Risks in The Bidding Process: 7 Common Pitfalls (and How to Avoid Them!)

The bidding process is crucial in the construction business. It forms the basis for choosing and carrying out projects.

Since each project is unique, the head contractor must recognize and address bidding risks early. Think of scope gaps, errors, or significant uncertainties in cost estimates, supply chain disruptions, and rushed vetting of subcontractor quotes.

In short, doing procurement right helps in successful project delivery. 

With that in mind, we offer a detailed guide listing the potential pitfalls in construction bidding. Then, we provide actionable strategies for continuous monitoring and managing risks to improve a contractor's bidding approach.

Let’s get started!

7 Common Project and Client Risks in Bidding Process

Contractors are prone to business, non-business, and financial risks at the bidding stage. Let’s check them out below:

Uncertainty of Cost Estimates

It is tricky to accurately estimate costs for construction projects susceptible to fluctuating raw materials, unforeseen project changes, unknown subsurface conditions, and fast-evolving technology and design. Such inherent uncertainties cause the biggest risk in the bidding process.

Without appropriate expertise, experience, and prudent judgment, a contractor may calculate their labor prices, materials or time costs to overbid or underbid, resulting in losing money or wastages from cost overruns or overbudgeting. 

The Incumbent Risk in the Bid Process

Are you a project owner who heavily relies on a single contractor? If so, you might experience financial setbacks should the contractor encounter delays, shortages, or disruptions in their business operations.

Likewise, clients using inefficient bid processes characterized by outdated technology, cumbersome bid documents, and bureaucratic communication flow may have to deal with pricing disputes due to inevitable changes or modifications in project scope and contractual obligations, misunderstandings, and additional costs.

Other incumbent risks at the bidding stage include lack of competition from existing suppliers, safety, compliance, quality assurance concerns, limited resources, and cash flow, and supply chain disruptions due to fluctuating market conditions.

Risky Procurement Processes

A company that prioritizes a low bid procurement over contractor expertise may award bids to inexperienced contractors who cut corners as they focus on maximizing their earnings. Likewise, poor due diligence on suppliers causes costly shortages and delays.

Other risky procurement processes involve the absence of risk assessment and contingency plans, inefficient change order management, and weak contractor performance monitoring. 

Risky Terms and Conditions

The terms and conditions define the contractual obligations and rights of all stakeholders in a bidding process.

Yet, some contracts have ambiguous clauses on change orders, indemnification, defining and applying force majeure events, payment terms, and dispute resolution pausing significant risks to the contractors and project owners.

For example, a contractor could lose money and damage their reputation if they work on a project where the client can end the contract at will and without fair compensation.

Poor Vendor Sourcing and Management

A poor vendor selection process can lead to poor quality supplies, delays in supply chains, non-compliance, and ethical concerns. For example, if a supplier fails to deliver a critical component on time, it can disrupt the project schedule and necessitate paying more for expedited shipping.

Second, if bidders don't communicate well with suppliers and the bidding process is all over the place, it can lead to costly procurement mishaps, delays, and disputes. 

Inefficient Contract Management

Ideally, companies should have a solid contract with their vendors. Further, the construction vendor contract should be accurate and compliant with applicable legal or regulatory requirements.

For example, the vendor contract should outline safety measures, how it complies with environmental regulations and building codes, and stipulate accurate financial terms and billing procedures.

Other potential risks of inefficient contract management include time consuming contractual disputes, costly revisions, and legal damages.

Inaccurate Internal Needs Analysis

How do you identify products and services necessary in the procurement process? The first step is to carry out an internal needs analysis. Through it, a project owner defines the service and product requirements, assesses current resources, anticipates future demand, evaluates construction budget constraints and engages the stakeholders to outline these needs in the bid documents.

Yet, without due diligence or research, the client can overstate these needs, prepare an inadequate budget or poor design requirements, or set unrealistic timelines. The potential risks result in cost overruns and time wastage with a ripple effect on the entire construction project.

Importance of Managing Procurement Risks 

Procurement risks are as diverse as the number of stakeholders in the bidding stage. Hence, companies should have strategies to anticipate and manage these risks to avoid wasting time and money. 

An ideal risk management approach involves investing in forecasting tools to identify potential risks associated with such factors as delays in supply chain management due to unforeseeable events like the Covid 19 pandemic, late deliveries, and errors in bid documentation. 

