Construction bidding allows eligible contractors to compete for building projects and win clients. It provides clients with a fair and transparent process to hire the right contractor for their project, leading to a successful and positive construction experience. So how does bidding work? In this detailed blog, we will explore the basics and nuances of bidding on commercial projects.
What is Bidding in Construction?
Construction bidding refers to the process where interested contractors submit a tender or proposal to prospective clients to undertake a construction project. Subcontractors follow the same procedure when pitching their services to the general contractor.
Using construction plans, blueprints, and material lists, the contractor prepares a realistic cost estimate (with a profit margin) and sends it to clients as their final price to manage the entire project. This fixed price proposal received by clients is called a ‘construction bid’. In essence, project bidding involves contractors committing to completing a construction project within a specific budget and timeline.
Note that construction bidding and estimating are not the same things. The former predicts the final costs to develop and manage the structure while the latter determines only the internal costs (labor, materials, etc.) to build the structure physically. The difference between the bid amount and project expenses is the contractor’s profit.
The more accurate bids a construction firm provides, the more bids they win. Across the industry, a bid-hit ratio of 5:1 is viewed as successful, meaning for every five projects the contractor bid or propose, they are awarded one.
What’s Mentioned in a Construction Bid?
A construction bid package entails all the necessary documents that a client requests from a contracting firm through Request for Proposal (RFP) or Invitation for Bid (IFB). In the RFP, the client includes a letter that describes all project details for contractors to bid accurately. Contractors carefully study this bid package and start developing proposals to win the contract. Recent trends report shows that on average, organizations win 44% of their RFPs.
List of fundamental components mentioned in every successful bid:
Basic Information – The names, contact details, and addresses of the parties involved, site details, and a place for signatures.
Project Description and Scope – Project name and a detailed description of scope of work, type of contract and project delivery method. It will also describe all services the company will provide, strategies, photographs, and illustrations of a detailed plan it plans to execute.
Timelines and Schedule – A start-to-end schedule that breaks down individual timelines for each phase.
Potential Concerns – After studying the RFP, bidders can mention potential risks, specific code requirements, or any other scope for modification related to the project.
Qualifications – Through a Request for Qualifications (RFQ), the issuer can ask for a summary of the contractor’s experience, qualifications, and past projects, including references and testimonials from previous clients.
Terms of Contract – An explanation of the terms and conditions of the proposed contract, including payment terms and schedule, warranties, and any other relevant provisions.
Bid Price – A breakdown of the total cost of the building structure including the Bill of Quantities that itemizes the required materials, parts, labor, and their associated costs. In addition, the service costs of general contractors and subcontractors, contingency amount, overhead costs, and profit.
Basis of Bid – Documents such as drawings, specifications, reports, sketches, photos, and addendums the company used to determine the bid price.
Company Information – Mentions company name, phone number, email address, bidder’s name, and contractor’s license number.
Supporting Documents – Copies of the standard agreement, bonding, liability insurance, and financial statements of the company.
Alternates – Optional items that can be added to the project, along with their associated costs.
Summary – A brief recap of the prominent aspects of the bid proposal, including the estimate.
Types of Construction Bidding (Tendering) Methods
As mentioned earlier, a construction bid is a fixed-price proposal to execute specialized construction work. During the construction bidding or tendering process, government entities or private organizations invite qualified and interested contractors to submit sealed bids or tenders for the supply of services or products. Organizations submit tender request documents in the form of an Invitation to Tender or Request for Tender (RFT) that specify project requirements, criteria, and standards to be fulfilled by the service provider. The commercial contractor that meets the selection criteria of price, timeline, and technical expertise ultimately bags the tender.
The core intention of the tendering process is to evaluate the ability and competency of a contractor in an unbiased manner. Therefore, selecting an effective tendering or bidding method assures that the right professional will be hired. Appropriate bids and tender management processes improve the quality of the finished products and reduce risks.
In order to invite bids, a property owner will use one of four standard tendering methods – open tendering, negotiated tendering, selective tendering, or serial tendering. Let’s dive into the pros and cons associated with each of these methods.
