Understanding Construction Bidding

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by Paul Wheaton
May 24, 2024

Read Time: Less than 13 Mins
Last Modified: May 24, 2024

Accurate construction bids are an essential part of running a successful construction company. You’re probably familiar with a construction bid, having gone through the motions of the construction bidding process already, however, understanding the ins and outs of construction bidding can make your proposals more precise and give you a competitive edge.

According to Knowify, 60% of all contractors are putting in higher bids due to stresses on the industry resulting in a more competitive landscape. Having a detailed understanding of how to bidbetter can help you win projects without breaking the bank.

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In this article, we examine the construction bidding process to help you understand what an owner is looking for so you can bid more effectively and manage more profitable jobs.

Key Takeaways:

  • A bid refers to the detailed proposal made by a contractor to show how their company would complete a project at a specific price and timeline.
  • An owner will not accept a bid that is over a feasible budget for the project or has too few details about how the project will be completed.
  • The bidding process starts negotiations between the contractor and project owner while the bid itself is a foundation for future contract negotiations and possible jobs.
  • The way you structure and what you include in your bid will be influenced by the specific tendering method used for the project.
  • A bid must be carefully crafted as bids with missing details, inaccurate numbers or incomplete calculations will most likely fall short of the competition. Construction digital takeoff and estimating software can help maintain accurate estimate and takeoff calculations.

Construction Bids

A construction bid, also known as a bid package, refers to the detailed proposal made by a contractor to show how their company would complete a project at a specific price and timeline.

A bid acts like an offer, outlining:

  • Contractor Information: Including contact details and relevant licenses that identify the company submitting the bid.
  • Project Understanding: Demonstrating the contractor’s grasp of the project scope, specifications and requirements.
  • Cost Breakdown: The estimate that accounts for all estimated materials, labor, equipment, permits and other project-related expenses.
  • Timeline and Schedule: Proposing a realistic project completion timeline, while outlining key milestones and probable completion dates.
  • Qualifications and Experience: Highlighting the contractor’s relevant experience, expertise and past performance on similar projects.
  • Contractual Terms: Including warranty details, liability and dispute resolution procedures that outline the proposed contract terms.

The owner of a project will select the most qualified and cost-effective proposal. This process is what makes the bidding process very competitive. An owner will not accept a bid that is over a feasible budget for the project or has too few details about how the project will be completed. Which is why having an accurate estimate and takeoff calculations can make or break a bid.

The Importance of A Construction Bid

Construction bidding catalyzes construction projects. This overall bidding process kicks off negotiations between the contractor and project owner while the bid itself acts as a foundation for future contract negotiations and possible jobs. Because of this, a bid is a crucial document for the construction company that must be carefully crafted. If bids are missing details, have inaccurate numbers or are incomplete they will most likely fall short of the competition.

With that, a well-crafted bid stands out, improving the chances of winning the contract. Once the job is secured, the bid will have created a foundation for price, timeline and execution, helping to serve as a guide and outline throughout the job and as a template for future projects.

Choosing a Bid

Let’s examine the bidding process by discussing how you get the chance to bid. Known as the bid solicitation phase of the process, there are two different ways an owner can offer contractors an opportunity to bid on a project: an Invitation for Bid (IFB) and a Request for Proposal (RFP).

Although both are used in the construction bidding process, they cater to different scenarios and prioritize different aspects of a proposal. Here’s an explanation of the difference between an IFB and RFP in construction bidding:

Invitation for Bid:

An IFB, sometimes referred to as an Invitation to Bid (ITB), is used by project owners to solicit bids from potential vendors or service providers that differ in price. Think of an IFB as a shopping list. It clearly outlines exactly what the project owner needs and specifies how they want it done.

  • Focuses on price: Contractors submit bids with their best price to complete the project according to the detailed specifications provided in the IFB.
  • Limited room for creativity: The IFB has strict guidelines, leaving little room for contractors to propose alternative solutions.
  • Faster selection process: Evaluating bids is simple because it mostly comes down to price. The contract is typically awarded to the lowest qualified bidder that meets all the requirements.

