The Tender Is a Decision, Not a Sum: Bidding Strategy and Settlement

In construction markets around the world, a contractor can spend weeks building an estimate with real care: measuring, pricing labour gangs, obtaining quotations from suppliers and subcontractors, planning the plant and the site set-up. By the end, there is a large and impressive total. It is tempting to treat that total as the tender. It is not. The estimate is a forecast of what the work will cost the contractor. The tender is the price, together with time and other conditions, that the firm is prepared to offer a client in competition with others, and which becomes the contract sum if it is accepted. Between the two sits a separate commercial function, carried out by management rather than by the estimator.

That function has to settle questions which no amount of measurement can answer. Does the job fit the firm's policy at all? How much margin should be added for overheads, profit and risk? How much work does the firm need, and how keen is the competition?

This comprehensive blog will explore how tendering policy is set before any price is considered, how a rate is built and what it deliberately leaves out, the dilemma between a high price and a low one, what happens when management settles the tender by reviewing the estimator's report, and why the client's evaluation of the bids is itself a decision. Whether you are an estimator, a commercial manager, a director or a client's quantity surveyor, understanding why the sum of the rates is not yet the bid is key to submitting a figure the firm can actually stand behind.

1. Policy Comes Before the Price

The first decision about any tender is made long before an estimator opens the drawings. A contracting firm needs clear strategic objectives, set by its directors, about the general range and area of its operations, the type of work it will undertake and the market it intends to serve. In practical terms these objectives describe the geographical areas in which the firm will work, the kinds of structures it seeks to build, the services it offers (for example, specialist work or package deals), the clients it favours, such as public bodies or private developers, and when any of these is expected to change. Executive management then has the task of deploying the firm's resources to the best advantage within that frame.

Because a contractor's turnover comes mainly from individual projects won in competition, a tendering policy is needed so that each project contributes to the firm. Part of that policy is a firm's mark-up target: the margin over production costs that contracts, taken together, need to earn to cover off-site overheads and the return the business requires. The method of setting such a target belongs to each firm's own financial planning and is not reproduced here. The important principle is that the target exists before any individual bid, and that management then examines it again, project by project, rather than applying it mechanically.

The decision whether to tender at all is therefore a firm-level choice, not only a job-level calculation. It is taken by management in the light of the firm's position at the moment of invitation: its current production workload and future commitments, the state of the market, the capital it has available, the risk the project carries, the prestige it might bring, the existing load on the estimating department and the time allowed to prepare the bid. Tendering is not free, and an estimating team that prices every invitation it receives will price some of them badly.

A procedure is needed if the policy is to be maintained, and a sound framework follows five stages: the decision to tender; the collection of information; the preparation of the estimate; the tender itself; and action with the tender results. Collecting information includes the tender timetable and key dates, examining the contract documents, assessing the client and the design team, enquiries to suppliers and subcontractors, a site visit, discussions with site management, plant and planning colleagues, and a method statement with a pre-tender programme. Preparing the estimate means building up the net cost of the work and of the project overheads. Only then, at the fourth stage, does management add the mark-up for overheads, profit and risk and fix the tender figure.

The fifth stage is often neglected, yet it closes the loop. Every set of tender results should be analysed and compared, because those results are the evidence on which future bidding strategy is built. Where a tender succeeds, cost information gathered during the work and a final reconciliation of estimate against final account feed the next estimate in turn.

Figure 1: Policy, then the estimate, then the bid. Firm policy on the range, area and type of work and on the market comes first; the estimator's build-up of net cost comes second; management settlement of the tender comes last. The build-up is necessary, but it is not the decision. The diagram illustrates the principle and is not a universal commercial flowchart.

2. How a Rate Is Built, and What Still Has to Be Added

Where design information is presented in a bill of quantities, the estimator's task is to predict the cost of each item of finished work. That prediction is only reliable when each item is broken down into its simplest elements and each element is costed from factual information. In a well-organised firm, the planning department, in consultation with the plant, costing and site management functions, will first evaluate alternative methods and sequences and produce a pre-tender programme showing labour, plant and expected outputs for each operation. The estimator then prices the resources in that programme.

