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Nobody is going to pay you for competitively bidding on their work. 

Estimating staff and even estimating time invested by operations staff is non-billable. That means all costs associated with the estimating effort fall to the overhead line in your profit and loss statement, which often represents a contractor’s largest source of overhead. 

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

I’m not saying that’s unacceptable, but it is a large enough number to pay attention to. The higher the win rate, the better the ROI on estimating costs. But in the competitive bid environment, there’s a ceiling. 

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

Negotiating work increases ROI

But there is an alternative. The win rates on negotiated work tend to be closer to 75%, making project pursuits a much higher-ROI activity and converting expensive overhead into sales for the company. 

That’s not to say negotiated work is a sure thing. It comes with its own failure rate, and some projects don’t move forward at all. The greatest contributor to the loss column is abandonment. 

Then, there’s the increased amount of time you have to put in upfront. Negotiated contractors often endure rounds of budgeting and numerous meetings with owners and design teams. Those can stack up the hours, so there may be greater investments required in your preconstruction and estimating departments.  

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

Business model shifts 

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

In this area, however, being too accurate often costs you the job. While winning on the low bid can offer an opportunity for significant change orders, nothing is guaranteed. Contractors who rely on competitive bids often also bank on securing additional profit through strong negotiation skills with their subcontracting community, securing profit through buyout, as their own margins are too thin without it.  

On the other hand, negotiating work shifts the mindset to long-term profit. The typical open-book nature of negotiated work eliminates some of the opacity GCs can use to build in profit outside of their stated fee. 

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

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

Having your cake and eating it too 

In 2021, one mid-sized GC doing virtually 100% bid work approached us to convert its business to 100% negotiated work. After a thorough analysis of their business and the market, we revised that goal to reach 50% negotiated work in five years. 

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