Nobody necessarily likes the idea of increasing their bid to account for the cost of capital– some subcontractors might believe a lean bid is more likely to win them work. But as Josh Luebker, construction consultant and fractional CFO, says, your bid coming in high isn’t necessarily a bad thing. It may mean your bid is one of the most comprehensive, and that your competition may have scope gaps, potentially undervaluing their services and likely losing money on the project. And the fact is, without adding the cost of capital to your bids, you’re vulnerable to profit erosion from even modest increases in DSO, which affect your financing costs.
In this video, Josh Luebker introduces a powerful calculator designed to help you determine the percentage to add to your bids to offset the hidden costs of capital that come from financing labor, materials, and lost opportunities. This calculator focuses on the cost of capital per project, allowing you to get specific for each bid.
These calculations will help you determine the ideal percentage to add to bids to offset working capital costs. They can also potentially identify if you’re losing money or even paying to work on projects.
To use it correctly, you need to start by inputting project-specific DSO for various clients on the first tab and then add information on each of your working capital options to help you understand the related costs.
You’ll need to come prepared with:
- Lender interest rates
- Credit card interest rates
- Bank line of credit interest rates
To get started, download the calculator and follow along with Luebker in the video.
Ensure all your data is correct as you plug it into the calculator. Accurate figures are integral to the utility of the calculations. Then follow the instructions Josh covers in the video below.
Once you finish your calculations, Luebker recommends that you price out 3 more working capital options to add to your capabilities and request an increase to one of your existing credit limits.
To learn more about accounting for the cost of your working capital and how to include that in your bids, watch our full Meetup on demand.
