The Cost of Bidding

Consultancy

One aim of the MarketingWorks 2014 Bidding Cost Research programme, developed in association with Professor Will Hughes of the University of Reading, was to understand more about the cost of bidding for construction projects.

MarketingWorks encourages clients to capture this important data on an ongoing basis, rather than relying on isolated surveys. We provide them with capture tools and processes as, when analysed, it delivers invaluable information at a company level.

In this article, I outline the key cost findings, the relationship between bid costs and project size and what this means to us in practical terms. I also encourage the industry to consider the influence of the number of bidders for projects on the cost of bidding to the construction industry and its customers. When the cost of losing is significant and the typical length of a tender list in this survey means there will be 3-5 organisations that invested resource with no return, I ask if it is time for a new approach to achieve greater cost efficiencies for all parties.

Looking at the bid cost as % of project value

From this survey sample, in 2014 the average cost of bidding was calculated at £60k for contractors and £24k for consultants. However as those average bid costs cover a broad range of project values from <£2m projects to >£250m, we decided to also calculate the bid costs as a percentage of the project value as this gives an alternative and more revealing perspective.

The bid cost worked out, across winning and losing bids, to be 0.57% of the total project value.

Bid result
Overall results Lost Won Total
Value of bids with cost data £3,767m £4,288m £8,055m
Overall cost of bidding £2.57m £4.60m £7.17m
Cost as % of value 0.48% 0.65% 0.57%

Overall this data set indicates that when consultants and contractors invest more in the work-winning process on a bid, they are more likely to win. In this sample, the investment in bids that won is 25% greater than for bids that lost, with the average cost of bidding for losing bidders being 0.48% and for winners 0.65%.

The significance of these figures in practical terms

Whilst these percentages may not seem significant at first glance, where contractors sub-contract a large proportion of the construction work, these figures can make a significant impact on the retained operating turnover.
For consultants the key number is how much of the project value is actual fee. It would be worthwhile for consultants to look at the cost of bidding in the context of fee income as the project value does not give a true picture.

For smaller projects (less than £5m) the proportion of bid cost to project value is highest.Here the win rate will have a considerable influence on the pipeline/ cost to win/ processing systems, especially if there are many, smaller bids. Clearly, efficiencies and a methodical approach to selectivity are crucial to avoid unfocused activity and unnecessary spend.

Equally it is vital that all companies manage their opportunity pipeline; the number and nature of the opportunities and the likely costs to win them. This is particularly the case where there are many, smaller bids.

Companies have to be sure that they have the necessary processes, systems and tools in place, with people mobilised, empowered, enthused and with the right skills to create winning bids.

Is it time for a new approach?

These results challenge the industry as to whether it is still a relevant strategy to have so many bidders. The more bidders, the greater the cost to the industry as both winning and losing bids represent a significant investment by the industry.

For the bids submitted to this survey, the median number of bidders is five, which aligns with the typical length of a tender list (between 4 and 6). There are slightly fewer competitors in the private sector and more bidders (and therefore more losing bids) in the public sector.

This may well be challenged by procurement advisors, but if the industry genuinely wants to lower costs, then exploring viable alternatives to current approaches would be advisable as there would be a significant saving for the whole industry and its customers in having only three bidders.

In our opinion, it is a concern that so many respondents were unable to identify how many competitors they faced as this would be expected to be part of a bid selection decision.

The importance of being selective

Given the cost of winning work, the single, most important tool organisations should deploy or revitalise is one that dynamically enables more effective selectivity

It is a timely reminder that, whereas the focus of companies in the recessionary market has been on managing a diminished number of opportunities, as the number of opportunities increases, the industry faces more complex choices and decisions. The activities undertaken to win bids also need to adapt accordingly

Bid selection will become increasingly complex, with many variables, so companies need to evaluate further their own specific markets, processes and governance to manage this effectively. There is a huge opportunity to better manage this investment in the industry, but from this sample we can only make general statements across a broad range of project types and sizes, of organisation types, of sector types etc.

The survey outcomes suggest that organisations should delve deeper into the cost of bids and where time is being spent on various elements of a bid, especially if it can be related to or taken together with the information on reasons for winning/losing bids. This will help the organisations and the industry to identify areas for improvement.

This knowledge would equip them to make more consistent bid/ no bid decisions and inform them where best to focus their investment.

Solutions to achieve more consistent bid/ no bid decisions

MarketingWorks offers a range of solutions to help our clients achieve these objectives including bespoke, easy-to-use bid selection tools that help contractors and consultants to quickly evaluate their bidding opportunities, enabling consistency and transparency in decision taking.

By using MarketingWorks’ Selectivity and Reporting Tools you will be able to avoid waste by refocusing resources and effort on enhancing the quality of those bids where they have the highest chance of winning.

Observations on the bid costs submitted to the survey

The sample represents a large proportion of the construction work carried out last year in the UK and is a good representation in the key areas of measurement:

  • Sample value vs market value: £8bn costed bids submitted in £11bn total value of bids submitted
  • Total value of contractors’ (only) winning bids with bid cost data is £4.09 billion – 3.7% of 2014 construction market value (£110 billion quoted as the 2014 value of the industry. Source: Office for National Statistics Output in the Construction.)
  • 179 respondents; 118 with cost data.
  • Almost even mix of won / lost bids in the sample.
  • Good spread of procurement routes, project values, selection methods, sectors (broadly in line with planning data* for new starts by sector 2014)

The fact that 61 of the participants who provided a great deal of data nevertheless were unable to provide estimates of time and cost invested in the bid indicates that many construction companies probably don’t have enough data easily available to contribute to a survey such as this. This may be because they do not consistently capture what overhead is being spent (and where) on work-winning activities. There were also other gaps in data provided by some contributors. For example: how many competitors they had on the bid; the sector; the procurement routes. The assumption being that either not enough was known, or that this information on the bidding environment was not shared. This information should have been captured as part of a bid selection decision.

MarketingWorks is a leading business development management consultancy, specialising in work winning in the construction industry. The company provides an array of tools, guidance and mentoring support that helps construction organisations to embed client-centric work-winning behaviours, processes and culture which ensures they win more work. MarketingWorks has provided services for over 1000 construction firms, including 9 of the top 20 contractors and 5 of the top 10 consultants.

We can work with you to identify desirable changes in behaviours and processes and then with your teams to uplift their capability, achieving rapid buy-in to desired behavioural change resulting in dramatic and immediate improvement..

Philip Collard, Managing Director, MarketingWorks Training & Consultancy Ltd Tel: 07973 501599
Email: philipcollard@marketingworks.co.uk Follow: Philip Collard @Win_Work

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