Why do we bid jobs? If you answered “to get the work,” that’s only part of the answer. We bid jobs to get profitable work, and bidding profitable work requires intentional bidding.
If you are not as profitable as you would like to be, it may be due to one or more of four reasons:
In this article we’ll look at bidding with a target in mind.
Margins are our share of each sales dollar. They are what’s left over from each dollar of sales after we subtract variable expenses (such as material and labor) that increase with each new dollar of sales.
Your target should be the total margins, or “gross profit,” necessary to pay overhead expenses PLUS enough to pay debt and grow our companies. What’s the target for your business? Most of us don’t have one. Let’s look at why targets matter.
Suppose your margin is $.50 of each sales dollar, your overhead is $100,000/ month, your debt payments are $10,000 per month, and your profit goal (in addition to debt) is $10,000. Your target is $120,000 of gross profit. How much do you have to sell to earn $120,000 gross profit?
$120,000 target gross profit / $.50 margin per sales dollar = $240,000 of work per month
You would have to do $240,000 of work each month at a $.50 margin per sales dollar to hit your target. Maybe that sounds reasonable at your company.
But what if doubt creeps in? What if you really, really need the work to “keep the guys busy?” You decide to come down on your original bid in order to get the sale. What happens if you drop your margins to $.30 or $.20 or even $.10 of each sales dollar?
$120,000 target gross profit / $.30 margin per sales dollar = $400,000 of work per month
$120,000 target gross profit / $.20 margin per sales dollar = $600,000 of work per month
$120,000 target gross profit / $.10 margin per sales dollar = $1,200,000 of work per month
Can you do $400,000 or $600,000 or $1.2 million of work each month? If you can’t, winning the bid at a $.30, $.20, or a $.10 margin per dollar of sales would be fruitless because you don’t have sufficient capacity to do the work.
To come up with an achievable target for bidding, start with an estimate of your capacity. Suppose you can do about $500,000 of work in a month. With a target of $120,000 and your $500,000 capacity, what’s the lowest margin you could use to have even a chance of hitting your target gross profit?
$120,000 target margin / $500,000 maximum capacity = $.24 minimum margin per sales dollar
To bid with intent, you need a target gross profit and an estimate of your capacity. Use the examples above and give it a try. What’s your target gross profit and what’s your minimum margin for bids?
In my next article we’ll look at how to use your margins and cost estimates to price bids.
If you’re interested in working together to improve your margins, bidding for jobs, and more, please get in touch.