A unit rate is built from three physical resources. Labour is priced as an all-in rate for the operative, combining wages with the costs of employment, applied through an expected production output. Materials are priced as an all-in rate for the material or component delivered and prepared for use, applied to the quantity that must actually be purchased once waste is allowed for. Plant is priced as an all-in rate covering ownership or hire and operating costs, applied through its output on the project; plant is often priced in the preliminaries rather than in the measured items. The cost of owning plant includes an allowance for maintenance, which varies with the type of plant and with the firm's own maintenance policy, and which the firm's plant records should support.

The fundamental principle is that unit rates are prepared net. Project overheads, meaning the cost of administering the project and providing on-site staff, general plant, facilities and services not included in the all-in rates, are a separate consideration based on the pre-tender programme. General overheads, meaning the cost of running the company and providing off-site services, are different again, and must not be confused with project overheads. They are recovered through the margin, together with profit and an allowance for risk, and how they are allocated to individual projects is a matter of management policy.

This produces a clear division of labour. The estimator delivers net production costs, with project overheads costed separately, and a report on the project. The mark-up for general overheads, profit and risk is decided by management at adjudication, in accordance with tendering policy, before the tender is submitted. Only when that decision is made can the draft bill be completed, extended and totalled. Management also decides where the margin is placed. It can be spread across the unit rates or carried as a separate sum in the preliminaries or on the final summary. Where a priced bill is required, the more usual approach has been to include it in the unit rates, so that the margin is carried into the valuation of any variations.

The point matters because a complete and accurate rate build-up can easily be mistaken for a finished price. It is not. It is a careful statement of what the work is expected to cost, net of the firm's own overheads and profit, and net of any judgement about the market. Until settlement, it is not the bid the firm is willing to defend in competition.

Two errors follow from forgetting this. The first is to let estimators load their rates quietly with personal contingencies, so that the net estimate is no longer net and management cannot see what it is deciding. The second is to treat the arithmetic total as an obligation, as if a good estimate dictated its own price. Both remove the decision from the people accountable for it.

Figure 2: What a rate contains, and what settlement still decides. The estimator prices labour, materials and plant net, including plant maintenance, with project overheads costed separately. General overheads, profit and risk are not further arithmetic lines in the estimate; they are a margin decided by management at settlement. The figure illustrates the principle and is not a pricing template.

3. The Bidding Dilemma and the Search for an Optimum Bid

In competitive tendering, the contractor faces a persistent dilemma. A high price protects profit but wins little work; a low price wins work but leaves little margin. Neither end of that spectrum is a strategy. A firm that always bids high slowly runs out of turnover to carry its overheads. A firm that always bids low may be busy, but it is busy carrying risk for almost no reward, and every pricing error falls straight onto its balance sheet.

Bidding strategy is the attempt to resolve that dilemma by seeking an optimum bid: the level that best balances the margin the firm would earn against its chance of being the lowest tenderer. That balance is informed by evidence rather than instinct, beginning with the firm's own analysis of tender results, the bidding patterns of the competitors it regularly meets, and the probability of being lowest bidder at different levels of mark-up. Those headings form the established agenda of bidding strategy. The models built on them, and the extensive later research on statistical and econometric bidding, are specialist subjects in their own right and are deliberately not reconstructed here. No figure given here should be read as a recommended mark-up or a probability of success.

What can be said without such models is that the optimum is earned, not assumed. It depends on knowing the competition, on having consistent estimates, and on recording the outcome of every tender so that the pattern of the market becomes visible over time. A firm that does not analyse its tender results has no basis for an optimum bid; it has only a habit.

It also helps to see where judgement enters. The estimator prices cost. Management, when it weighs the margin, is already pricing risk and pricing the market, and it is doing so on behalf of the whole firm rather than the single project. A practical interpretation is that the dilemma cannot be solved inside the estimate at all, because the estimate contains no information about the competition, the firm's workload or the value of the job to the firm's strategy. Those are settlement questions.

Consider a regional contractor invited to tender for two similar projects in the same month. On the first, its order book is thin and two site teams will soon be idle. The temptation is to cut the margin almost to nothing simply to keep people employed. On the second, the firm is already stretched, and the temptation is to add a high margin and accept that the bid will probably lose. Each response may be defensible, but only if it is a conscious decision. The thin margin on the first job may be justified if it genuinely recovers overheads that would otherwise go unrecovered, and if the risks in the job are understood; it is reckless if it simply hopes that nothing will go wrong. The high margin on the second job may be sensible, but if the firm does not want the work it may be better not to tender at all than to tie up the estimating team on a bid it neither needs nor expects to win. In both cases the estimate is the same quality of evidence. What differs is the commercial decision, and the outcome of each remains conditional on the market and the competition.

