Usually the bid price should cover net project cost estimate, the overheads, the additional project financing costs, the required profit and the risk margin. But in some cases, the bidder will give the price lower as the reasons that Park and Chapin (1992) indicated as above. Therefore the bidder company not only needs to provide good project cost estimation, but the company also needs to consider some factors that influence setting the bid price. After the estimation and consideration of those factors, the bidder company will determine a right price strategy to set the bid price.
Factors that influence the contractor to set the bid price
Before the contractor sets the final bid price, there are some factors, which usually effect the final bid price determination, he needs to consider. There are four major factors that influence the contractor to determine the bid price:
- The current position and reputation of the contractor in the marketplace.
- The current position of the competitor and how the competitor influence the client
- The situation of the client and the environment around the client.
- The risks that can modify the factor above
Before the contractor determine the final bid price strategy, he must know himself very well. As Michael E. Porter (1985) stated, the contractor must know the workload the he can assume during the period of implementation of the project, the current estimating workload, and his financial situation. The contractor also needs to the advantages and disadvantages of his competitors and how the competitors influence upon the client. The most important is the contractors must understand and influence the client very well.
According to Tweedley(1995), the most important aspect of effective the bid price determination is understanding and influence upon the client. The contactor needs to know what the client’s needs and wants. After client puts the project into tendering, suppliers are required to bid or present their offer with the bid price, terms and conditions that, upon acceptance of the client. The client knows the right price that he can pay to the contractor. The client will decide to accept one of the bidders who give the right bid price. If the bidder doesn’t know the client very well, may be he could quote the price too high which leads he to fail bidding. Therefore the bidder should know the client’s enterprise, understands the client’s concerns, and influences the client. The bidder should always attempt to view the opportunity from client’s perspective first. Then the bidder can set an acceptable price to the client. How can the bidder know his client well? Building a good relationship with the client is very important. As Tweedley(1995) stated that the relationship between client and supplier is important. And the clients and suppliers are currently working in closer relationship. Even in normal supplies this is beginning to prevail. It is beneficial to both client and supplier. They have better relationship with the supplier resulting in knowledge transfer and improved pricing, an influence in future developments and improved competitiveness. The supplier benefits from the good relationship that evolves with the client organisation, a satisfied reference site and steady income streams.
When determining the bid price, the contractor can’t ignore the risk that will modify the factors above. The risk should be:
- Risk of the contractor’s own business
- The competitor built a better relationship with the client or build a long-term relationship earlier
- The client has potential financial risk that the contractor didn’t make sense before.
Therefore the contractor should analyse himself, the competitor, the client, the environment and the risk well before determine the bid price.
The factors referred above are pivotal factors in the bidding. But it stated much general and only among the client, contractor and competitor. As the investigation of Mochtar and Arditi(2001) shows, the five most important factors that affect respondents’ current pricing strategies are project size/complexity, financial goals of company, company’s strengths and weaknesses, expected future project from the owner and the need of work.
In Mochtar and Arditi’s point the most important factors that affect the bid price strategy of the company are the project size/complexity and financial goals of company. The larger project size or more complexity, the company will determine a bid price strategy that will set higher bid price. Because the project with larger size or more complexity, it must be more risky for the company to finish the project successfully.
The financial goal of company is another most important fact that affects the determination of the bid price strategy. If the company wants to make more profits from the project, it will determine a pricing strategy to set higher bid price.
Company’s strengths and weaknesses also affect a company how to set the pricing strategy. The company must know its strengths and weakness well. If the company has more strengths to do the project, he should put the price lower. But is the company has more weaknesses to do the project, he should put the price higher because it’s more risky.
Sometimes the bidder company expected future project from the owner. If the company expects a long term relationship with the client and make profit during the long term partnership, the company should also determine a bid price strategy that will set a lower bid price. The lower price the bidder sets, there are more chances that the bidder can be awarded the offer of the project. Then the company can make long term relationship with the client.
The need of work influence the company’s bid price strategy as well. For example, if the company has financial problem, the company should determine a bid price strategy that will set a lower bid price to ensure to be awarded an offer of the project, because the company needs the cash flow of the project to help solving its financial problem.
The detail of Mochtar and Arditi(2001)’s point of the factors that affect the bid price are:
- Project size/complexity
- Financial goals of company
- Company’s strengths and weaknesses
- Expected future project from the owner
- The need of work
- Owner’s characteristics
- Project location
- Demand/economic conditions
- Competition
- Owner’s consultant characteristics
- Subcontractors’ characteristics
The list of the factor above is sorted with the order of important rating.
According to A J Smith (1995) the bid team is faced with two crucial decisions: firstly whether or not to submit a competitive tender, and if so what the bid price should be. The price is the major aspect to determine the bidding successful or not. To win the bidding company management should set the bid price strategy with the consideration of the factors listed above.
Bidding price strategy
After the company decided to bid, he should estimate the project cost. Although there are many factors that can decide the bid is successful or not, perhaps the bid price makes the largest single contribution. The bid price is different from the project estimate cost. The bid price should include a margin of the optimum profit on estimated cost and direct and indirect overheads. If the price doesn’t cover the net estimated cost, it will lead the bidder to incur losses. Making profit is the objective of the business not making losses. But sometimes the bidder can’t get the job because the bid price with covering all costs and margin of profit is too high. Therefore the company management should not only transform the net project estimate to the bid price, the company also needs to have a suitable pricing policy and a bid price strategy with competitive power to determine the price for winning the bid.
