Bidding a Job You Need, Against a Number You Can't Match
You are the estimator for a general contractor bidding a 24-unit wood-frame apartment building. Your takeoff and priced subcontractor quotes total $2,150,000 in cost, which includes a $150,000 allowance for the sitework package (three sitework subcontractors declined to quote) and a $60,000 contingency. Company policy applies 6% overhead and 6% profit, both calculated on the preceding total. A competitor that has underbid you on the last two jobs is expected at about $2,280,000. The owner's published budget is $2,350,000 and award goes to the low responsible bidder. Your backlog runs out in four months and you have 22 field employees you do not want to lay off. Bids are due Thursday.
1. Compute the bid at policy markups. Where does that put you relative to the market?
Read the worked answer
Bid at policy markup: $2,150,000 × 1.06 = $2,279,000 (with overhead); × 1.06 = $2,415,740.
(If your policy instead applies 12% flat to cost, the number is $2,408,000 - the same neighborhood, and the conclusion does not change.)
- Owner's budget: $2,350,000. You are ~$66,000 over.
- Expected competitor:
$2,280,000. You are **$136,000 over**.
At the stated markup you lose the job. Note also that your $2,279,000 figure is almost exactly the competitor's expected number - which is a signal that the market is pricing this work at roughly cost plus overhead and no profit. That is the real decision in front of you, not a markup arithmetic problem.
2. Lay out the realistic options and the risk in each. What do you recommend?
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Option 1 - hold the policy markup. You keep your margin and lose the job. Cost: nothing but the backlog. Do not dismiss this.
Option 2 - cut profit to ~2%, hold overhead. $2,150,000 × 1.06 × 1.02 ≈ $2,324,600. Under the owner's budget, still ~$45,000 over the competitor. Still probably a loss.
Option 3 - spend the contingency to get under the competitor. This is the worst option and the most tempting. The $60,000 contingency exists for exactly one thing: the sitework package you could not get quoted. Removing it means the one line item you know least about carries zero reserve.
Option 4 - bid at break-even to keep the crew. $2,150,000 × 1.06 = $2,279,000. Covers all direct cost and overhead, zero profit. This is rational only if: overhead is genuinely fixed and would otherwise be unabsorbed for four months; the sitework risk is capped; and the cost of losing 22 trained field employees (rehire, retraining, quality) exceeds the value of the profit you give up. Quantify the layoff cost before you decide - do not just assert it.
Recommendation: do not bid Thursday on a number that depends on an unquoted sitework package. Spend the next two days getting a firm sitework price. If you get one, the decision becomes a straightforward capacity call between Option 1 and Option 4. If you cannot get one, bid Option 2 with the contingency intact and accept that you may not win.
3. Wednesday afternoon one of the sitework subcontractors offers a firm, complete price of $185,000 - $35,000 above your $150,000 allowance. How does that change the bid?
Read the worked answer
Mechanically, almost nothing. Cost goes to $2,185,000, but you can now release $35,000 of the $60,000 contingency, because the risk that contingency was reserved for has just been converted into a fixed price. Net carried cost stays at about $2,150,000, and the policy-markup bid stays at about $2,416,000.
In substance, everything changes. What you bought is certainty, and certainty is worth more than the $35,000:
- You can now justify carrying a smaller contingency (say $25,000) instead of $60,000, so the same total cost carries less embedded margin for risk.
- More importantly, you can now cut profit without also cutting your safety net. At 4% profit: $2,150,000 × 1.06 × 1.04 ≈ $2,370,000 - inside the owner's budget, still about $90,000 above the expected competitor, but now a bid you can stand behind.
- Check responsiveness first. If the owner must award to the low responsible bidder, a bid that is qualified with allowances or exclusions may be rejected outright. Price the firm number into the base bid rather than making it an alternate.
- Verify the offer in writing: scope, inclusions, exclusions (rock, dewatering, haul-off, topsoil), and unit prices for anything over the firm amount. A firm price with an exclusion list is not a firm price.