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Mastering the Construction Project Bidding Cycle and Financial Management

In the construction industry, success is built not just on winning bids but on managing projects profitably. Contractors must navigate the complexities of estimating, backlog management, and financial reporting to maintain sustainable margins. This article outlines the construction project bidding cycle, explains key financial concepts such as backlog and pipeline, discusses the importance of estimating accuracy and change order management, and explores Work-in-Progress (WIP) accounting methods. Additionally, it will cover how WIP ties to Cost in Excess of Billings (CIEB) and Billings in Excess of Costs (BIEC) and how these impact a company’s balance sheet.

The Construction Project Bidding Cycle

Winning a construction project requires strategic bidding and precise financial planning. The typical bidding cycle includes the following stages:

1. Project Identification

• Contractors identify potential projects through bid announcements, relationships with developers, and invitations to bid from general contractors or owners.

2. Prequalification

• Many owners require financial statements, bonding capacity, and past performance records before allowing a contractor to bid.

3. Bid Solicitation

• General contractors release bid packages with specifications, drawings, and contract terms, allowing subcontractors and suppliers to submit pricing.

4. Estimating & Takeoff

• Contractors conduct quantity takeoffs, analyze labor and material costs, and apply overhead, risk contingencies, and profit margins.

5. Proposal Submission

• The bid is submitted, including cost breakdowns and proposed timelines. Competitive but realistic pricing is key to securing work while maintaining profitability.

6. Bid Review & Negotiation

• The owner evaluates proposals and may negotiate terms before awarding the contract to the selected bidder.

7. Contract Award & Execution

• The successful bidder signs the contract, mobilizes resources, and begins project execution.

A well-managed bidding cycle ensures contractors secure projects that align with their capacity, capabilities, and financial objectives.

Understanding Backlog and Pipeline

Backlog

Backlog refers to the total dollar value of work under contract that has yet to be completed. It represents a contractor’s future revenue stream and workload. Managing backlog effectively ensures resource availability and cash flow stability.

Pipeline

Pipeline consists of potential projects in various stages of bidding or negotiation. A strong pipeline ensures continuous work opportunities, reducing gaps in revenue and maintaining operational stability.

A balanced backlog-to-pipeline ratio prevents overextension while ensuring steady project acquisition.

The Importance of Accurate Estimating and Change Order Management

Accurate Estimating

Bidding too low can result in negative margins, while bidding too high reduces competitiveness. A robust estimating process should include:

• Detailed quantity takeoffs using historical cost data and real-time material pricing.
• Risk assessment to factor in potential cost overruns.
• Labor productivity analysis to avoid underestimating workforce costs.

Managing Change Orders

Change orders—resulting from design modifications, unforeseen conditions, or client requests—can significantly impact project profitability. Without proper management, they can erode margins. Best practices include:

• Defining clear contract terms regarding change orders.
• Documenting all changes promptly and securing owner approval before proceeding.
• Tracking cost and schedule impacts to ensure profitability is maintained.

Failure to manage change orders effectively often leads to disputes and financial strain.

Work-in-Progress (WIP) Accounting Methods

WIP accounting tracks earned revenue and costs on ongoing projects. The two primary methods include:

1. Percentage of Completion Method (PoC)

• Revenue is recognized proportionally to the percentage of work completed.
• More accurately reflects financial performance and profitability.
• Preferred for large, long-term contracts where progress billing is used.

2. Completed Contract Method (CCM)

• Revenue and costs are only recognized when the project is fully completed.
• Delays revenue recognition, which may defer tax liabilities but can create cash flow instability.
• Used for short-term projects or when there is uncertainty in project completion timelines.

Most contractors prefer the Percentage of Completion method as it aligns revenue recognition with actual work progress.

Why Weekly “Cost-to-Complete” Job Variance Analysis is Critical

Tracking actual costs versus budgeted costs ensures project profitability. Running a weekly cost-to-complete variance analysis helps:

1. Identify cost overruns early, allowing corrective action before losses accumulate.
2. Improve forecasting accuracy, refining estimates for future projects.
3. Ensure cash flow stability, avoiding surprises in financial reporting.

Without routine variance tracking, contractors risk unexpected cost escalations and reduced profitability.

How WIP Ties to CIEB/BIEC and the Balance Sheet

WIP accounting ties directly into Cost in Excess of Billings (CIEB) and Billings in Excess of Costs (BIEC), which impact a contractor’s balance sheet.

Cost in Excess of Billings (CIEB)

• Also known as underbilling, CIEB occurs when a contractor has incurred more costs on a project than has been billed to the client.
• Appears as a current asset on the balance sheet, as it represents revenue earned but not yet invoiced.
• Often indicates slow billing processes or owner-related payment delays, which can strain cash flow.

Billings in Excess of Costs (BIEC)

• Also known as overbilling, BIEC occurs when a contractor has billed more than the costs incurred.
• Appears as a current liability on the balance sheet, as it represents revenue received in advance for work not yet completed.
• Overbilling can temporarily improve cash flow but must be managed carefully to avoid underperformance on the remaining scope.

Mapping to the Balance Sheet

• CIEB (underbilling) increases assets, reflecting revenue yet to be collected.
• BIEC (overbilling) increases liabilities, representing unearned revenue.
• Contractors must monitor WIP closely to avoid excessive underbilling (which can lead to cash shortages) and overbilling (which may create financial strain later if project costs exceed estimates).

A well-managed WIP schedule ensures accurate financial reporting and stable cash flow, preventing surprises in financial statements.

Conclusion

Success in construction requires more than just winning bids—it demands precise financial control. Contractors who accurately estimate costs, manage change orders effectively, and track WIP correctly are better positioned to maintain sustainable margins.

By implementing:

• Robust backlog and pipeline management to ensure consistent project flow.
• Accurate estimating and proactive change order control to protect profitability.
• WIP accounting and weekly variance analysis to track job performance.

Contractors can stabilize cash flow, enhance profitability, and strengthen financial resilience.

By tying WIP to CIEB/BIEC, contractors ensure their balance sheets reflect true financial health, avoiding cash flow pitfalls and enabling long-term success.

Paul Fioravanti, MBA, MPA, CTP, is the CEO & Managing Partner of QORVAL Partners, LLC, a FL-based advisory firm (founded 1996 by Jim Malone, six-time Fortune 100/500 CEO) Qorval is a US-based turnaround, restructuring, business optimization and interim management firm. Fioravanti is a proven turnaround CEO with experience in more than 90 situations in more than 40 industries. He earned his MBA and MPA from the University of Rhode Island and completed advanced post-master’s research in finance and marketing at Bryant University. He is a Certified Turnaround Professional and member of the Turnaround Management Association, the Private Directors Association, Association for Corporate Growth (ACG), Association of Merger & Acquisition Advisors (AM&MA), the American Bankruptcy Institute, and IMCUSA. Copyright 2025, Qorval Partners LLC and/or Paul Fioravanti, MBA, MPA, CTP. All rights reserved. No reproduction or redistribution without permission.

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