1. Open Tendering
Because open tendering keeps bid opportunities open to all, it is generally used for government projects. An open tender advertisement invites all interested contractors to submit their quotations and bid on the project via tender documents. It has greater scrutiny of bids which eliminates corruption and collusion. Open tendering is typically used for large-scale projects that require significant investment. Private organizations also opt for the open tendering method if they are unfamiliar with the suppliers’ landscape or plan to switch from an existing vendor.
Pros: High levels of competition and transparency provide owners with better prices.
Cons: Large lists can be time-consuming. The chances of hiring an inefficient candidate are greater.
2. Closed or Selective Tendering
In selective tendering, the client advertises their project and invites contractors who will later be shortlisted for bidding. Contractors are asked to give a list of information about themselves in order to ‘pre-qualify’. Only selected contractors who are financially secure, experienced, and have the necessary skills and resources are invited to place bids on the project. This tendering method addresses the drawbacks of open tenders by filtering contractors with the necessary qualifications. It is the most appropriate tendering method for complex or specialized contracts.
Pros: Cost-effective and consumes less time. Guarantees that only qualified prospects are allowed to tender.
Cons: Restricted scope for new entrants and may lead to favoritism. The tender price is higher than open tendering.
3. Negotiated Tendering
Under a negotiation tender, the property owner identifies a suitable contractor and negotiates a contract with them from the tendering process to the dispute resolution stage. Typically, this arrangement involves a single contractor but allows for a maximum of three contractors. The selected contractor may be from the clients’ list of preferences or advised by a consulting team. Negotiated tendering is also known as ‘two-stage tendering’ as it is divided into two phases: pre-contract negotiations and post-contract negotiations. It works well for projects where the contractor is also a stakeholder and has a long-term business relationship with the employer, or the construction work is urgent. Negotiated bidding is usually found to be practiced in the construction and engineering industries.
Pros: Offers an accelerated and dependable procedure in emergencies or in situations when there are security concerns.
Cons: Anticompetitive and may restrict work available to other companies.
4. Serial Tendering
In serial tendering, contractors create tenders based on a bill of quantities (BOQ) or schedule of works. This submitted price proposal is used to value works over a series of similar projects for a fixed period of time, after which the tender may be repeated for more projects. The tender documents define the scope of work, the term of the contract (often 1-5 years), an estimate of total costs for the term, and the size of individual orders. Serial tendering may be the best option for clients who want a single contractor to handle a regular supply of work. For example, building a series of offices, hospitals, and shopping malls or dividing work into smaller packages such as foundation work, interior finishing, tenant improvements, etc.
Pros: Encourages bidders to submit low rates and enhances innovation in ongoing work.
Cons: Exclusive and prevents other players from submitting alternative bids.
3 Key Decisions to Make Before Construction Bidding
When bidding on a project, companies need to review the project plans and specifications. This is to understand how the project is being built, what criteria will be used to select a bid, and how their costs and profits will be covered. An owner must make three key decisions before issuing an RFP: (1) the project delivery method, (2) the procurement method, and (3) the contract type. Understanding all three will significantly make the bidding process more advantageous for both parties.
5 types of Project Delivery Methods are as follows:
- Design-Bid-Build (DBB)
- Construction Management at Risk (CMAR)
- Design-Build (DB)
- Integrated Project Delivery (IPD) and
- Public-Private-Partnership (3P)
The 5 major categories of Construction Procurement Methods are:
- Best Value Method (BVS)
- Negotiated Method
- Sole Source or Direct Select
- Low Bid
- Qualifications-Based Selection (QBS)
Although there are many contract types, the 5 most common are:
- Lump Sum
- Cost-Plus
- Time and Materials
- Unit Price
- Guaranteed Maximum Price (GMP)
Step-By-Step Construction Bidding Process
The bidding process for construction projects usually follows these 5 phases: bid solicitation, subcontract, bid submission, bid selection, and contract formation. Let’s study each phase in detail.
