Bid requests are a vital part of the residential construction process. Effectively scheduling, scoping out work, receiving quotes, and communicating with trade partners can make or break a project’s profit margin. Especially when 88% of contractors report moderate-to-high levels of difficulty finding skilled workers.
In analyzing over 6,000 projects in CoConstruct that utilize our bid request feature we have identified common usage trends in the residential construction industry. These include the affect a project’s price has on the number of bids awarded, the regional and yearly differences in the number of bid recipients on a project, and the impact of the number of bids sent on a project’s profit margin.
A note on terminology
In this report residential construction projects are classified as either home building or small construction projects depending on the price point of the project.
- Home building projects are projects that are priced above $250K.
- Small construction projects are projects that are priced below $250K.
This report will also use the following terminology when referring to different aspects of the bidding process:
- Bids awarded are the average number of bids awarded out per project. These occur when a contractor accepts a trade partner’s quote to perform a specifically scoped-out portion of work on a project.
- Bid recipients are the average number of trade partners who are sent the same bid request on a project. For example, if a contractor sent a bid request for HVAC installation to five trade partners, the number of bid recipients would be five.
This report also will refer to two different types of construction contracts:
- Fixed price contracts, also known as lump sum contracts, are when contractors and clients agree to a set price for a project. This price includes all materials, labor, and markups and is only changed if clients exceed any allowances or select upgraded materials.
- Open book contracts, commonly known as cost-plus contracts, are when contractors charge clients directly for materials and add a markup to every item in the project. This way the entire project is treated as an allowance where clients see their costs continuously accumulate.
Higher priced projects award more bid requests
As the price of a residential construction project increases, so does the average number of bids awarded. Projects priced below $250K awarded on average 3.5 bids per project while projects priced between $250K and $500K averaged 6.3 bids per project. As projects increase in price, they also likely increase in square footage, amenities, or complexity that all could require the services of more trade partners.
This trend, however, does not apply to the average number of bid recipients per project bid which increases up until projects priced at $500K and decrease for higher priced projects. For instance, projects priced between $250K and $500K sent bid requests to an average of 7.5 recipients while projects priced between $500K and $1M sent bid requests to an average of 7.1 recipients. This rise and fall in bid recipients could be caused by several factors impacting the lowest and highest-priced projects. These projects could have more profit margin padding (reducing the need for more competitive bidding) and higher-priced projects specifically could require more specialized trade partners meaning fewer recipients for each individual bid.
The average number of bid recipients per project bid has varied from 2019 to 2021. For projects priced below $250K, the average number of bid recipients per project bid was consistent from 2019 to 2020 but then increased 39% from 2020 to 2021. From 2020 to 2021 projects priced between $250K and $500K saw an even higher increase at 131%. But projects priced above $500K had a 32% average decrease in average bid recipients from 2020 to 2021.
So, while bidding on smaller-priced projects became twice as competitive, bidding on higher-priced projects became less competitive. Interestingly in 2021, the average number of bid recipients per bid for projects priced above $1M fell back to normal pre-pandemic operating levels. This suggests that while there are construction labor shortages, they are not impacting projects priced over $1M any more than they were back in 2019.
The number of bid request recipients does not significantly impact the profitability of a construction project.
.png)
The average profit margin per project for both home building and small construction projects is consistent whether contractors send their bids to one trade partner or ten. Home builders who send their bids to one or two trade partners have an average project profit margin of 13.7% while builders who send their bids to ten or more trade partners have an average profit margin of 14.2%. Small residential construction projects, on the other hand, have average project profit margins of 24.5% when bids were sent to only one or two trade partners, and 22.7% when sent to ten or more trade partners. While one might assume that more bid recipients per project bid would lead to more competitive bidding and therefore higher profit margins, it appears that the bidding itself is not enough to impact profit margins.
Fixed price and open book construction contracts have similar bid request usage
.png)
Residential construction projects that use open book pricing contracts awarded slightly more bids than projects that use fixed price contracts. However, no matter which contract type was used in a project the average number of bid recipients per project bid was 4.4.
Regional differences exist for both home building and small construction projects
The average number of bids awarded per project differs by region across the US for home building projects. Projects in the Northeast and South averaged 8.7 and 8.8 awarded bids respectively while projects in the Midwest and West averaged 5.6 and 6.6 awarded bids. Some of these regional deviations come from land availability, and therefore project square footage, in the area where CoConstruct customers are building.
When it comes to the average number of bid recipients for home building projects there is less regional variation. The average number of bid recipients for projects in the Midwest, West, and South range from 4 to 4.9 recipients. But projects in the Northeast averaged 8.5 bid recipients per project bid. With an equal number of bids awarded between home building projects in the Northeast and South but twice as many average bid recipients, home builders in the Northeast have significantly higher competition for bids than home builders in the South.
Across the US small construction projects had very similar numbers of awarded bids with 0.5 being the biggest discrepancy between any two regions. Their average bid recipients, however, varied more with projects in the Northeast averaging nearly twice as many bid recipients as the other regions. Similar to home building projects, this suggests that the competition for trade partners is fiercer in the Northeast than in any other region.
Where we got our numbers
CoConstruct’s construction management software helps over 100,000 building professionals manage clients and trade partners, schedule work, track financials, and more. By aggregating and analyzing the data builders input into the system, CoConstruct can identify residential construction trends and highlight emerging issues in the industry. By using and sharing this information CoConstruct is doing its part to eliminate the chaos of project management and help create rewarding experiences for both home builders and clients.
