Business of making money

By Ron Coleman

When it comes to the bidding process, there are several options when it comes to getting projects. There is the invited/select bid process, the design-build process, or the negotiated process. Here in British Columbia, we used to have a “Division 15” bid depository, but it went the way of the dodo years back.

Relying on the open bid process means that there are often many contractors bidding on the job, and some don’t have the qualifications to complete the work, or to even complete a solid bid. One issue is often the specifications and drawings. They are not very complete because the engineers have not been paid sufficiently to prepare comprehensive bid documents.

The contractor who makes the most mistakes is the loser who becomes the winner by getting the job at a poor price. Their options then are to work very efficiently, cut corners, or be aggressive with change orders or a combination of all three so that he can make a profit.

If you are being awarded 10 per cent of the jobs you’re bidding, that means that all the cost of you bidding on 10 jobs has to be recovered on the one job that you have been awarded. This is a no-win situation for the client and the contractor. I would recommend you reduce the number of open bids that you quote.

Pre-approved

Getting on an invited/select bid list is far better as the specifications are usually clearer and the competition has been pre-qualified to ensure they can do the work. Usually, there are no more than four bidders so your chances of success and making a profit is far better.

If you ask one of the major general contractors how much work they bid, you’ll be surprised to find that the answer is virtually none. They tend to collaborate with owners or owners’ representatives and then go out to tender to the trades. As a mechanical contractor, if you can become a contractor of choice for these general contractors and get involved in the design-build process then your chances of making a profit are significantly improved.

Most of the value-added changes that could be made to a contract are made before the bid documents are issued. Getting in on the ground floor is a huge advantage. Often the bids only consider the construction costs rather than the life-cycle costs. Adding value and eliminating activities that add no value saves time and money.

Another option for mechanical contractors is to negotiate with an owner. This happens more often in retrofit projects such as boiler refits and other major mechanical replacement work. This requires great relationships with the client and the technical expertise to design the project to ensure that life cycle costs are included. I would consider this a very effective way of sustaining a profitable contracting business. Usually, to get such a project, you have to have the service contract, as this is where you build the client relationship.

Official guide

The Canadian Construction Association released an official guide, titled “CCDC 23– 2018 A Guide to Calling Bids and Awarding Contract.” When valuing a contracting business, it is generally accepted that the more open-bid work you do, the less valuable your business is.  

With average pre-tax profits running around five per cent for mechanical contractors, we can’t afford to waste timing bidding jobs that are high risk or low reward. The following guidelines should help you cull the jobs that you are less likely to be awarded or make a profit on. 

Firstly, if the job size or type is not within your level of expertise, now is not the time to experiment. Forecasting timelines is critical for ensuring you have the resources to complete the job in a profitable and timely manner. If there are more than four or five bidders, do you really want to bid on the job? 

Staying within your geographical area reduces risk significantly. It can be difficult to get rewarded for “out-of-town” work as there are many unseen variables. 

Additionally, working for the right client is important. Some clients have very rigorous procedures that they will have to follow. Make sure you are aware of that before you bid. Also, ensure that the customer is looking for a reputable contractor. Don’t bid against the crazy guys. “Know your client” is the mantra. This will reduce risk significantly. 

Make sure you complete a comprehensive bid from good tender specifications and get a fair reward for the risk. 

Dual overhead recovery 

Jobs that are more labour intensive are higher risk and use higher overhead than those with a higher rate of materials or subcontractors. This is why general contractors work on small margins as they take a very little risk. 

Ask yourself, which job has the least risk and which job are you likely to be awarded? 

If the type of work you do is fairly consistent, then the percentage of labour-to-sales should also be consistent. If your percentage of labour is increasing, it usually means that you are not marking up your labour sufficiently or marking up your other elements of direct cost (materials, equipment, and subs) too high. You need to get your markups in balance. 

Look at the last five years of your financial statements and divide labour into materials and subs. What is the trend? If you are showing an increase in the labour ratio, it means you are not pricing your jobs accurately. 

FMIcorp.com wrote an excellent program on dual overhead recovery, which I covered in one of my 10 Gold Seal programs that I wrote for MCA Canada. It went into mathematical formulas for determining mark-ups for labour and materials depending on job size and labour to materials ratios. 

No matter which bidding process you are involved in you need to ensure that you are not increasing your risk by taking on labour-intensive jobs without getting a higher profit reward and ensuring that you are recovering a higher level of overhead. Overhead is not a factor of sales so much as a factor of the amount of labour you have to manage. A boiler is a boiler every hour of the day. Labour is not so constant. Most of your management time is spent managing labour. 

Kerry O’Brien, a Toronto-based engineer (now retired), wrote a great book covering “On-Site Productivity.” He makes the following claims that by all parties working together on a project you can improve outcomes as follows.  

Your plan of action should include twenty per cent of the completed work generating around 80 per cent of your profit. If you focus on that 20 per cent, you are in the business of making money. Make that your focus.