the project's necessary resources
The types and quantities of resources needed to complete the project must be taken into account.
1. For a relatively modest amount of revenue and profit, certain projects may be quite challenging or spread out over a big area. The corporation can accomplish a bigger turnover (thus producing more profit) using the same number of employees, so it is obviously better to focus on these projects. Other projects with a similar profit and revenue may require less monitoring and management.
2. It's preferable to submit bids for projects that match the skills of the staff that needs work because some projects, of course, are better suited to particular employees. For instance, if a business needs to hire more building supervisors but doesn't have any spare concrete supervisors, it should submit a bid for construction projects rather than civil ones.
3. If a company has a lot of equipment that is mostly unutilized, it can be beneficial to win a project (even at a lower margin) that would make use of the equipment and generate income for it.
Unfortunately, some businesses submit bids for projects they lack the necessary employees for and end up winning them. This implies that they will need to hire new workers for the project. Because hiring is typically done quickly, some new employees may not be the best or most qualified and are merely used to fill positions. The company's procedures, safety and quality objectives, and behavioural rules are typically unknown to the new hires. This frequently results in issues that could harm the business's brand and financial standing.
Simple is best.
The initiatives that are easiest to complete and least appealing tend to be the most lucrative.
Our business struggled for many years to land a project with a certain client because they were typically building several new projects at once. We finally had our chance one day. For the client, a significant rival had built a brand-new processing facility. The majority of the work was finished, but many small details still needed to be completed, as with many significant undertakings. The other contractor only wanted to work on bigger projects and wasn't interested in tackling them. We accepted the managing contractor's offer to do the remaining works since we were eager to begin serving the client.
Not only was this work profitable for us, but the customer also offered us chances to take on more projects after we finished the first one, which led to us finally becoming their preferred contractor.
We used to often say that if a project received an honour or had gorgeous photos on calendars, it almost surely lost money. This is obviously a generalisation and not always the case. However, it frequently happens that the projects with the best appearances are also the ones that are most expensive, hazardous, and difficult to build. Many of my most lucrative ventures are hidden from the public's view.
One of our main rivals constantly pursued megaprojects that made for interesting headlines but rarely generated the significant profits they were hoping for.
Threats to the project
Given that some projects might be quite risky, it is crucial that the contractor is aware of the risks associated with a contract. Do you really want to build a bridge across a river during the rainy season? These dangers may be attributed to a weather-related incident. They might be connected to potential issues with labour relations, or there might be dangers of causing harm to people or to public or private property.
One of our loyal customers insisted that we take on a brief yet challenging job. We had already finished a number of sizable projects for them at the time, and we were also working on many million dollar projects. This particular project was situated in the centre of a petrochemical complex and was only worth $100,000. I imply in the centre! We had to dig up literally hundreds of subterranean cables that were already there, locate them, and remove them because they were underneath and surrounding important operational equipment. The project was high risk; if we had damaged the running cables or equipment, we could have had to shut down parts of the plant, which would have caused negative press for our business and potentially stopped us from receiving additional work from the client. We might have also been responsible for paying for the repairs. These dangers could not be compensated for by the profit from a $100,000 project, so it was clear that this endeavour should be avoided.
Unfortunately, the customer was very persistent in this instance, and we were ultimately compelled to accept the deal. However, we made sure the client changed some of the terms in the contract document (reducing our risk exposure) and purchased additional insurance in case we damaged any of the existing facilities. We also included enough supervisors and management in our price to reduce the likelihood that issues would arise. Ultimately, the project was effectively finished without incident, and we generated a healthy profit.
From the aforementioned, I'm not saying that you shouldn't submit a bid for a high risk project, but it's crucial to take into account and comprehend the dangers. Because a significant project was undertaken at great risk and the probable risk events actually occurred, you don't want to ruin the business.
There are several ways that can be used to manage these risks when tendering for projects with high risks:
1. By negotiating better contractual conditions with the client and transferring risks to them, some risks can be reduced.
