How to Leverage Unbalanced Bidding for Greater Profit Margins
In this article, we will explore the concept of unbalanced bidding in construction projects. We will discuss its definition, benefits, risks, and strategies to effectively implement it to increase your profit margins. Whether you're a seasoned contractor or new to construction bidding, this guide will provide valuable insights to help you succeed.
What is an unbalanced bid?
A bid is considered unbalanced when the prices bid for specific elements of work are overstated or understated because markups and possibly direct costs have been redistributed across other parts of work.
Key characteristics of an unbalanced bid
An unbalanced bid typically includes higher unit prices for items expected to have quantity overruns and lower prices for those with potential underruns. This strategic adjustment helps contractors secure increased profit margins (called "windfall") during project execution. An unbalanced bid can also have higher prices on lump sum items because money has been shifted from other work items that may have underruns or are have a risk of not happening at all on the project. By carefully analyzing project requirements and anticipating potential variances, contractors can strategically price items to maximize profitability. This method not only optimizes revenue but also provides a buffer against unexpected financial fluctuations during the project lifecycle. For an in-depth example of an unbalanced bid, check out Bid Unbalancing – How It’s Done To Increase Profit.
Why do estimators unbalance their bids?
- To take advantage of estimating errors in quantities.
- Items quantities that are understated by the engineer are called "overruns" because the estimator's takeoff quantities are higher than the bid item quantities. Estimators will typically increase the price of these items.
- Items quantities that are overstated by the engineer are called "underruns" because the estimator's takeoff quantities are lower than the bid item quantities. Estimators will typically decrease the price of these items.
- To move money from more high-risk items (underruns or items that are at risk to be eliminated from the project for example) to items that the estimator believes are guaranteed to happen on a project.
- To "front-load" the project. Front-loading a project means the estimator takes money from work items throughout the project and shifts that money to initial work activities (i.e. mobilization) to obtain greater earlier income on the project.
How unbalanced bids can increase profit
When unbalancing a bid by predicting quantity variances and adjusting unit prices accordingly, contractors can increase their profit margins above and beyond the projected earnings that are built into the bid. This is called windfall profit. (Read on to learn more about windfall profit). Unbalancing a bid by moving money out of high-risk work items, these strategies ensure that no profit margins and overhead costs are lost if those high-risk work items are changed or eliminated completely. Unbalancing a bid by front-loading a project can help the construction company gain more profit by getting paid more upfront for a project. This helps to finance upfront construction costs and guard against losses if the project has unexpected costs or is terminated early. Overall these approaches allows for better financial planning and resource allocation, ultimately leading to higher profitability.
Advantages of unbalanced construction bids
Unbalanced bids provide a competitive edge by enabling contractors to offer more attractive bid pricing while still maintaining profitability. This strategy can be particularly beneficial in securing projects in highly competitive markets.
The risks associated with unbalancing a bid
Bidding is as much of an art as it is a science. Unbalanced bidding requires saavy bidding expertise, a clear understanding of project requirements and limitations, and a little gut instinct that can only be gained from experience. Without having all the elements listed here, unbalanced bidding is risky business.
While unbalanced bidding can be profitable, it carries risks which are important to know as an estimator.
- Being flat-out wrong in your takeoff calculations can lead to severe financial losses if the actual quantities differ significantly from the estimated quantities.
- Not knowing the rules and limitations set by the locality officials you are working for can result in rejected bids, even if you are the lowest bidder.
- Reactions from engineers can occur if a price is high or low. High prices can inspire engineers to "go back to the drawing board" and potentially eliminate the work item from the project altogether. Low prices can be attractive and potentially entice an uptick in the quantities of that item.
- Front-loading a job can result in underpayment on work items where subcontractors are involved, and payment disputes can occur.
For these reasons and more, there are voices in the construction industry that caution against unbalancing bidding. Dennis Curtis, in his article Avoid Unbalanced Bids to Prevent Payment Disputes, gives reasons for maintaining a balanced bid.
To mitigate risks, contractors should thoroughly understand the project scope and contract terms. Conducting accurate takeoffs and staying informed about inspection practices can help ensure that unbalanced bidding yields the desired financial outcomes. For a detailed analysis on this topic, refer to "Unbalanced Bids and Avoiding Disputes Relating to Them" (Manzo & Tell, 1997).
Use estimating software for unbalanced bidding
Using advanced estimating software can help an estimator create an unbalanced bid with ease, providing detailed transactions so you know exactly where your money is allocated. Estimating Link® by TCLI is unit price and lump sum estimating software for heavy construction contractors. Estimating Link® includes a feature called "Move Money" to easily create and track your unbalanced bid transactions. Simply move your markups from one work item to another, analyze your new bid unit and total amounts, then apply it to your bid. You can create multiple transactions to analyze the best outcome. Estimating Link will automatically calculate the potential windfall profit that the contractor could possibly achieve by unbalancing the bid.
What is windfall profit?
Windfall profit refers to unexpected gains that occur when actual project conditions differ from initial estimates, resulting in higher revenue than anticipated. For example, if a project has a higher quantity of work than estimated, the contractor can benefit from the adjusted unit prices. For an in-depth understanding, visit Windfall Profits: What it is, How it Works, Examples.
Achieving windfall profit with bid unbalancing
Contractors can achieve windfall profits by strategically unbalancing their bids. By accurately predicting which items will have quantity variances, contractors can set unit prices that maximize revenue when these variances occur.
Conclusion
Unbalancing bidding can be a powerful strategy for contractors to win bids and increase profit margins. By adjusting linte item bid prices strategically, contractors can secure better cash flow and optimize financial outcomes throughout the project. The main motives for adopting unbalanced bid pricing are found to be increasing chances of winning bids, improving project profitability, and minimizing financing costs of projects (Hyari & Alamayreh, 2022). However, understanding the complexities and potential risks of unbalanced bidding is crucial. Contractors should ensure accurate takeoffs, comprehend contract terms, and keep field supervisors well-informed to maximize the benefits of this approach.
Estimating Link’s® Move Money feature can help contractors navigate the unbalanced bid practices effectively. This tool allows you to easily unbalance bids, showing exactly where the money was moved and how it impacts the project. For more information on how Estimating Link can enhance your proejct bidding strategy, try Estimating Link® for free today and experience immediate productivity and accurate bids.
References:
Hyari, K. H., & Alamayreh, T. (2022). Unbalanced bidding in construction projects: a contractors’ perspective. International Journal of Construction Management, 23(12), 2058–2066. https://doi.org/10.1080/15623599.2022.2035498
Manzo, F., & Tell, S. (1997). Unbalanced bids and avoiding disputes relating to them. Chapter 7 of the 1997 Wiley construction law update.
