How to know if you should switch from tender to negotiated work

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No one will pay you to competitively bid for their work.

Estimating staff and even estimating time spent by operations staff is not billable. This means that all costs associated with the estimating effort fall into the bottom line of your profit and loss account, which often represents a contractor’s largest source of overhead.

With typical profit rates for general contractors in the 25% range, this means that about 75% of that cost has little or no return on investment.

I’m not saying it’s unacceptable, but it’s a big enough number to pay attention to. The higher the win rate, the better the ROI in the cost estimate. But in the environment of competitive bidding, there is a ceiling.

The best I’ve ever worked with in this area can get to 50% of competitive bids, which is rare. For every company that reaches this height, there are four that fall well below the 25% average. The bottom line is that competitive bidding can lead to significant waste.

Negotiating work increases ROI

But there is an alternative. Win rates on negotiated work tend to be closer to 75%, making project activities a much higher ROI activity and turning expensive overhead into sales for the business.

This does not mean that negotiated work is a sure thing. It comes with its own failure rate and some projects don’t move forward at all. The biggest contributor to the loss column is abandonment.

Then there’s the increased time you have to put in up front. Negotiated contractors often endure rounds of quotes and numerous meetings with owners and design teams. These can add up to hours, so larger investments in your preconstruction and estimating departments may be required.

Under the right circumstances, however, many negotiated contractors have been effective at billing for their preconstruction services. This allows them to turn what is normally an overhead department into a direct cost department, reducing the company’s overhead costs and increasing profitability.

Business model changes

Both bidding and negotiated procurement can produce healthy and profitable work, but the type of work changes your business model. Bid work can shift profit strategy into more hopeful territory by relying on winning with a low cumulative number on a set of imperfect plans.

In this area, however, being too precise often costs you your job. While winning on the low bid can provide an opportunity for significant trade orders, nothing is guaranteed. Contractors who rely on competitive bidding often also bet on additional profits through strong negotiation skills with their subcontracting community, making a profit through procurement as their own margins are too thin without it.

On the other hand, negotiating work shifts the mindset towards long-term benefits. The typical open-book nature of negotiated work removes some of the opacity that GCs can use to generate profits outside of their stated fee.

With negotiated work, there are fewer windfalls, but also fewer risks. The right mindset for this job requires a contractor to value a stable, long-term source of business over the short-term benefits of windfalls.

When this is your model, however, customer satisfaction is paramount. It doesn’t work if the flow dries up and bargain buyers have plenty of options. Operational excellence and customer service are non-negotiable.

Have your cake and eat it too

In 2021, a mid-sized GC that was doing virtually 100% tender work approached us about converting their business to 100% negotiated work. After a thorough analysis of your business and the market, we revised this goal to reach 50% negotiated work in five years.

The truth is that much of their tender work was extremely profitable, and the profitable work was almost all in a sector with very limited potential for negotiated work. Unprofitable tender work was in the private sector with clients that had significant potential to convert to negotiated awards.