Bid Spreads on Bonded Projects
Updated: May 15, 2022
Out of the many things that lead to success in contracting, developing a winning strategy for bidding is one of the most important. Creating a specific process for preparing and entering a bid can affect whether you achieve the goal of being the lowest bid and ultimately awarded the project.
Once a bid has been submitted and the results have been released the sureties next concern is the bid spread. The bid spread is the dollar amount difference between the lowest bidder and the second to the lowest bid. The spread of these numbers can either build the sureties trust or shake their confidence when it comes to the company’s estimator. When there is a bid spread greater than 10% between the winning bid and the next-lowest bid, further clarification is required.
Why is a bid spread of 10% or more a concern?
When there is a bid spread greater than 10% the surety underwriter will want clarification as to what advantages the contractor has that allows them to bid the project at an amount lower than others. They want to be sure the 10% spread will not be the difference between the contractor’s chances of profit and/or loss on the job.
There are many acceptable reasons for a bid spread of 10% or more, knowing the right questions to answer will help alleviate the surety of concern:
Are you comfortable with the bid and why do you think there is a spread greater than 10%?
Have you checked to see if anything was omitted from your bid? Did you bid on all requested parts of the project?
Were there any mathematical errors? Perhaps a number was transposed or a zero was left off?
What’s the profit on this job? What is your competitive advantage to earn that?
Is there an engineer estimate? If so, please provide it.
Although these are just some general questions, other factors can play a part in the surety’s view of the bid spread, such as the strength of the contractor’s balance sheet.
Contributing factors that are also weighed:
Several factors go into a contractor’s bid for a job, including experience, resources, pricing advantage, timing, and location. All of these can affect the contractor’s bid and may result in a significantly higher or lower amount than the other bids on a project.
For example, a contractor located close to the job site may have significantly lower mobilization costs than a bidder located 50 miles away. Familiarity with the contractor, owner/architect, or the specific project itself, can give them a competitive edge. Sometimes you’ll even find that the closest competitor will be bidding high due to capacity issues.
When there is a bid spread, an underwriter's job is to engage the contractor through their agent and weigh these factors against his/her knowledge of the job and our experience with that contractor. If there are still concerns, chances are the surety will request more frequent work-in-progress reports and possibly visit the job site to monitor the progress.
Showing the surety you are able to bid and complete projects at the estimated cost will strengthen the relationship and install confidence in your capabilities as a contractor. This will allow us as your bond agents to push the surety towards considering bigger projects and acceptance of larger bid spreads in the future.
Questions from the surety’s point of view to keep in mind:
What is the consistency of the contractor underbidding? Is it frequent or random? Contractors that are performing projects just to keep revenue flow can be a concern.
The bid spread to equity or net worth of the company is a computation often used. If that becomes more than 30% on one or even multiple jobs, it can require further investigation by the surety.
The bid spread is not the tell-all when it comes to a surety viewpoint, but it is and ould be monitored. Staying on top of your bids and monitoring job progress is one of the keys to a positive surety relationship. Having a trusted advisor, such as a surety agent, who understands the thought process of a surety is an important factor.