Bid costs are rising while life-of-project profitability shrinks

Bids eat into margins. But with clients ever more demanding, bid costs are rising while life-of-project profitability shrinks. We need to generate bids that win good contracts and don’t swallow the profits! Not only that, but the Government is pushing for greater transparency in bid management processes as it moves to counter allegations of corruption in the run-up to the 2012 Olympics.
 
WCI’s Andy Robson, “Organise your bidding process in the right way and you’ll find that your new bid process ups the win rate reducing bid cost per contract; nets you contracts that achieve forecast profits and provides a standard, auditable process to satisfy compliance requirements”.

Public sector clients have become sharper and smoother in handling the tendering and contracting process. They’ve fostered a realistic atmosphere that’s helped the industry to start improving bidding efficiency and accuracy. According to a survey by the Major Contractors Group, covering 2003-2005, bid costs are gradually falling, while scheduling and project control are more accurate and more in-line with bid details.

Good news: creating opportunities for new work and then bidding successfully are key to survival in construction. But there is a long way to go before the mainstream of the industry catches up with current best practice in other industry sectors. This means that improving bid management still offers the best and quickest route to higher profitability Unsustainable costs? If you are a contractor you may not be so worried about bid costs, but 3% is still significant as margins tighten. If you are a consultant then bid costs are business critical.

Reducing costs per bid will help, but the big payoff comes from increasing win rates. On these figures a 5% improvement in win rate is equivalent to a 25% reduction in costs per bid! For large and complex PFI (Private Finance Initiative) contracts, the stakes are even higher with bid costs running into the millions e.g. average of £2.4m for school contracts and £11.5m for hospital contracts in 2005 (ref. Major Contractors Group survey). At 6 - 8 % of contract value, PFI bid costs impact significantly on margin, even if you win every time you’re short listed! No wonder the major players in the construction sector recognise the need to reduce bid costs, but even more, to get the process right and increase win rate.It sounds hard, but there’s plenty of headroom if you’re prepared to transform your process and challenge your assumptions. And disaster if you don’t. The answer is not simply organisation nor technology, but the combination of people, process and technology.In this paper, we are concentrating on the overall process, and on the importance of knowledge management and supporting IT.

A key word is ‘portfolio’. The excellent organisation has a portfolio of actual and potential projects, and a portfolio of bids balancing available resources with future activity, matching the expertise and resources available. You need a smoothly flowing pipeline full of opportunities, coming through at the right rate – and supplying a constant stream of valueIdentify opportunities. But where will all these jobs come from? The motherhood-and-apple-pie advice is “don't include apparent opportunities rashly, but do always assess against your experience, favouring best fit projects. Ask “Is this what we’re looking for to keep our portfolio balanced?” Other good questions are, “Can we apply a template we've developed before?” and “Do we want to do more of this? Is it worth it if it doesn't generate a useful template?The successful company does more than wait for invitations. To develop a planned portfolio into real projects, you have to be pro active. So focus on the right opportunities – not just the ones that are out there, but the ones you’ve nursed and nurtured, even floated yourself. Strive to develop initial leads you pick up so that your efforts focus on the projects you’re best equipped to do.

When you see a potentially good fit, get in early. You’re trying to eradicate surprises. So don’t make it a series of blind dates, maintain relationships with clients and potential clients! It’s this rapport that, for instance, enables you to front the argument about bid cost recovery, so that everyone knows where they stand, with no surprises.

Today, the technology is here to support this ‘Customer Relationship Management’, whether it is simple contact management and knowledge-sharing, e.g. using Microsoft Outlook and SharePoint, or complex account planning and data mining using a CRM application. But the technology alone will not improve the identification and management of opportunities. It depends on the quality of information provided, which in turn depends on the attitudes and behaviours of all those involved.
 
Knowledge management - Your portfolio development is underpinned by knowledge and how you manage it. Timing is critical. You need to be always managing value, attractiveness against competence, resources and value to the company.If you do not have the right management software, tried, tested, up to date and accessible, you will struggle to juggle the individual projects and their requirements against the overall resources and time available to your organisation. Project and bid progress must feed up to a corporate level model that takes a global view of operations so that you don't, through zealous operation in one project, run into a resource problem that threatens other projects and your corporate reputation.

