The Overhead Trap: Why Your Bidding Strategy is Failing
The Overhead Trap: Why Your Bidding Strategy is Failing
In a slow market, Project-Based Organizations (PBOs) feel the pressure. It’s not just about winning bids; it’s about surviving the overhead cash burn.
The Markup Price Dilemma
When a PBO loses several bids, the pressure mounts to lower the markup price. This price is a critical formula, typically combining Hard Costs (HC), Overhead (OH), and Profit (Pr). However, the way these are calculated can be a major flaw.
Consider a project with a hard cost of 100 million. If overhead is calculated as just 1% of turnover, that adds one million to your markup price. This is a sign of an opaque system. The right formula should reflect the project’s specific contribution to overhead and profit, not a blanket percentage.
The Reactive Approach: Cutting Costs Blindly
Overhead budgets depend on company size, business model maturity, and current and future projects. The most radical and common approach to reduce overhead is restructuring. This is a lagging indicator; it tells us the business model was not agile enough to adapt before losses forced a drastic change. The market forces them to change before they change themselves.
So what change can a PBO make on time, with limited cost and no impact on operational development?
The Proactive Solution: A Visible Portfolio System
The first step is creating a visible Enterprise Project Portfolio Management (EPPM) system with defined cost centers. If a PBO has organized portfolio data from the last three years, it can confidently evolve its business model to reduce costs and increase profits.
With a mature portfolio and PMO system, top management gains quality decision-making on three dimensions:
- Confirmation: Validating their thinking with approved best-practice methods.
- Justification: Providing clear reasoning to stakeholders and partners.
- Reference: Creating a model to return to, use, and improve over time.
However, the quality of the analysis depends on the quality of the data. This requires a skilled PMO leader who understands what leaders are looking for and can build the tools and processes to collect, validate, and test data continuously.
Strategic Overhead Optimization
A portfolio system enables smarter, more strategic ways to optimize overhead beyond simple restructuring.
Key Optimization Strategies:
- Distribute Overhead Costs: Allocate overhead accurately across portfolios and projects, ending debates about performance.
- Monitor with KPIs: Track the value-added contribution of every staff member and asset. This helps justify high-cost, high-experience managers whose value may not be visible in day-to-day operations but is critical in winning a big project or solving a major problem.
- Optimize Resources: Redistribute workloads and use engineers in finance, admin, and HR. An internship program can bring in fresh talent at a lower cost to support senior engineers.
- Introduce Flexibility: Consider outsourcing, long leaves, or limited-hour work weeks for certain roles.
- Analyze Assets: For contractors, regularly analyze high-cost assets against current and future project pipelines to stop cash burn.
Change Before You Are Forced To
If your overhead calculation is still locked in the finance department with no link to a visible enterprise portfolio system, you are limiting your options to three bad choices:
- Adding unnecessary cost to your markup price, causing you to lose bids.
- Being forced to reduce overhead costs blindly and reactively.
- Making the wrong decisions because you lack the right data and advice.
Change before the market forces you to change. Some changes are tough but necessary. Make them when you can, or you will collapse.