2. Some risks can be partially taken into account in pricing; for example, if we anticipated losing time due to bad weather, we frequently priced to account for some of the anticipated lost time. Obviously, if there had been no bad weather
Whether we would have gained more money if we hadn't used the contingency. Although we had minimised the risk and potential loss by allowing for some inclement weather, if we encountered more bad weather than was anticipated, we would have used the full contingency and some of our profit.
3. Insurance may also be able to be purchased to cover some hazards.
4. On occasion, one can increase the tender's profit, making the dangers worthwhile.
There are risks involved in any building project, it's just a matter of making sure they are recognised and taken into account.
A few risks to think about are:
1. challenging terrain, such as needing to dig in rock
2. Pre-existing services that are difficult to find, take longer to relocate, and, if destroyed, could cost a lot to fix and ruin the company's reputation.
3. unfavourable weather circumstances, like heavy rain, strong winds, and freezing temperatures 4. Issues with labour relations
5. New or experimental technology 6. a tight or challenging schedule
7. intricate and challenging constructions
8. doing work in and around currently operational facilities
The ideal size
You don't want to be working on tasks that are too big or too tiny, exactly like in the children's fable of Goldilocks, where some things weren't right (either too big or too small) and others were just perfect. Working on assignments that are appropriate for the business is what you want to do. I must emphasise that this is "right for the company." Therefore, it's crucial to know what the ideal project size is. A larger organisation might find a project that is appropriate for a small one to be too tiny. The magnitude of their projects will alter as the company expands. This might also have an impact on the customers the business serves, as well as the market or area where they do business. Although many contractors expand in size, they are hesitant to lose their current clientele. I don't advocate getting go of all of your current clients, but sometimes businesses run out of clients and have to move on, respectfully declining to charge for projects that may suddenly be too small or unprofitable.
Many contractors run into problems when they win projects that are too big for them because: 1. They don't have enough people, so they have to hire new employees who can be unskilled and unfamiliar with the company's principles. Alternately, the corporation understaffs the project, which leads to ineffective management and monitoring.
2. They lack qualified staff with extensive project expertise.
3. The business lacks the expertise and experience necessary to manage a significant project.
4. The company's financial flow is subjected to greater demands from large projects.
5. If a big project uses up all of a firm's resources, it prevents it from working on other projects, putting all of its "eggs" in one basket, which could be fatal for the company if the project fails.
6. If a contractor's resources are fully focused on one project, they may not be able to complete projects for other clients, some of whom may be excellent clients, leading to the possibility that they will never work with them again.
7. When a large project concludes, there is frequently an abrupt release of personnel and equipment, and replacement work must be found for all of them quickly (ideally, you want a number of projects starting and ending at different times, each with a value that is not greater than 50% of the company's annual turnover).
Larger bonds and sureties are necessary for large projects, which might consume all the
limiting the company's financing resources, prohibiting them from taking on additional tasks. It should be noted that a lot of projects call for these bonds and sureties to remain in place for the duration of the warranty period, which may be up to a year or longer after the project is finished.
There are projects that are too small—either in terms of duration or cost—for a corporation, just as there are initiatives that are too huge for them. smaller initiatives:
1. Frequently demand the same management and supervisory personnel as a large project, making it easier for the same staff to manage and create more monthly revenue with fewer larger projects than with many smaller ones.
2. Typically take less time to complete than larger projects, which makes them less efficient since every time workers and equipment are moved between projects, inefficiencies occur and time is lost travelling between them and getting ready for the new one. Additionally, a project rarely continues exactly where the one before it did. As a result, there are frequently stretches of time during which staff and equipment are not in use and not producing income.
3. Require more administrative time at the head office than a single large project because: 1. Payroll staff must manage frequent personnel transfers between smaller projects
2. In contrast to a small number of larger purchases for the massive project, creditor administrators must deal with many smaller transactions.
3. Compared to merely a few invoices for the larger projects, debtors personnel must process more invoices to the numerous different clients.
4. The estimating division needs to submit and obtain additional bids
However, it is sometimes advantageous to have a mix of projects of various sizes because smaller projects enable junior project managers to manage their own projects, while larger projects employ a number of junior engineers who can benefit from the experience of the more senior staff working on the project.
