Bid-Hit Ratios Provide Valuable Road Map
The beginning of a new year is a great time for contractors to re-examine their key performance indicators and conduct any necessary fine tuning.
Given the environment we’re in today, perhaps the first indicator contractors should consider is their bid-hit ratio. Why? Because many contractors do not know what their ratio is. In one survey of 2,000 general contractors, subcontractors and design-build companies, only 6 percent knew what their ratio was and tracked the information.
This lack of knowledge can be attributed partly to the fact that contractors perform a lot of work relatively quickly without the benefit of many support services -- including personnel. This environment doesn�t lend itself to accumulation of data, even vitally important feedback like bid-hit ratios. Marketplace realities being what they are, however, contractors should pay closer attention to these ratios and the treasure trove of information they provide.
When asked what they think a good bid-hit ratio is, contactors cite everything from one to one (one contract awarded for every bid) to 35 to one (one contract awarded for every 35 bids submitted). In fact, according to industry reports, the average ratio for general contractors pursuing public works projects falls between six to one and 10 to one. For private bid work, the actual ratio is about five to one, and for negotiated work is about three to one.
For subcontractors pursuing public works projects, the average ratio is between seven to one and 11 to one. For private bid work the ratio is about five to one, and for negotiated work is about four to one.
Determining the ideal ratio is not as easy as it sounds. Many factors have to be considered. For example, contractors who procure most of their work from public jobs -- or who regularly bid against a long list of competitors -- tend to have higher bid-hit ratios. On the other hand, contractors who negotiate lots of their work tend to have lower ratios.
Despite the many variables, there are a few rules of thumb that seem to hold up. One of them is that the highest reasonable ratio for public works bidding should not exceed 10 or 11 to one. Higher ratios cost a company too much in estimating expense and don�t provide a reasonable profit. Another enduring rule is that for private work, contractors should aim for a four-to-one ratio or less.
To learn where they fit within these statistics, contractors need to track their bid-hit performance and then augment that information with profit data. This combination of information allows contractors to see exactly how and where they generate profits -- and where they�re wasting their time. As this body of data grows, patterns become even more informative.
Contractors with sufficient bid-hit data learn pretty quickly that the bidding process is littered with false assumptions. Foremost among them is the notion that revenues are higher when a contractor bids constantly. In fact, that�s rarely true. The most successful contractors tend to specialize, and many earn the lion�s share of their revenues from only a handful of well-known clients in a single sector or two. This strategy may hold potential for other contractors as well, but they cannot know for sure until they track and analyze bid-hit ratios. The most successful contractors include this information in documents that record every project�s type, size, location, and delivery method.
Having this information on hand is priceless. For example, a contractor with sufficient data can determine pretty quickly whether to bid against a long list of competitors. One leading contractor tracked his bidding for a year and then decided to primarily seek negotiated jobs and never bid against more than three quality competitors. For years this contractor had been exceedingly busy, but had only low profits to show for it. Profits began to rise once the contractor become less busy by submitting bids only for certain types of work in certain markets and against fewer competitors. Without extensive bid-hit data the contractor wouldn�t have known there were other directions available to him.
Tracking outcomes sheds light in many directions. For example, bid-hit data can reveal whether low-ball bidding actually brings in more work and whether a contractor is more successful in winning large projects or smaller ones.
Contractors who have collected data for years say the most important fact revealed is that they should not chase projects they probably can�t win. Contractors nearly always learn they need to bid more wisely, and for many contractors that means being more selective in choosing projects. It also means they need to do more than just submit bids. To the extent possible, contractors need to also provide value-added service. The best way to do this is by sitting down with project owners to find out exactly what they need and how money can be saved. Moreover, at a face-to-face meeting a contractor has the opportunity to ask a very important question: �What can I do to separate myself from my competitors?��
Practically everyone is familiar with the pithy saying �the devil is in the details.�� Just as often there is gold in the details: Contractors just need to have enough data on hand to be able to mine the gold. That�s where bid-hit ratios come in. Among key performance indicators, bid-hit ratios tend to be overlooked because too many contractors merely toss bids out in all directions and then pray that one sticks. Because one of them usually does, that method of bidding becomes the norm.
There is more money to be made, however, by focusing operations on those sectors and project owners that offer more dependable opportunities. Bid-hit ratios show where these opportunities are found most often.