Construction bidding presents a challenge: setting the right profit margin amidst uncertainty. Globally, a $15T industry relies on competitive bidding. The tension between profit desires and loss aversion prompts tools for informed margin decisions, aiming to curtail leaving potential profit on the table.
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In construction bidding, one aspect stands out as a challenge: determining the elusive profit margin. The uncertainty that shrouds this decision can be agonizing.
Globally, a substantial chunk of the $15 trillion construction industry relies on competitive bidding, where securing a project hinges on having the lowest bid. In the United States alone, annual highway and road construction work amounts to a staggering $200 billion, primarily operating on the principles of low bids.
Competitive bidding entails contractors submitting their lowest prices to secure projects. The bidder with the most economical offer wins the contract.
The weight placed on the individual responsible for setting profit margins is immense. Why? If the profit margin is set too high and the bid is lost as a result, it's a public display of failure. The repercussions extend beyond personal embarrassment, potentially leading to a shortage of projects and/or employee layoffs if one’s profit percentages are consistently above the market. Conversely, an excessively low profit margin that wins a bid comfortably could result in missed revenue. Every dollar left on the table by the low bidder is potential profit squandered. This balance teeters on the edge of a zero-sum game, where either you win or your competition does, and can create an emotional and reactionary tit for tat.
To further complicate matters, cost estimates that the profit percentage is added on top of must be accurate. Company ownership's yearning for greater profits often collides with management's aversion to losses, creating a tension that's palpable. The crux of the issue lies in this paradox: more profit versus fear of losing.
Amid this landscape, tools are being forged to equip margin-setters with comprehensive data for informed decisions. Insights from backlog data, historical bid spreads, and predictive competitor pricing models are offered to empower them.
While solutions in this domain largely center on estimating and cost management, a broader perspective beckons. The untapped potential lies in minimizing the common trend of leaving around 7% of potential profit on the table. A modest reduction to 4% could translate to significant gains, like an additional $1.5 million to the bottom line for a $50 million contractor.
This is the puzzle being unraveled - a quest to balance ambition and prudence, to improve how margins are chosen. We're venturing to alter the game's fundamental dynamics, channeling missed opportunities into gains. And we are optimistic about what we continue to learn every day.
At Edgevanta, our proprietary SaaS software platform helps highway contractors win more of the work they want at the right price with the least amount of hassle.
Thanks for reading our post.
Sincerely,
Tristan Wilson
Co-Founder and CEO
Edgevanta