Contractors may provide and service a specific niche market or client. The contractor must make sure that their tender is sufficiently competitive to do this because it is normally in their best interest to keep other contractors out of this market.
In other instances, if the contractor has the necessary staff, tools, and experience for the job, their prices may be lower than those of other tenderers who lack these advantages, allowing the contractor to apply a higher profit margin.
Because these niches frequently come to an end when other contractors enter the market or when work slows down, contractors must be careful not to become caught in a specific specialty. If the contractor doesn't have other clients or industries to operate in, they may find themselves suddenly without a job, which could force them out of business.
The lesson of the story is to pursue a niche market where it makes sense to do so, but to always be engaged in other ventures that might supplement the income generated by this market should it become dormant.
Potential for a new market or a fad
Case Study: Several years ago, a large number of South African contractors were unable to find enough work there. As a result, they competed for and won projects in other African nations, with different degrees of success. The business environment wasn't ideal; logistics were frequently a challenge; some clients didn't pay; staff didn't like working far from home; the legal environment was different; and there were additional taxes that weren't always taken into account when calculating the price. Unfortunately, failed efforts outweighed successful ones. Many medium-sized businesses chose to expand into Africa after observing the large corporations doing so, which resulted in more failure stories.
The moral of the story is that there was potential for significant financial gain in other African nations, but it did depend on the nation, the client, and the quality of the offer. Just because one company has achieved success does not guarantee that yours will, nor does it guarantee that when you enter a market, earnings will be as simple to come by.
To make sure you understand all the dangers and that the market is going to be sustainable in the future, it's crucial to investigate new markets and prospects. In addition, you don't want to invest in brand-new specialised equipment for a new market just to discover that the market dries up and you're left with equipment you can't use. You don't want to open an office in a different nation, state, or region simply for one or two contracts.
However, if you've done your homework and are confident that the market is sustainable, the financial model is sound, and you can minimise the risks, then by all means submit a bid for the project. You might stumble onto a promising new market.
Recognizing the circumstances of the market today
Depending on the current market or economic conditions, some projects may be more suitable than others. It's not always possible to be careful about which projects to submit a bid for when there is limited available work.
The labour supply in the construction industry fluctuates and shifts fast from periods of relative abundance to periods of scarcity. It's crucial to comprehend and prepare for these cycles. I frequently witness contractors taking on a challenging project with a slim profit margin just before the market is about to experience a boom. As a result, other contractors are free to tender for projects with higher profit margins while they are constrained by the project's low margin.
The inverse is also true, and it's crucial to get a long-term project at a profit at the conclusion of a boom cycle, just before the tender profit margins start to decline. At the very least, this endeavour will help the business get through its challenging time.
To account for these changes in the market environment, profit margins must be timely and correctly modified. When a boom is coming to an end, I frequently witness contractors fail to cut their margins quickly enough in preparation for the downturn. Every time they do, they aren't reduced low enough to secure the project, causing them to go even lower on their next bidding.
You may be able to secure a project with a higher profit margin than usual if you are aware that your rivals are working on other projects or aren't interested in submitting a bid.
Tender (or bid) procedures
Whether or not to price a project should depend on how the client requests bids.
1. A lot of customers put projects up for open bidding, which means that any contractor is free to make a bid. Usually, government projects are advertised for bids in this manner. It goes without saying that the client may receive dozens of bids for the project, and I've even seen clients receive as many as fifty. Since there is frequently at least one contractor that is desperate and submits a low or even dumb quote, there is heated competition and a poor probability of receiving the contract. With an open tender, it's also common for smaller, less-experienced contractors to submit false prices because they don't fully comprehend the job. I would try to stay away from submitting bids for these projects.