The dilemma also explains why the decision to tender, the bid and the analysis of results belong to one cycle. Results that are recorded and studied make the next bid less of a guess. Results that are ignored leave each settlement meeting to start from scratch.

Figure 3: High price or low price is not yet a strategy. A high margin protects profit but wins little work; a low margin wins work but leaves little profit. Between them lies the optimum bid that bidding strategy seeks, informed by tender results and competitors' bidding patterns. No method or mark-up is implied by the diagram.

4. Settlement Reviews the Estimate: Science and a Gamble

Compiling a tender is conventionally divided into two stages: calculating the anticipated cost to the contractor of completing the work, and setting the price the contractor will quote, usually in competition. The conversion of the first into the second is called tender settlement, or adjudication, and it is a management activity. In competitive conditions it calls for subtle and often subjective commercial judgement. One well-known description puts it simply: settlement is about getting the job at the best price, securing it in competition by the smallest possible margin, and on the best commercial terms available. A contractor whose winning bid sits far below the next lowest tender has won the work, but it has also left money on the table that a better settlement might have kept.

Settlement depends on the estimator's report. The full estimate for a large project is bulky and full of detail that management does not need. The report brings together the facts that influenced the estimator, highlights what is cost-significant, and identifies unusual contract conditions and risks. It typically describes the project and the proposed method of construction, notes special risks, summarises any departures from standard forms of contract or onerous obligations, assesses the quality and completeness of the design information, records the major assumptions in the estimate, gives the estimator's view of probable profitability, passes on commercial intelligence about the market and other tenderers, notes subcontractors' special terms, and analyses the estimate into labour, materials, plant, domestic subcontract work, prime cost sums and provisional sums. A standard format within the firm helps ensure that nothing is forgotten. The decision itself is usually taken by a small group of senior managers, or by the owner in a small firm, ideally after those who compiled the estimate have had the chance to contribute what they learned.

Tendering is often described as both a science and a gamble. The pairing deserves care. It is not a licence to treat the final figure as a hunch. The better reading is that management should try to increase the science and reduce the gamble, while accepting that the speculative element can never be removed entirely. The practical guidelines that follow from that view are sober ones: keep the estimating team consistent so that management can trust today's estimate as much as last month's; work within the firm's tendering policy and its turnover and profit targets; distrust any temptation to set aside facts and solid experience in favour of hunches; and stay resilient when a run of tenders is lost, rather than making hasty, unsound decisions.

Explicit evaluation of risk sits at the centre of this. Contractors face two separate questions on any price-competitive tender: will the bid be low enough to be accepted, and, if accepted, will the project end acceptably close to the forecasts in the tender? Estimating and tendering both carry considerable risk and uncertainty, and contractors can improve both their chances of winning and the outcomes of the work they win by evaluating that risk explicitly rather than burying it in an unexamined margin. A useful distinction is between risk, where the probability of an event can be assessed and the exposure can often be insured or priced, and uncertainty, where it cannot. Quantifiable risks tend to be costed by the estimator; unquantifiable uncertainty tends to be reflected in the margin according to management's perception. Better information can move an item from the second category to the first. It is also unrealistic to treat any estimate as a single-point figure, and thinking in ranges supports better decisions at tender stage.

The established agenda for that evaluation includes the nature of the construction business, risk and uncertainty, risk evaluation, aspects of human decision-making, and three groups of risk to be considered in estimating: project risk, risks posed by the client and professional team, and risks inherent in the contractor's own tendering and estimating process. The detailed contents of those groups, and the tools for evaluating each, require dedicated study and current guidance, and they are named here as issues rather than expanded. References to period standard forms, such as JCT 98, should likewise be treated as historical rather than current.

Settlement also extends to the form in which the bid is submitted. Increasingly, the submission is the start of a series of meetings, presentations and negotiations rather than the end of the process. Where a priced bill is required, the agreed margin has to be distributed through the rates, and the agenda at that point includes so-called tactical pricing under the headings of front-end loading, item spotting, back-end loading and maximising the net present worth of cash flow. These are named here as issues only. They raise serious questions of commercial risk and of the client's interests, consultant quantity surveyors will seek to resist them, and any pricing strategy that departs from straightforward pricing creates problems for the contractor's own post-contract cost control unless it is carefully documented.

