4 common bidding errors to avoid

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Accurate bidding is critical to any construction company that wishes to be profitable over the long haul. Here are four common bidding errors that you need to avoid:

1. Miscalculating direct costs. Items such as labor, materials and subcontractor fees are typically referred to as direct costs. They tend to be relatively straightforward but mistakes can happen if, for example, you:

  • Use inaccurate or out-of-date labor rates,
  • Use labor rates that omit certain costs (such as payroll taxes), or
  • Overlook minimum wage requirements, such as those imposed by the Davis-Bacon Act.

If you have trouble getting the numbers right, consider using estimating software or upgrade the system you have now. The right application can make the bidding process more efficient and help you avoid these common errors and many others.

2. Relying on inexperienced subcontractors or suppliers. If your bid is based on low prices quoted by inexperienced subcontractors or suppliers, the savings can be erased if they fail to deliver. For example, a novice subcontractor may require additional supervision — increasing your labor costs. And an unreliable supplier can cause delays and other costly problems.

3. Underestimating indirect costs. The only way to develop an accurate bid is to understand a job’s true costs, including indirect costs. These are costs you incur to keep your business running, such as rent and other office expenses, equipment, supplies, clerical staff salaries, insurance, marketing and accounting.

Build a system for allocating indirect costs that makes sense for your company. For example, many contractors allocate indirect costs based on direct labor hours and include equipment costs (such as depreciation and maintenance) in overhead. But if certain jobs are more equipment-intensive than others, allocating equipment costs based on direct labor hours may mean that you’re underestimating the projects’ true costs. To improve accuracy, allocate equipment costs based on actual usage.

4. Not including profit as a line item. Building a profit cushion into your bids can help protect your company against the risks and uncertainties inherent in the construction process. But simply calculating profit as a percentage of total estimated costs may not accurately reflect your risk.

A better approach is to use a higher percentage to mark up riskier costs, such as labor, and lower markups for more predictable costs, such as materials.

If you would like additional information or to discuss the topics mentioned, please contact Tim Ayler, CPA at 317-260-4401 or tayler@greenwaltcpas.com.