Bidding made better with go/no-go analysis

by David M. Wolfenden, CPA, CVA, MS, Managing Director

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To bid or not to bid? For contractors, this is always the question. When times are tough, you may be tempted to bid on anything and everything. During a more stable economic climate, however, you can and perhaps should be as selective as possible.

How to make this critical decision is the question beneath the question. One way to decide whether to bid on a prospective project is to conduct a go/no-go analysis. This process has been applied for years by the U.S. military, as well as in engineering and software development. It can work for contractors, too.

Find your sweet spots
Under the go/no-go approach, you first determine the categories that should be evaluated to define a typically “good” project for your construction company. For example, you’ve often turned a profit on this type of job, encountered few if any financial or legal disputes, and have done strong work.

Common categories include:

  1. Type of construction (examples: homebuilding, commercial, health care),
  2. Estimated project revenue (for instance, $5 million to $10 million),
  3. Delivery method (such as conventional bidding or design-build),
  4. Geographic area (could be a region, neighborhood or proximity to company headquarters),
  5. Customer identity (for example, a specific developer or commercial entity), and
  6. State of backlog (that is, heavily or lightly backlogged).

From there, you assign points to each category ranging from, say, 5 for “definitely a go” down to 1 for “definitely a no-go.” The objective is to create a cumulative score that tells you whether the project in question is truly worth a bid.

To come up with the categories and scores, you’ll need to look to historical knowledge of your company and its projects. Don’t hesitate to gather your more experienced managers and employees to help you recall key details about where you’ve performed best. You might also use benchmarking to establish “sweet spot” areas for similar construction companies in your area.

Score yourself
Here’s how a go/no-go analysis might work. Let’s say George owns a general contracting company that primarily builds and rehabs multifamily housing projects but has also worked on some single-family homes and even a couple of smaller commercial jobs.

For simplicity’s sake, we’ll say George and his management team come up with three of the six previously mentioned categories by which to assess forthcoming bids:

  1. Project type,
  2. Estimated project revenue, and
  3. Geographic area.

Because multifamily housing jobs are the company’s focus, those types of projects would likely rank a 4 or 5 in the go/no-go analysis. Building a single-family home or working on a manageable commercial project might rank a 3; other, less familiar, jobs would probably rank a 1 or 2.

Historically, most of George’s company’s projects have had estimated project revenues in the $4 million to $6 million range. So prospective jobs that fall in that range would likely be ranked a 4 or 5, while larger projects (which may stretch company resources too thin) or smaller jobs (which may not be worth the effort) would rank lower.

George and his managers decide to rank geographic area using concentric circles of miles. Because lower fuel costs and travel times are optimal, the closer a job is to the company’s offices and equipment lot, the higher it will rank.

So if a project ranked 5 on project type, 5 on estimated revenue and 4 on geographic area, that’s a total of 14 points, which would indicate a “go.” A different job that amassed only, say, 7 points would likely be a no-go. A project that wound up somewhere in the middle, perhaps a 10, might call for further analysis to decide whether to proceed with a bid.

Make the best choice
The example above is greatly simplified. Go/no-go analyses can incorporate a multitude of categories and dozens of data points to arrive at an accurate ranking for each job being considered. The ultimate objective is to establish an objective, analytical means by which to decide whether a bid is truly worth your construction company’s time, effort and resources.

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