Understanding the Variables of Successful Bidding -- Part One

Comparing Tables 1 and 2 shows how easy it is to be fooled by the numbers, even though we know that simply moving a cost from one line to another would not affect profitability.

But it does raise several important questions. Does your current estimating process accurately account for your company's real-world costs? Would fine-tuning the process give you a better handle on your expenses and your true break-even point? And, would this understanding lead to more accurate – and ultimately more successful – project bids on jobs that are worth winning?

Now let's consider a scenario that many construction pros have grown uncomfortably familiar with – a decrease in sales. In Table 3 we see that our direct labor costs have increased as a percentage, not because of added workers, but because sales volume has declined.

Table 3

Without adjusting the company workforce, direct labor costs actually increased as a percentage of sales by 25% (from 40% to 50%) while sales dropped by 20% and direct labor costs remained the same.

This multiplier effect shows how critically important it is to understand and monitor the true, real-world costs of doing business, to allocate them appropriately between fixed, variable and mixed costs, and to react nimbly with proper adjustments to the company's expense centers, especially in the area of labor costs.

Unfortunately, too many business owners fail to realize the impact that fewer direct (i.e., project generated) labor hours has on their company's fixed overhead. Others may recognize it but aren't sure what to do about it.

In Part Two of this series, we will delve further into the importance of accurately determining break-even, setting realistic profit margin and factoring these numbers into bids that will win future business.

Sal Falzone is a partner in the Boston area accounting and business advisory firm Rucci, Bardaro & Barrett PC. Through the firm's Construction Business Services Group, he offers business, financial and strategic planning advice to companies in transition. For specific questions about the variables that go into successful project bidding, contact Mr. Falzone at (781) 321-6065 or salf@rb-b.com.