Hidden Costs in Tendering — The Silent Profit Killers
Introduction
In tendering we spend hours perfecting technical proposals, commercial schedules, and compliance checklists. But many bidders lose margins — not because they priced poorly, but because of the costs they didn’t foresee. These hidden costs are real, and if you ignore them, they can quietly erode profit and derail delivery.
What are hidden costs?
Hidden costs are unplanned or underestimated expenses that surface during execution. They are often invisible at bid time because they stem from assumptions, external changes, or scope ambiguities. Common examples include:
- Mobilization delays that extend project timelines and increase lodging/logistics expenses.
- Currency fluctuation and inflation affecting imported materials and equipment.
- Community engagement or local content requirements that demand additional manpower or payments.
- Rework when specifications are unclear or the scope is under-defined.
- Overtime and extended contractor costs due to unexpected site constraints.
- Regulatory or certification demands introduced after award.
The impact during execution
Hidden costs hit projects in three main ways:
- Profit erosion: Margins shrink when unforeseen expenses are absorbed.
- Cashflow strain: Unplanned outlays disrupt working capital and may delay payments to subcontractors.
- Reputational risk: Cost pressures can lead to corner-cutting, quality compromises, and strained client relationships.
How can hidden costs be recovered or mitigated?
Recovering hidden costs is possible — but it depends on preparation, contractual rigour, and communication. Here are practical strategies I use:
1. Include clear contractual protections
Draft variation clauses, escalation clauses, and scope definitions that allow for price or time adjustments when conditions change. Also include clear approval processes for variations so emergency costs don’t become your burden by default.
2. Ask clarifying questions early
Use the tender clarification period to remove assumptions. Don’t assume anything about access, permits, local liaison, or data quality — get confirmation in writing.
3. Add a contingency line item
Include a modest contingency (typically 1–5% depending on project risk) in your commercial schedule. Label it transparently — it’s a buffer, not a hidden profit.
4. Price risk items separately
Where risks are identifiable but uncertain (e.g., customs delays, local levies), price them as separate provisional sums or priced options. This makes it easier to claim additional costs when they materialize.
5. Record and document everything
When hidden costs occur, keep detailed records (timestamps, correspondence, site photos, invoices). Documentation is essential to support variation claims and expedite approvals.
6. Build strong client communication
Proactive, transparent communication with the client makes recovery more likely. Early notification of issues and proposed remedial costs builds trust and speeds resolution.
Prevention: the real profit protector
The best defence is prevention. Conduct thorough risk assessments during bid preparation, engage local knowledge advisors, and stress-test assumptions with your delivery team. A realistic bid with fewer surprises beats a low bid that forces recovery efforts later.
Conclusion
Hidden costs are the silent profit killers of tendered projects. Recognising them, planning for them, and embedding contractual and operational safeguards is what separates firms that win sustainably from those that win once and struggle thereafter.
Over to you
Have you faced hidden costs on a project? How did you resolve them — or prevent them next time? Share your experience below; practical stories help the whole industry get better.
No comments:
Post a Comment