Figure 4: The estimator's report is an input. The report passes from the estimator to a management review that weighs the science, meaning the built-up estimate and an explicit view of risk, against the gamble, meaning the market decision that remains. Reviewing the report is not the same as totalling the rates. The diagram illustrates the principle, not any firm's actual sign-off process.

5. The Client's Evaluation Is Also a Decision

The other side of the table faces a mirror-image problem. Inexperienced clients often assume that the lowest tender equals the best value for money. It may, but not necessarily. A client's real objective is a finished building that meets its needs, delivered without shocks, and the lowest figure can conceal risks that only appear later. An unrealistically low bid may be a genuine error, in which case the tenderer may withdraw before acceptance, or it may be a deliberate attempt to buy the work with the intention of recovering money through claims as the project proceeds. Accepting such a bid can produce a much higher out-turn cost than a sounder price would have done. A professional cost adviser who has prepared a reliable pre-tender estimate gives the client one of its best protections, because an implausibly low tender stands out against it.

For these reasons, client-side tendering practice is usually organised around a recognisable agenda: establishing the client's objectives; current tendering practice; identifying and selecting suitable contractors, including how many contractors should be invited and how they are pre-qualified; choosing the best buy, particularly when multiple criteria are involved; and feedback to tenderers. Each heading is a decision in its own right. The detailed methods by which contractors are pre-qualified and by which multiple criteria are weighted and scored are specialist subjects, and they are named here as issues rather than reconstructed.

What can be stated plainly is the judgement that was reached on contemporary practice. The methods used to evaluate multi-criteria construction bids were described as somewhat crude and unscientific, even though workable approaches to multi-criteria decision-making had been available in other disciplines for many years. In other words, the client's choice deserves the same discipline that the contractor is urged to apply to its own bid. Evaluation that rests on unexamined preferences, or on weightings that nobody can explain, is no more a decision than a tender that is simply the total of the rates.

Feedback links the two sides. Contractors judge market trends and price levels largely from the results of their own tenders, so feedback from clients matters to the health of the whole market. A common compromise has been to publish the list of tender sums without names, so that each tenderer can see how its bid compares with the winner and with the range. Where clients give no feedback, contractors fall back on informal networks, which work only if they know who their competitors were.

A short review, offered as application rather than as a validated protocol, can help both sides test whether a tender has been decided rather than merely totalled:

• Has the firm's policy, on area, type of work, client and market, justified the decision to bid?
• Has the estimate been built net from identifiable labour, materials and plant, with project overheads costed separately?
• Has risk been evaluated explicitly, distinguishing priced risk from uncertainty, rather than absorbed into an unexamined margin?
• Has settlement reviewed the estimator's report, rather than simply accepting the total?
• On the client side, has the evaluation been based on stated objectives and explainable criteria rather than the lowest figure alone?
• Which questions, such as an optimum bid model, the distribution of the margin in a priced bill, or a client's scoring method, require specialist advice and current guidance before they are relied upon?

Conclusion

A tender is a commercial decision. It is not the unadjusted total of the estimated rates. The estimate is indispensable, and its quality determines whether any later decision can be trusted, but it answers only one question: what is this work likely to cost the firm? The tender must answer several more. Does the work fit the firm's policy? What margin will cover general overheads, profit and risk? How hungry is the firm, and how hungry is the competition? Which risks have been priced, and which remain genuinely uncertain? What terms, presentation and pricing structure will the bid carry?

Those questions are answered in sequence. Policy comes first, setting the range, area and type of work and the market, and with it the margin the business needs to earn. The estimator then builds net costs from labour, materials and plant, with project overheads costed separately. Bidding strategy frames the dilemma between a high price that wins little and a low price that earns little, and directs the firm towards an optimum bid that only consistent estimating and careful analysis of tender results can support. Settlement then brings management together with the estimator's report, adds the margin, evaluates risk explicitly and fixes the figure. On the other side of the table, the client's evaluation is a decision too, and one that ought to be at least as disciplined as the bid it is judging.

Some important subjects have been named here rather than explained: the models behind an optimum bid and the probability of being lowest bidder, the techniques for distributing the margin across a priced bill, the contents of the main risk categories, and the client's methods for scoring multiple criteria. They deserve proper study and current guidance, not inference.