When construction companies develop a history of successful projects, they often consider bidding on larger projects. However, larger projects can carry greater risks.
If your company has successfully completed numerous $10 million projects and is considering a bid on a $100 million project, there are several factors to consider before submitting a proposal. That is because bidding on the wrong project could potentially put you out of business.
“When a contractor bids a larger project, there is a greater financial risk,” says Tim Holicky, a senior executive underwriter at The Hartford. There are more subcontractors to manage and additional materials to purchase, which all leads to greater financial risk.
If a contractor fails to complete a project, it can have dire consequences, including bankruptcy, Holicky explains. “A large, unprofitable job is the quickest way to go out of business,” he adds.
Before bidding on a larger project, Holicky recommends reviewing this checklist of ten items to consider. “This list gives contractors a good idea of what to think about when bidding larger jobs,” Holicky says. If you are not sure whether to submit a proposal, he offers this advice, “A contractor should have at least five of these items locked down before considering a large bid.”
Determine if the Project Is a Good Fit
Let experience guide the type of large-scale project you bid on. For example, if you have built a two-mile bridge and are considering a bid to construct a project for a 10-mile bridge, reflect on what your company has done in the past to scale up its experience and capabilities.
“We encourage contractors to look thoughtfully at their past experience and reflect on the progress of successful jobs to ensure this leap isn’t too big,” he instructs. Is that success scalable for the large project being considered?
In addition, he warns that in our current economy, a normal-sized construction job is going to seem larger because of inflation. “What you used to do does not cost the same. Inflation is driving the costs of larger projects.”
Assess Your Capabilities
Carefully consider your own skillsets as a leader as well as the capabilities of your company before bidding on a larger project. “Don’t bite off more than you chew,” Holicky says.
Consider the Project’s Impact on Cash Flow
Larger jobs can alter a company’s cash flow and impact existing projects. The costs associated with a larger job are likely to be much greater than what your company is familiar with. Your company will need to front the costs before they are paid, he says. “Help plan for that impact by increasing working capital, securing a bank line of credit or increasing the borrowing limit of your current line of credit,” he says.
Evaluate Internal Controls
Bigger projects require more robust accounting and project management control platforms. Before you bid on a larger project, make sure your company has the necessary tools and technology to scale up for a larger project. For instance, your company might need a higher level of financial oversight to manage costs and review budget variances as close to real time as possible.
Review Standard Contract Agreements
Before bidding on a larger job, review your standard contract agreements with subcontractors to determine if they need to be updated to reflect higher insurance limits. “You’re relying on others to fulfill your contractual agreement with an owner and if one of those subcontractors fails, it’s a bigger problem for you,” Holicky explains.
Another factor to consider is whether the project is in an urban environment with more exposure to bystanders. For instance, if 1,000 people a day walk by the construction site, your company may need more insurance to protect itself from liability.
Secure Multiple Subcontractor Bids
When bidding the cost of a large job, it’s best to get bids from multiple subcontractors to determine the costs of the final project. “If you only have a single bid on a subcontracted scope, you are running the risk that you’re not pricing the job correctly,” Holicky says. “But if you have five bids within a few dollars of each other, then you know you have the right project costs.”
Determine if Existing Subcontractors Still Qualify
If you are bidding on a much larger project, the subcontractors you typically rely on might not have the sophistication or technical knowledge to complete a large job. Holicky recommends requalifying the group of subcontractors you typically rely on to make sure they meet the job requirements.
Ensure Your Team Leader Is Committed to the Project
Sometimes, contractors hire new staff with specific experience before bidding on a larger project. If your company’s ability to complete a large-scale project is dependent on the new project team, make sure those individuals plan to remain at your company for the duration of the project.
Evaluate Existing Commitments
Before bidding on a larger project, make sure you have the resources to complete your existing contracts. It is important to assess your capacity to determine if it makes sense to take on larger projects, while supporting the demands of the work under contract.
Be Careful Not to Under Price the Work
Larger jobs take more time and there are many unknowns to consider. Are you scaling up your organization to meet the demands of larger and longer-term projects?
Project risks may not come at the beginning of the project. Instead, they may come eight or ten months after a project starts because it was priced for the cost of materials and labor nearly a year ago. Rising inflation and supply chain disruptions have made it even trickier to price larger jobs. “Large jobs take time and you’re essentially pricing the future,” Holicky says.
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