Phase 1: Bid Solicitation
Firstly, the property owner or their representative will issue a Request for Proposal (RFP), Request to Tender (RTT), or an Invitation for Bid (IFB) to the general contractors. Public bid invitations are advertised for all available GCs to bid whereas private bid invitations are sent to selected general contractors. Interested contractors who meet the requirements will be able to submit a bid.
Phase 2: Subcontract
In the second phase of the construction bidding process, contractors may solicit bids, proposals, or RFIs from subcontractors for specialized parts of the work. They develop their own invitations to bid that contain detailed information on the project and its scope of work. The GC then disperses invitations and project documents to potential subcontractors via various channels. If subcontractors have questions regarding the documents, addenda is shared, which usually provides clarification or missing information.
Phase 3: Bid Submission
As the bid submission date approaches, subcontractors present their bids to the general contractor bidding on the project. The GC reviews each sub-bid and selects the winning subcontractors for different trades based on the required criteria. Next, the GC adds the subcontractor proposals to calculate their final bid price for the project and completes the bid package. They may also send any supporting documents the owner has requested.
Phase 4: Bid Selection
When it comes to bid selection, commercial property owners take into consideration a variety of factors beyond price. For example, professional experience, safety records, subcontractors’ resumes, scheduling philosophy, or even interview sessions. As contractors submit bids in a wide range of formats and prices, the bid solicitor will attempt to standardize them through ’bid leveling’. This process enables the owner to compare their similarities and differences and make a more informed decision about the right candidate for the job.
Phase 5: Contract Formation
Once the owner selects the bid, both the general contractor and owner enter into contract negotiations. The two parties will negotiate contract terms like schedule, payment terms, and insurance requirements before a legal contract is formed. If they cannot agree on the terms and price, the owner can move ahead with another contractor and resume negotiation. Once a satisfactory agreement has been reached, both parties will formalize it by drafting and signing a contract.
Finally, your team begins the construction work based on the selected project delivery method.
How Do Contractors Prepare Construction Bids?
Construction estimation involves developing a construction estimate, a document used by general contractors to submit bids. Estimators assess all construction costs including direct, indirect, overhead, and GC profit margin. Generally, the process begins during the bid estimation phase of a project. Construction companies will use separate documentation provided by the client for bidding and estimating. They are mentioned below.
Documents for Estimating – Architectural drawings, technical specifications, contracts, and construction bonds.
Documents for Bidding – Bid invitations, bid instructions, bid forms, and supplementary documents.
While preparing estimates, contractors should follow the Code of Ethics rolled out by the American Society of Professional Estimators (ASPE). The accuracy of the construction estimate will influence the contractor’s profit margin. For this reason, construction businesses must conduct thorough construction estimations in order to remain viable. Furthermore, it allows contractors to bid more competitively when trying to win new business.
To calculate accurate prices, the bid estimators leverage some of the following tools and information:
- A historical cost database and unit prices
- An estimation software
- Stick estimating
- Market trends
Today, construction bidding software help create, track, and manage bids. These bid management tools come with valuable features like project management, contact management, reporting, and analytics that offer a competitive edge over others. In a recent study by Dodge Construction Network, researchers found that 69% of civil contractors use an online tool to find opportunities and submit bids, with 88% leveraging bid notification systems.
Factors to Consider While Estimating a Construction Bid
Count the following costs when developing a construction bid estimate:
Direct costs: Expenses associated directly with the construction of a facility such as materials, labor, and equipment costs. Direct costs make up the largest percentage of a project estimate, ranging from 60% to 80%.
Indirect costs: Costs not directly associated with construction activities including personnel costs, utilities, quality control, administration, permits, security, contingencies, legal fees, etc. Indirect costs typically constitute 10% to 20% of the estimate.
Labor hours: Labor costs cover 20-30% or more of the total bid price. These are wages or rates paid to the team with an estimated cost for each task and potential overtime.
Subcontractor expenses: About 10-20% of the estimated expenses for duties that are handed out to subcontractors including labor, materials and equipment.
How Do Clients Evaluate Construction Bids?