2. Another approach that clients request bids is to open the project up to anyone who satisfies the requirements outlined in the tender documents. Some of these requirements, including the contractor's requirement to be registered in the state or nation, can be extremely basic. Many contractors are unable to meet some of them because they can be more onerous. These could include the need for a tender bond, which some contractors might not be able to provide, the need for the contractor to show that they have completed projects similar to the one in question, the achievement of a minimum annual turnover, or the presence of a target for the minimum amount of local content or participation from local contractors. The number and types of conditions will determine how many contractors are qualified to submit a bid for the project. Although some clients may not always judge proposals in a fair and honest manner and may be misled by a low price and award the project to a contractor who doesn't match the tender criteria, it is typically a waste of time to submit a tender if a contractor cannot meet the terms of eligibility.
3. Some clients request prequalification of contractors before inviting them to tender, and only qualified contractors are invited to submit bids for the project. Unfortunately, some clients can prequalify a dozen or more contractors before they submit offers, which can still lead to intense competition for the contract.
4. The majority of private clients only request a small group of contractors—typically six, but it might be as few as three or as many as twelve—to submit bids. Since there is obviously considerably less competition, it is definitely worthwhile to submit a bid for these projects. The key is to join the group that the client requests to submit a tender. In the following Module , this topic is expanded upon. An
It's vital to keep in mind that if a client invites a contractor to tender, the contractor is almost required to do so and is expected to do so; if they don't, some clients may be unforgiving and may decide not to invite the contractor to tender for their subsequent project.
5. Contract negotiations between a client and a contractor are, of course, the greatest way to win a job. This is something I've been able to arrange on several times. Not only is it possible to increase the margin marginally, but it also almost certainly eliminates the competition from the tendering process, guaranteeing the contractor will win the project. The contractor might be able to suggest ways to make some parts of the project easier to build during the negotiation phase, saving the customer money and possibly even boosting the contractor's profits. Having said that, a word of caution: I have witnessed contractors lose contracts they were negotiating because they were either too avaricious and demanded the contract at a price the client was unwilling to pay or because they were requesting terms and conditions the client found intolerable.
The written agreement
Different types of contract documents are used by clients. Many of them are straightforward modifications of common conditions employed by the industry. Most provide both the client and the contractor with protection. However, some clients utilise their own, often highly biassed, form of contract paper, passing all risk to the contractor and providing little in the way of protection. Avoid putting these projects out to bid and make sure the risks are eliminated, qualified out, or priced in the bid.
The success of the business depends on the cash flow from a project. Some clients have quick payment terms; they might even pay just one or two weeks after an invoice is submitted. These projects are far more appealing than those with terms of 35, 56, or more days. The majority of larger contractors must pay suppliers within thirty days, while many smaller contractors must pay suppliers upfront. The project is effectively financed if the contractor is paid later than this. Since they frequently only get paid after seven or fourteen days and have to pay their suppliers and subcontractors after thirty days, many building contractors find that they may make more money by managing their cash flow than by actually performing the work.
It might not seem like much, but if the project profit is 5%, the difference between projects paying after fourteen days compared to projects paying on fifty-six days might be worth 12% of the project value in interest collected.
But only for the time of payment. How about a few of the payment terms? Client retention typically ranges from 5% to 10%, with half released at the conclusion of the project and the other half at the conclusion of the warranty period, which is typically twelve months.
As compared to a project with no retention, one with a 10% retention maintained until the project's conclusion and a 5% retention held beyond the warranty period could incur approximately an additional 1% in interest charges.
Also take into account how and when the client pays. Many clients refuse to pay for supplies and machinery that haven't been incorporated into the work at the time of billing. These products occasionally entail a hefty price tag that the contractor frequently bears for several months until they are integrated. However, to cover the expenses of this material or equipment, many clients will accept a bank guarantee or insurance bond, freeing up the contractor's cash flow.
Some clients only pay upon achievement of a milestone, and occasionally the contractor may be required to perform a sizeable amount of work at their expense in order to meet the milestone prior to receiving payment.
the cost to the client
The budgets of some clients are too small. The client's budget is obviously not always known to contractors, but simple research may reveal what it is.
When the budget is insufficient:
1. The contractor's pricing is typically greater than the budget, and project administration is challenging since the client will contest and fight all claims and modifications that the contractor proposes, even if they are reasonable and legitimate.