According to Tweedley(1995), there are usually four stages to determine the bid price.
- Establish a pricing policy within the company.
- Apply the specific attribute of the opportunity to this policy and translate it into a bid price strategy for bid.
- After the bid price strategy is made, build up the costs to ensure the project is profitable and can be sustained.
- Specify when and how the client will pay in constructing the financing plan.
Establish a pricing policy within the company is important to winning a bid. If a company decided to make a bid, the company won’t only want to win the bid; the company also wants to make profit by winning the bid. Therefore a company establish a pricing policy to reflect what level of profitability that the company wants to achieve. To establish a pricing policy, the company should consider which level the business is pitched at. The business always has the aim to achieve being the best value with the lowest price. Therefore the company can enlarge the market share while beating the competitors. To achieve the goal of being the best value with the lowest price, the company must minimise the cost and control and monitor the operation well. Then the bidder can represent his quality price to the client. As a part of the pricing policy, the company also need to establish the business objectives. The common business objectives are:
- Make profit by winning the bid with covering net estimated cost of the project and the direct costs of unsuccessful bids
- Develop the market, enlarge market share and beat the competitors
- Improve the productivity
The bid price is based on the company’s price policy and the bid price strategy. After establishing a price policy and the objectives of price policy, the company will translate them to bid price strategy. As Tweedley(1995)’s point, the company must set the bid price to take advantage of the company’s strengths and unique selling proposition which are the factors that differ you bid from those of your competitors. Before the company decide bid price strategy, there are some things that the company must analyse. First the bidder must analyse his situation in the market. The bidder should know who are the competitors and the situation of the competitors. For example, the bidder should know what strengths competitors have and the relationship between the competitors and the client. Secondly, the bidder must make a good relationship with client and know the client well. For example, the bidder should know why the client put the project in tendering and the client’s budget and price expectations.
After completed the analysis, the bidder should determine a set of price objectives that the strategy will be built based on. Tweedley(1995) gave several sample objectives as following:
- Give a matched or better bid price than other competitors
- Apply a promotional discount in your key market or geographical areas to gain a foothold and steal a march on competition
- Put the focus on reduce the costs of the client
- Build a meaningful relationship between bid price and cost-reduction
- Enhance your position with the client by using open-accounting
After setting the price objectives, it comes to decide the bid price strategy. There are four major bid price strategies that are commonly used in current bidding war.
- The low-price method
- Maximising the profit
- Gaining market entry
- Loss-leader bids
The price is the most important aspect of the client to consider awarding the offer. Therefore the low-price method is the major strategy to win the bidding war currently. As Fischbach (2003) stated, to provide a lower bid, a contractor can look at one of two things — labour or material. She means if providing a lower bid price, the bidder must minimise the overhead of the project. But reducing the cost is not enough; the bidder should bids at lower profitability strategy. This strategy will help the bidder get more chances to win the bid and enable bidder to increase the share of the market.
Before the bidder builds the bid price strategy, he must analyse the client and competitor. If the bidder found the client has ability and is preparing to pay high price, the bidder has a chance to build a maximising profit strategy. But before the bidder decides to build that strategy, he should also consider the situation of the competitor. If the competitor is weak or can’t meet the client‘s requirement. The bidder can build a maximising profit strategy. And if the bidder has an innovation technology that the client needs and the competitors lack of that, the bidder can consider using maximising profit strategy. Another condition is that the bidder can use maximising profit strategy is there is only one bidder is invited to the tendering. Maximising profit strategy means put the bid price high. The high price should cover the net estimate cost of the project, the direct cost of the some unsuccessful bids and reasonable high profit. But the high price must be realistic. If the price is too high for the client to accept or the client feels be forced to accept the high price, the bidder will be possible to fail to win the bid.
If the bidder wants to entry to the market quickly, the bidder should provide a low bid price to ensure he can win. But the bidder can gain more return because of winning a bid with low price. For example, there is a British company and the company wants to entry the market in China because the market in China is big and easy to gain chances to make profit. Therefore the British company builds a gaining “market entry strategy”. The company bids a project in China with very low price and wins the bid. It is a very good beginning for the British company to entry China market. And then the British company builds a good relationship with the client and collaborate on a serial projects with the client in China. Finally the British company entries the market in China and gain a lot of return. Although the bidder should put the bid price low to entry the new market, the low price must cover a minimum reasonable profit and the project cost.
Although the objective of the bidding is making profit, sometimes the bidder use loss-leader bids strategy as well. There are several conditions to use loss-leader bids:
- Have to win a bid and use the advance payment of the project to solve the company’s current financial problem
- Establish future market share.
As bidder bids at loss, the bidder must have ability to withstand the project cost and the bid cost. Before bidding at loss, the bidder must analyse himself and market well and have a plan to increase the price and gain more profit later on.
Conclusion
The bidder usually faces a dilemma that the bidder submits a high bid price that the bidder can make a profit, but he loses the job; or the bidder submits a low bid price and gets the job, but he loses the profit. How to find a balance point between the price and the profit? The bidder should provide a perfect estimation of the project cost and overhead. The bidder should also analyse the market, the client, and competitor and himself and consider the factors that possibly influence the determination the bid price. The bidder needs to determine the price policy and business objectives and translate those to a right bid price strategy. Finally the bidder can set the bid price at the balance point between the price and the profit under the right bid price strategy.