Many construction companies already use dashboard style project management systems to monitor individual projects against Key Performance Indicators (KPIs) and Service Level Agreement (SLA) criteria. A modern dashboard system puts live data onto a screen near you, complete with alerts if any of the things you are measuring go outside their pre-set range, or if the system needs information or action from you. You can also see easily how urgent the alert is. When you need to know more, or to act at a more detailed level, you can ‘drill down’ through data and status information, identify the root cause of a problem, correct it and even alter the parameters or add notes for others. The areas and depth of access vary with individual need: security is paramount!

The ideal system flags up risks and problems, as they emerge, to all those who need to know, in time for them to respond swiftly and accurately to keep the project (in this case, the bid) on course. But however smart the IT, the system won’t deliver without high levels of collaborative working – internally as well as externally - with suppliers, partners and clients. Not a strong tradition in the industry, but construction cannot move forward without it. Other industries have done it.

Once you have the management will, a culture that rewards early and honest alerts, supported by training and the right kind of management software, all help.Happily, there is excellent Microsoft software that addresses just these problems, readily adaptable to individual corporate need, for example Enterprise Project Manager (EPM) and SharePoint. It can give a portfolio view of projects across the organisation, and the ability to assess resource implications.

Sometimes, to keep your hat in the ring, you do have to bid for poorer fit projects... But avoid bidding when you really don’t want to win! You can’t win ‘em all, and the below-the-line management cost is too high.For similar reasons, don’t be tempted to go for more work than you could handle. It’s traditional, but it costs. The portfolio approach does recognise that not all opportunities will be won, but by filtering at each ‘stage gate’, and accurately assessing the probability of winning, a realistic balanced portfolio can be maintained.

The risk of under or over winning, and the equally common timing dilemma, can be reviewed as scenarios and contingencies are planned to handle these dangers. Today’s software makes that a reality.Garbage in, garbage out. Project and bid data are only as accurate as the figures the Project Manager feeds into the system. Inevitably, that means hidden contingency inflation – everyone likes room for manoeuvre! That’s natural. But make accuracy and currency of data a KPI, and the software will highlight the weaknesses.

Continuous improvement - A good knowledge base and a knowledge management system that’s widely accessible but allows those needing more detail to drill down, is essential to make the most of the template approach to bid preparation. It enables you to develop quicker, easier to use, more efficient templates, revising and refining with every cycle, so that they address what the client wants to know.

Risk management is often the difference between winning and losing, and between profit and loss in delivery. Building the experience and knowledge base, and collaboration links to answer the questions, allows more effective management and mitigation of risk. For example, you can use a database of risks to identify those relevant to the project, quantify the risks using reference data and standard quantitative analysis techniques, and test mitigating actions to identify the most effective responses. The risk register can be shared, tracked and aggregated to a company level for corporate risk management.

Every bid is not a new adventure; your bidding should get steadily better with every opportunity. The more you learn, the more comparative data you have, the more you become able to standardise, select, predict – and the more accurate your costing will be. You begin to identify what drivers change with each project, and in what way. You can also begin to spot aberrant internal figures earlier and deal with them. It’s a learning curve, a process of continuous improvement; or it had better be!How mature is your bid processToday, the major contractors are good at the costing side. The big improvements are going to come through: managing the bid team and managing client relations improved collaboration and repeatability in bid execution developing a world-class stage gate review process so that you go for the right opportunities and achieve results.

When you’re trying to transform yourself, it helps to know where you are now and where you want to be.  It plots degree of expertise in bidding against the processes of bidding. You can use it to construct your ‘maturity profile’, which shows where you are up to speed and where you need to improve. It also indicates what you have to do in order to get there. The tool grades expertise on a continuum of innocence, through awareness, understanding and competence to excellence.

You position your organisation along this continuum in terms of People and Organisation, Processes, and technology Where do you need to be on the maturity profile

An investment is needed to move up the maturity scale and not everyone can be or needs to be excellent. Identify where your company is on the scale of innocence to excellence, and where it needs to be. If there is a gap, then ask the question “what are we doing to improve the bid. The fact is, one way or another, most companies need to transform their bid management process; moving up from the costing focus into portfolio-based, technology-powered, client-centred systems that provide accuracy, transparency, efficiency and control

The benefits? Fewer surprises, a clear overall picture on all bids: co-ordination, reduced costs, increased win rate, and a smooth flow of best fit jobs. A standardised, clear, repeatable process will also provide clarity around decision-making and ensure compliance