Essentially, use an IFB for simple, well-defined projects where getting the lowest price is the priority.

Fixed-price contracts are the most common types of bid contracts used with IFBs. In these, the price submitted in the bid is typically fixed during contract negotiations. The burden is on the contractor to accurately estimate all costs upfront. However, there might be very limited exceptions for unforeseen circumstances, usually with strict change order procedures.

Request for Proposal:

An RFP is a more formal document outlining the project’s requirements used to solicit proposals from interested contractors. Think of an RFP as more like a design challenge. It outlines the project’s goals and desired outcomes but allows flexibility in how to achieve them.

  • Focuses on qualifications and approach: Contractors submit proposals showcasing their experience, qualifications, and a detailed plan for completing the project. Price is still a factor, but not the only one.
  • Encourages innovative solutions: The RFP allows contractors to propose creative approaches that might be more efficient or cost-effective.
  • More complex evaluation: The selection process is more involved as the owner considers price, the contractor’s experience, the proposed methodology and the timeline. This may involve presentations and interviews.

You should use an RFP for complex projects where expertise and innovative solutions might be beneficial.

Cost-plus contracts are the most common types of bid contracts used with RFPs. Here, the owner reimburses the contractor’s actual costs, with an additional fee for the contractor’s services. So, the final price can fluctuate based on actual costs incurred.

Negotiated contracts can be used with either IFB or RFP. This involves discussions between the owner and the chosen bidder to finalize the contract terms, including price. There’s more flexibility to adjust the price based on negotiations, but it usually stays within a reasonable range of the initial bid.

Construction Bidding Tendering Methods

The differences in bids depend on the project owner’s chosen tendering method. Tendering refers to the process of inviting contractors to submit bids or proposals for a project. It encompasses everything from how the owner solicits bids, what information they provide, how they review them and ultimately, how they award the contract.

The way you structure and what you include in your bid will be influenced by the specific tendering method used for the project. For example, a public contract, typically a government-owned or funded project, and a private contract will not require the same information. Knowing the common tendering methods will help you prepare the proper type of bid.

There are generally, four tendering methods:

Open Tendering

This is the most common type of bid solicitation and requires contractors or builders to submit their bids to the project owner without prior contact with the owner. Owners will then review each bid and select the one that meets their criteria.

The open bidding tendering method fosters a competitive bidding environment. Contractors compete for these jobs and is almost guaranteed to be awarded to the lowest bidder. This pressures contractors to reduce costs as much as possible and include an accurate estimate.

It’s important to note that not all owners strictly adhere to the lowest bid philosophy, a lower bid may be more likely to win but some owners will choose to award the bid that offers the best value.

Negotiated Tendering

Under a negotiated bid, the project owner will contact a contractor directly. Instead of holding an open bid selection, there will be an unofficial agreement to use a specific contractor’s company while the project details are sorted out. During these negotiations, contractors will tailor their bids to match the owner’s specifications.

Selective Tendering

The process of selective bidding is similar to negotiated tendering, but instead of contacting a single contractor, the owner will invite a select group of several contractors. This often creates more competition among potential builders while giving the owner more options to weigh.

In this process, contractors will work to structure their bids to meet the owner’s needs. The value is often highly considered during this process. If a contractor can provide a superior team or has a strong track record of performing this type of project well, they stand a better chance of winning the bid.

Serial Tendering

Project owners typically use serial tendering when handling a large number of jobs that are identical in scope. Contractors will submit bids in groups using the same pricing model on a predetermined plan.

This method allows project owners to assess the performance of identical projects while reducing the burden of having to conduct multiple open-bid RFPs. Serial tendering may also be used when an owner has repeatable work on a schedule they would like completed by a single contractor.

