Aaron Gregory, Treasurer
The Voice Newsletter February 2024
In the dynamic world of construction, achieving annual revenue goals should not be simply an accident, but a strategic pursuit guided by science and metrics. In this article we will skim the surface of looking at the symbiotic relationship between overhead costs, bid-to-hit ratios, and weekly business opportunities all to hit your annual company revenue goal. By understanding these interconnected elements, construction firms can optimize bidding strategies to attain the desired dollar value return on the annual number of contracts, ultimately paving the way for profitable growth.
Beginning with Overhead Costs
To begin the journey toward a targeted return on investment, it is crucial to understand your company’s overhead costs. Overhead costs in a construction company are the indirect expenses incurred in the daily operations of the business that cannot be directly attributed to a specific project or product. These costs are essential for maintaining and supporting overall business activities but are not directly tied to the production or construction of a particular structure. Overhead costs include items such as rent, utilities, insurance, administrative salaries, office supplies, and equipment depreciation. Effective management is paramount for sustained profitability. Setting the desired return on overhead, what is essentially the year-end minimum profit goal, becomes a guiding factor in navigating the strategy of construction sales.
Decoding Bid-to-Hit Ratios
Bid-to-hit ratios serve as the compass in the landscape of construction sales. Understanding the formula and interpreting ratios are fundamental to success. The bid-to-hit ratio is a key performance metric in the construction industry that measures the success rate of winning bids or projects. It is calculated by dividing the number of successful bids, or projects won, by the total number of bids submitted. You may also find it helpful to use this ratio in a dollar value basis, versus simply a number of bids/awards. Benchmarking yourself within the segment of construction you perform work in will provide valuable insights, yet for planning purposes, looking at your past years bit-to-hit ratios as guides.
Calculating Weekly Business Opportunities
Breaking down annual revenue goals into manageable weekly targets is a key step in the science of construction sales. By incorporating bid-to-hit ratios into the calculation of the dollar amount quoted each week, you can determine the required number of bids that need to be sent out each week to meet the annual revenue goal. This approach ensures a systematic and goal-oriented sales cycle. Achieving the desired return is not just about numbers, but optimizing bids and ensuring a minimum gross margin on each bid submitted to reach the year end profitability goal, or return on the overhead investment.
In the digital age, leveraging tools and technologies is indispensable for tracking metrics and revenue goals. Software solutions that automate the sales cycle provide a competitive edge. Integrating the desired return into project management systems creates a seamless workflow, aligning business objectives with day-to-day operations. Whatever system you land on, just remember, "What is measured, improves." - Peter F. Drucker.
Benefits
A complete sales cycle, anchored in a revenue-generating plan, brings forth numerous benefits for contractors. Improved profit margins and sustainable growth become tangible outcomes of a meticulously planned and executed strategy. The science behind metrics ensures that every bid and business opportunity contribute meaningfully to the overall financial health of the construction company.
Implementing this science into practice requires a structured approach. A step-by-step guide to integrating metrics and revenue planning, coupled with training and development initiatives, forms the foundation. Continuous monitoring and adaptation allow businesses to stay agile in our dynamic sector of the economy.
The science behind targeted return on investment in the construction sales cycle lies in understanding and application of metrics, with a strategic mindset. By adopting these practices, our businesses can not only meet their revenue goals, but also pave the way for a thriving and sustainable future in the construction sales cycle.