A Subcontractors’ Guide to Pursuing the Right Construction Bids

Not all business is good business, especially for subcontractors. Pursuing the wrong construction bids can waste time, ruin your reputation, rack up debt, or worse—drive your business to close up shop. You need profitable, low-risk projects within your wheelhouse and aligned with your long-term strategy. 

If you’re tired of looking at subpar profitability reports and want to help your team choose construction projects that are the best fit for your business, you’re in the right place.  

This article will help subs adopt a holistic approach to financial decision-making when pursuing new construction projects. You’ll get a comprehensive overview of how your accounting team can assess the financial viability of construction bids, including how to: 

• Evaluate whether a project is a fit for your business
• Identify and mitigate construction project risks
• Manage and grow the financial health of projects 
• Develop a closeout process to make more informed future bids

Criteria for Evaluating Construction Project Fit

There’s a lot to consider when deciding whether or not you should bid on a project. First things first, you need to make sure it’s a good fit, you have the resources to execute it, and it will be profitable.  

Focus on your core competencies.

It can be tempting to bid on every project that crosses your path, but it’s important to only pursue projects that align with your core competencies. Doing otherwise can jeopardize your financial stability and overall business success. 

So, when you’re reviewing a request for proposal (RFP) for a construction project, start by scanning the logistics to quickly determine whether it fits your strategy and capabilities. 

• Market: Unless your strategy is to expand into new markets, it’s advantageous to focus on pursuing bids in industries where you’re already experienced. There’s a big difference between retail buildings, healthcare facilities, universities, and warehouses. Projects in your target industries will ultimately be more profitable in the long run.  
• Project Type: While some subs exist to build new things, others are in business to tear things down. Consider whether this is a new project, demolition, renovation, or maintenance contract. And again, make sure it’s aligned with your specialties. If you’ve only done renovation work before, you might not be fit to take on a major new development project. 
• Contract Size: You should already have an idea of what size projects are in your sweet spot. If you haven’t figured that out yet, it’s worth honing in on. You can figure this out by reviewing past projects to identify where you've been most successful and profitable. Are you looking for projects in the $1 to 2 million range? $500K to $1 million? 
• Location: Obviously, you must be licensed in the state where the project is located. So be sure you either already have the required licenses or that it makes sense for you to secure them before the project start date. Beyond that, working on job sites close to your operations can also have financial advantages. 
• Compliance Requirements: Construction compliance can be challenging for subs to keep up with. We encourage you to review any compliance requirements disclosed in the RFP and determine if you’re prepared to meet them.  

Make sure you have the right resources available.

The next thing to look at is the resources required to execute the project. Consider the target start and end dates, and whether you’ll have or can easily procure the right people, materials, and equipment to complete the work on time. Also, think about whether you have the bonding capacity and cash flow to take on the project. 

• Labor Availability: Do you have enough of the right laborers with the right skills? And do you have enough money to pay them? If the project is in an area you don’t work in regularly, research local unions to understand their influence on labor costs and availability.
• Supply Chain Analysis: Look at the required materials to see what you have in inventory and what you need to order. Then consider any potential supply chain issues. If you haven’t had a reliable cement delivery for months, it might not be the best time to pursue bids for parking garage projects.  
• Specialized Equipment: Will the project require any equipment that you don’t already have? With some heavy-duty equipment costing millions and rental fees running as much as a thousand dollars per day, not owning the right machinery and tools may be a reason to think twice about bidding on a construction project. 

Always calculate project profitability.

Let’s say the project looks like a perfect fit for your capabilities. There’s still one more critically important factor to determine whether or not you should bid on it. It’s the factor everyone should care most about—will this construction project be profitable?  

To answer this, you need to review the cost estimation and prospective bid. The estimate must be as comprehensive as possible, accounting for all labor, materials, and equipment expenses, including indirect costs like taxes, insurance, workers’ comp, employee benefits, and other overhead fees like warehouse rentals. 

If the project doesn’t meet your minimum target profit margin, raise the bid or walk away. 

Prioritize projects with favorable payment terms.

The construction industry is notorious for long payment cycles. A lot of subs may be inclined to shrug their shoulders and say “It is what it is,” but there’s a lot you can do to get paid faster—starting with the contract.

Prioritizing projects with favorable payment terms will go a long way toward ensuring a healthy cash flow and avoiding financial strain. In fact, at the NECA Emerge conference, one speaker emphasized that payment times are the most critical factor when evaluating new clients. Therefore, it’s essential to ask about payment terms up front and review contracts carefully. Consider running for the hills when you see things like pay-if-paid clauses.  

Do your due diligence on the client.

RFPs will give you all the details about the what, when, and how of the project. You should also be asking “who?” As in, who is the project owner and who would be your direct client? 

Conducting in-depth research on potential clients and GCs is always a good practice. Look at their payment history, reputation, and financial stability. Some states (like Arizona) have a registrar that allows you to search for contractors, check the status of their licenses, review any complaints filed against them, and more.

When you find projects from reputable, profitable GCs known for paying on time, move those bids to the top of your priority list.

Identify and assess potential risks

Construction projects are often wrought with risks that can quickly derail work—like unknown site conditions, rushed timelines, and potential safety concerns. The best risk mitigation strategy is a proactive one. 

You might not have a crystal ball to predict everything that could go wrong, but you do have a lot of information at your disposal to help spot risks during the bidding process. Carefully review all bidding documents, plans, and project specifications. Also consider your experience with similar projects in the past.  If you identify several high-impact or high-probability risks, you may want to pass on the opportunity.

A Process for Making More Informed Future Bids 

Accounting should actively participate in identifying which construction bids are best for the company to pursue. It’s important to approach this role with as much data as possible. Your past and current projects hold a treasure trove of insights that can help you recommend which projects to pursue in the future.

• If you haven’t done it already, audit your past projects to identify which were the most profitable, were completed on time, and had the strongest overall outcomes. Any trends that you can identify should inform your future bidding strategy. 
• Maintain a strong balance sheet for a clear view of when cash is flowing out of and coming into the business. Invoice according to this timeline and make sure you have an efficient collections process to get money in when invoices go past due. Building a cash reserve will help you weather payment fluctuations and industry downturns.
• A/R aging reports can reveal powerful insights like which GCs pay the fastest. They’re also instrumental in evaluating if you can afford to take on a specific project. 
• Start conducting a post-project review as part of your closeout process. Look at things like total profit, estimated costs compared to actual, and what portion of the project was completed on time. As you learn which projects are most profitable for the company, you’ll get smart with your bidding strategy. 

Siteline’s A/R reporting module lets subs review the financial health of every project from every angle—after the fact and in real-time. You can forecast cash flow, analyze A/R aging trends, and easily see your fastest- and slowest-paying clients. 

‍Think how powerful this data can be in making calculated bids for work that will yield the fastest payments. Curious if Siteline is a fit for your sub? You can book a demo here.