelope.
Your responses to numbers 1 and 2 will help me categorize your
other responses with similar companies. For number 2, please
indicate which of the three fundamental bidding strategies (A,B,C)
your company follows. If your company uses a mixture of these or
is better classified some other way, please indicate this. Please
indicate what, if any, tools your company uses to make bidding
strategy decisions (e.g., whether or not to bid, how much to mark
up).
For number 3, please indicate for each factor or subfactor whether
you consider it in your bidding decisions and if you do, how you
might vary your bidding stategy for that factor or subfactor. To
give you an idea of the types of variations I am referring to, I
have listed some examples.
Short answers that provide detail but fit within the space provided
should give me the information I need without requiring a lot of
writing on your part. If you have any questions, or if after seeing
the questions you decide it would be more convenient for you to
answer over the telephone, please call me at 881-8770.
Ron Barr
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