The risk assessments are strategically important to streamline the bidding processes and address challenges as they happen. Besides, risk taking contractors can make informed decisions that guarantee winning more bids without compromising price, project budget, or client expectations.

9 Tips to Minimize Procurement Risks

Here are handy strategies to anticipate, manage, and minimize risks in the bidding phases of construction projects:

Develop a Procurement Risk Management Plan

Contractors should have a risk management team that identifies the potential risks for their current projects. The team prepares a functional procurement risk management plan to avoid, mitigate, transfer, or even accept the risk early. Besides, this plan plays a major part in facilitating risk assessment in future proposals. 

Standardize the Bidding Procedures

Strategies to standardize procurement services introduce consistency, fair market competition, and effective time management while minimizing errors and ambiguities in construction contracts. In turn, the quality of bids improves. And, there is better accountability and transparency, safeguarding the good reputation of participating companies.

Learn the Lessons of Previous Projects

Are you submitting a bid for new business from a previous client? If so, what risk assessments can you learn from the previous contracts? Specifically, you want to know the real risks that happened in previous jobs, how these risks affected the project's success, and what strategies your team took to manage the risks.

Invest in a Digital Adoption Platform to Support Your Procurement Digitalization

A construction company should invest in a digital adoption platform (DAP) like Procore, PlanGrid, and SmartBid to digitize the construction bidding and identify risks and inefficiencies on a real-time basis.

Indeed, these platforms centralize the prequalification process and allow seamless collaboration, bid monitoring, custom access to bid paperwork and submitting proposals, easy comparison of subcontractor bids, and easy tracking, monitoring, and analysis of project metrics. 

You can compare ProCore, BuilderTrend and Downtobid as options here.

Leverage e-Procurement Solutions

Apart from a digital adoption platform, many businesses leverage e-procurement solutions like Dodge Data & Analytics, PipelineSuite, and ConstructConnect. Through them, they access tenders remotely, submit bids online, digitize bid document management, collaborate with other stakeholders in the project, and automate bid evaluations.

Further, e-procurement solutions are key in eliminating risks from relying on a single contractor, poor vendor sourcing and management, errors in bid documentation, price disputes, and legal non-compliance. 

Have an Effective Supplier and Vendor Onboarding

The success of construction bidding depends on an effective supplier and vendor onboarding process. Here, project owners and contractors aim for thorough vendor background checks. Also, they engage key vendors and suppliers with appropriate safety and compliance training and proven ability to deliver quality services. Plus, they set and review performance evaluation criteria, ensuring these teams are up-to-date with the latest industry standards and technological advancements.

Nurture Client and Supplier Relationships

Contractors should have a long-term partnership approach with project owners and suppliers. That way, these stakeholders can collaborate and address any significant risk early to guarantee project success. Then, start by involving the clients and suppliers in the planning stage of the bidding phase. Next, invest in professional communication tools to keep clients and suppliers updated on the project. Also, prioritize timely and early supplier payments, quality assurance, and periodic performance reviews. 

Use Risk and Uncertainty Analysis to Make Key Bid Decisions

How do you assess procurement risk and make smarter bidding decisions? Consider using the Monte Carlo Simulation approach, a technique for analyzing risks and uncertainties associated with a project. Through it, contractors can predict the chances and effects of specific risks. Furthermore, they can create winning proposals by considering factors like handling tricky contract terms, setting fair pricing, and knowing when to avoid risky projects.

Incorporate Risk Assessment into the Construction Bidding Process

Incorporate risk assessment into the construction bidding phase to cushion your business from unforeseen external risks. Include the following requirements in the plan:

• Analyzing past project data to identify patterns of cost overruns
• Planning comprehensive site analysis to find possible risks
• Creating a detailed list of potential risks and categorizing them in a risk register
• Drafting a contingency plan to set aside money for unexpected external risks
• Collaborating with key stakeholders to ensure everyone understands the potential risks

Conclusion

Then, what bidding risks does your company face? Develop a strategic approach to successfully navigate these risks, win more bids with better pricing, and meet client expectations. Prior planning, standardizing the procurement process, leveraging technology, and managing relationships are effective strategies for dealing with risk in the bidding process. Read more tips on construction bidding in our beginners guide.