What is Margin Capture and why should you care?

tl;dr: Margin Capture is the amount of margin you’re extracting from the market on low bids. Most contractors don’t measure this. Here’s why you should.

Snapshot:

• Margin Capture - how to calculate: On a low bid, add gross profit dollars bid plus dollars left on the table. That’s total available margin. Then, divide gross profit dollars bid by available margin. This gives you a percentage called Margin Capture. Another way to look at this is the difference between your cost and the second place bidder.

• The Untapped Profit Potential: In highway construction, data suggests that contractors miss out on an average of 8% in potential profits on highway projects. By adopting a data-driven approach to bid optimization, this lost revenue can be reclaimed.

Margin capture matters for low bid contractors. It's not just about winning bids; it's about maximizing profit on each project. Many folks overlook this because it’s inconvenient and counter to our natural aversion to losses. If you are leaving too much money on the table, this will help you reel it in. Understanding and applying Margin Capture can increase profit.

To improve net profit, contractors have two main levers:

1. Efficient operations with low production costs.

2. Maximizing profit through strategic bidding and pricing.

Let’s assume you are the low cost provider of work in your markets. Now, your goal is to win bids. And win them profitably.

For example, if you bid $9 million on a project and your closest competitor bids $9.8 million, with a gross profit (GP) of 10% ($900,000), you're leaving $800,000 on the table. The goal is to minimize this gap. $900K of GP / $1.7MM of available GP = 53% margin capture. Aim for a margin capture rate of 70% or greater. Heck, just starting tracking and sharing this period. Any improvements, no matter how small, go to the bottom line.

Some benefits 💸 from measuring MC:

• Shifts focus away from merely winning bids to winning profitably.

• Levels the playing field across divisions and markets. It’s a way to measure the teams in more challenging markets to those in less competitive ones. And the trends across divisions may prove insightful.

• You can also track the margin capture of your competition. Just subtract your cost from their bid prices on their low bids to rough in their estimated profit. This is one of my favorite things to monitor… Why? Have you ever had a competitor that fills up on cheap work in Q1 and then backs off the rest of the year? Measuring their margin capture versus yours over the year may train you to stay disciplined early in the year, let them fill up, and then capture the higher profit work after they get overloaded. At the end of the year, do you care who won all the jobs in the first 3 lettings or do you prefer to have the biggest pile of gross profit? Exactly!

Notes 🗒️ and Downside Prevention

• Getting to breakeven especially in paving with high capital/plant costs is critical. All of the above assumes that minimum throughputs are generally being achieved.

• Comparing GP captured from public bids to private/negotiated bids to determine which ones yield more profit is helpful.

• One and only’s: You should measure total margin on single bidder jobs in comparison to multi-bidder jobs. Sometimes we get complacent when bidding against engineer’s estimates and it’s vital to track awarded single bidder GP over time.

In Summary: In the long run, the contractor who consistently extracts the most margin from the market is winning the game. Margin capture is a more sustainable metric than just hit rate or revenue. Leveraging technology to automate the process of calculating and optimizing margin capture can enhance your business. We make this easy with Edgevanta. To learn more, reach out.

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Stoic Wisdom Quote

“Happiness is in making things rather than in consuming them” - Will Durant

Reflect on this as we embark on another week of bidding and building.

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Warmly,

Tristan

About the Author

Tristan Wilson is the CEO and Co-Founder of Edgevanta. We make software that helps contractors win more work at the right price. He is a 4th Generation Contractor, construction enthusiast, bidding nerd, ultramarathoner, and paving nut. He worked his way up the ladder at Allan Myers in the Mid-Atlantic and his family’s former business Barriere Construction before starting Edgevanta with his Co-Founder Matt in Nashville, where the company is based. Reach out to him at [email protected]