The Construction Bidding Process

Each project is different, however, there are typically five phases to the construction bidding process.

  1. Bid Solicitation

This refers to the owners sending out an IFB or an RFP.

  1. Bid Submission

After assessing the project details, contractors will create their bids and submit them to the owner before the deadline. Sometimes owners will incorporate a “qualifying round” where the list of potential bidders is narrowed down for further evaluation. During this phase, some owners will request a more detailed bid or more information to make their decision.

  1. Bid SelectionPhase

Depending on the tendering method chosen, the owner will evaluate bids to find a qualified contractor who meets the criteria for the project.

  1. Contract Negotiation Phase

When a bid is selected, the owner and winning contractor will enter contract negotiations. This will require them to finalize the final project cost, working conditions and timeline.

It is during this phase that a bid price may be adjusted. As a general rule of thumb, the initial bid price will be used but there may be room for negotiation depending on the bidding process, contract type and reason for adjustment. Most adjustments are made due to minor clarifications made to the project scope or unexpected conditions discovered during construction.

The negotiation will also establish the chosen billing contract type. Some common billing contracts include:

  • Lump sum/fixed price
  • Cost plus
  • Time & materials (T&M)
  • Unit pricing
  • Guaranteed maximum price (GMP)
  1. Project Delivery Phase

Once the contracts are signed, work can officially begin via the owner’s chosen project delivery method. This refers to the overall method of executing the project and outlines how construction will be completed. The four most common project delivery methods are:

  • Design-bid-build: The project is divided into three distinct phases: design, bidding and construction.
    • Design phase: The project owner contracts an architect or design team to create a comprehensive set of plans that outline every aspect of the project.
    • Bid phase: The project owner solicits bids from contractors outlining the cost of construction, project timeline and their qualifications.
    • Build phase: The project owner selects a contractor based on their criteria and they begin work on the project, following the design specifications outlined in the construction contract.
  • Design-build: This method involves a single entity, often a design-build contractor or firm, that is responsible for both the design of the project and the construction of the project.
  • Construction management at risk: This method involves a construction manager who works with the project owner during the design phase, and later takes on the role of contractor.
  • Integrated project method: This method requires the early involvement of all key stakeholders, including owners, designers and contractors, in a single contractual agreement.

The delivery method is chosen in tandem with the contract negotiation phase. Once the delivery method is solidified, the job will begin according to the project scope.

Best Practices for the Construction Bidding Process

According to Blackridge Research and Consulting, a bidder will likely win one out of every eleven submitted bids. Ensuring you are submitting accurate bids is crucial to ensuring your company is selected. With that, always remember to:

  • Thoroughly review the bid package: Take your time with the bid procedures, carefully review the specifications from the RFP and make sure your documentation is correct.
  • Bid on a project within your expertise: To avoid mistakes that can become costly, make sure your team is prepared for a job within their qualifications.
  • Conduct a site visit: Before submitting the bid, be sure to look at the construction site. Failure to consider site conditions, such as the natural environment or access limitations, can be costly.
  • Check your estimate: An inaccurate bid can reduce your profit margins and keep you from winning jobs, be sure your estimate and takeoff calculations are correct.
  • Address your strengths and weaknesses: Be sure to highlight your strengths as a competitor as well as your qualifications and education, but also be sure to point out any potential risks or concerns you can overcome. This transparency can increase your chances of winning a project.

See How McCormick Can Improve Your Construction Bidding

To win more profitable jobs, it’s essential to create more accurate bids. By having accuracy from the start, you greatly increase your likelihood of getting selected. Consider using construction estimating software to ensure your projects are being estimated correctly.

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Finding a solution that is right for your company is crucial. The most robust solutions allow you to complete estimating and takeoff in one system, keeping all the required budgeting information on one drawing in one place. Tools like McCormick can streamline the estimation process and improve accuracy and efficiency. With built-in templates per trade, estimators can use the software to upload information quickly while building bids.

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