2. The client will also seek out every opportunity to save money, which may lead them to choose inexpensive, low-quality materials that are difficult to utilise or that may result in a finish that falls short of their expectations and commonly becomes the contractor's problem.
3. In addition, the client might cut corners with the design or even reduce payments to the design team, which could have an impact on the standard of the design information or the effectiveness and promptness of the team's responses to the contractor's questions, both of which could affect the schedule and cause delays for the contractor.
4. In addition, there is always a chance that the client could run out of money before the job is finished, which would result in the contractor not being paid.
The calibre of the proposal documents
A client's and their design team's quality and experience are frequently reflected in the tender documents. Bad-quality paperwork are a sign that there might be issues with the contract owing to inadequate and poor information, which can cause delays and possibly lead to claims. In general, I would steer clear of these contracts, or at the very least, price them with the understanding that you will need to use a team with experience and preparation who can handle any issues and submit variations to account for the delays and inconveniences brought on by the incomplete information. It's occasionally also possible to make money off of the scenario if the client has a significant budget and the contractor has a skilled staff.
It is crucial that the contractor explains all of their assumptions and details what they have priced (or not priced) in their tender submission because some tender documents and scopes of work are so poor that it is unclear what the contractor should price.
Some projects contain liquidated damages that are unreasonably expensive or strict. These damages may frequently be uncapped, allowing them to swiftly mount up and eat away at any prospective profits or, in certain situations, the entire project's value. It's critical to comprehend liquidated damages and the potential consequences of getting fined.
In some circumstances, it may be feasible to set a cap on the maximum amount of damages that can be awarded as well as a lower value for the liquidated damages in the tender proposal. It might be essential to withdraw from the tender if the client rejects these proposals. When a contractor didn't finish a project on time, it forced them to incur fees and penalties that they couldn't afford, and more than one of them went out of business.
The project's timeline
It's crucial to comprehend the project timetable and the project completion dates in relation to the liquidated damages. These deadlines are frequently unattainable, in which case either suggest a more reasonable plan or don't charge for the task. Let another contractor be saddled with a problematic project that they can't complete on schedule, incurring liquidated damages as well as reputational harm.
Are you going to compete?
Frequently, you are aware that your price will not be competitive before filing a tender. The project might be too little for you to handle, it might be in a location where you aren't employed, or you might lack the necessary knowledge or tools. Your price will be significantly more than theirs if the project is better suited (either in terms of location, size, or type of project) for other contractors. There is a risk that the company's reputation has been harmed because the client might believe the contractor is too expensive and uncompetitive and they will not invite them to price their next tender. This means that not only has valuable time been wasted in preparing and submitting the tender, time that could have been used more effectively on another bid.
We frequently turned out tenders because we thought we wouldn't be competitive. When we decided not to submit a tender, we would often call the customer and send them a letter outlining why we felt we would not be competitive or have the resources to provide them with the level of service they had come to expect from the company in this specific circumstance.
Criminal and illicit activity
Contractors need to exercise caution not to engage in unlawful or criminal activity. Projects that are illegally constructed without the proper permits or that call for the clearing of vegetation without the appropriate permits can lead to:
1. The contractor receives negative PR since their equipment and personnel are frequently seen on television and in pictures published by the media.
2. The project's termination, which could have an impact on the personnel and equipment of the contractor
3. even having equipment seized 4. The contractor's unpaid invoice
In addition, many people obtain money illegally, which they then use to fund construction projects. Although you might believe that there is nothing wrong with receiving payment from these illicit gains, there is always a possibility that:
1. If the contractor's money source is revealed, it will draw unfavourable attention. 2. The client is taken into custody, which halts the project.
3. The contractor is left underpaid as a result of the client's assets being taken
4. Should the contractor disagree with someone who engages in criminal activity, that person may use illegal means to gain their way.
There are occasions when certain projects are contentious, such as when they are carried out in environmentally sensitive locations or when local residents had to be moved. Vocal opponents of these projects may occasionally resort to sabotage, vandalism, and blocking off site access. This opposition may cause the project to be delayed, cost the business money, and land it in the news for the wrong reasons.