Bid evaluation is a process that takes place after the submission of the contractor’s response to the RFP. The tender implementing agency opens and carefully examines the submitted bids to identify the preferred suppliers of goods and services. Later, it may enter into negotiations with one or more shortlisted prospects before awarding the contract to the most suitable. This process is sometimes referred to as tender evaluation or tender adjudication.
The evaluation process has multi-attribute criteria, and the client needs to merge diverse standards into one evaluation scale. When conducting a bid analysis, clients take into account criteria such as technical expertise, safety, financial security, and reasonable pricing. According to Tenders Info, each tender response receives a score against each criterion, with 0 being the lowest score and 10 being the highest. Depending on procurement methods, the assessor can use different techniques to evaluate a tender. The most common assessment process is to multiply each criterion’s score by its weightage, then combine the two for a final average score.
Once the bid evaluation process is complete, the participating firms are notified of their tender scores and the contract award is announced.
Factors to Consider While Evaluating a Construction Bid
When evaluating a tender, the project owner may take into account the following factors:
Price: Cost estimations and their influencing factors like unit pricing, labor and equipment rates, overheads, and profits concerning their quantity and quality are evaluated. Bids can be ranked from the highest to the lowest or vice versa.
Compliance with the Invitation to Tender: The bid should include all documentation and information requested by the bid issuer. They may comprise deadlines, specifications for quality and performance standards, project-specific costs, certifications, and licenses. Additionally, the bid should conform to all applicable regulations.
Past Performance and Relevant Experience: The bid solicitor assesses the submitted list of past references and reviews previous similar projects. They will contact these references to know how various challenges were resolved with corrective actions and verify overall customer satisfaction.
Technical and Managerial Skills: The owner or a consulting engineer checks the bidder’s documents to see if they meet technical and managerial requirements. These may include operating costs, specifications, execution capabilities, compliance checks, workforce sources, and management knowledge.
Resource Availability: Proposed staffing plan showing the quantity and qualifications of personnel assigned to the job, availability of equipment inventory, and material procurement plan.
Legal and Financial Security: A company’s financial standing is evaluated through its credit score, financial statements, bank references, and bonding capacity.
Safety and Health: Review of safety records, experience modification rate (EMR), OSHA incident rate, and management safety accountability.
Conclusion
In commercial construction projects, the bidding process provides a transparent way for property owners to fetch suitable service providers. Moreover, it is an effective way for construction firms to win clients whose needs align with their expertise. The probability of a contractor winning a contract is directly proportional to the accuracy of their bid proposal. Bid participants should thoroughly understand the client’s expectations and evaluation criteria in order to reduce their bid-hit ratio.
Besides selecting the appropriate delivery method, procurement method, and contract model, owners should be careful that they don’t award contractors purely based on the lowest price. It’s wise to identify the best value tender, based on their predefined criteria that relate to the aspects of the contractor’s performance. Oftentimes, lowering the price means lowering the quality.
Looking for reliable construction services for your next project? We are here to help you.
From ground-up construction, renovation, remodeling, and tenant improvement services, Constructive Solutions, Inc. has successfully executed commercial building projects across multiple industries in San Francisco and San Jose.
Contact us today to get a quote.
FAQs
What is included in a construction bid package?
A bid package typically includes project specifications, drawings, contract documents, bonds, bid forms, and any other information necessary for contractors to submit an accurate proposal.
What are some common mistakes to avoid in the construction bidding process?
Underestimating costs, overpromising project timelines, and failing to submit a complete proposal.
How can I find and connect with clients looking for construction services?
Today, many governments and public construction entities use online portals to solicit bids. One can search for good contract opportunities on top construction bidding websites.
Relevant Resources:
- How Do I Choose a Good General Contractor?
- 10 Common Mistakes To Avoid When Hiring a Commercial Contractor
Constructive Solutions, Inc. is a full-service commercial construction company serving San Francisco and Bay Area.
Whatever your vision, we have the resources, experience, and insight to make your concept a reality, and a space where your business can flourish.
Call Us Now for Estimate
