Augment

Construction Tenders: When Winning the Job Isn't Worth It

Sunday 23rd March 2025

Jon Richards

🚨Unpopular opinion alert🚨

Far too many main contractors (especially when tendering for large government projects) are pricing jobs so tightly that the risk far outweighs the potential reward.

The old “rule of thumb” — 10% overhead and 10% profit (a 1.2 markup) was once seen as a reasonable starting point; a way for contractors to price work sensibly and aim for a fair 10% net profit.

But the reality today is very different.

Industry data shows that on public sector tenders, contractors are often working on combined overhead and profit allowances of just 5–8% — sometimes even lower.

The Numbers Just Don’t Stack Up

Let’s break that down on a £5m project cost:

• A typical government tender might allow/expect an 8% combined overhead and profit
• That gives a £5.4m contract value
• An 8% markup translates to a 7.4% gross margin (profit as a % of turnover)
• Out of that, the contractor needs to cover head-office costs, project risks, and profit

But overheads are so often underestimated.

The idea that most contractors can operate with overheads below 5% of turnover is absolute bullcrap. Unless you’re a huge contractor with serious economies of scale, it’s simply not realistic.

Even if overheads are actually 5%, that immediately eats up most of the 7.4% margin — leaving around 2.4% profit if everything goes perfectly.

And let’s be honest — how often does a £5.4m job go exactly as planned?

The Reality on Site

The harsh reality is that many contractors end up relying on project variations just to make any profit — or worse, charging their private sector clients more elsewhere to cover shortfalls.

When margins are that thin, corners get cut. Not because contractors want to — but because they have to!

The end result? A “cheap” job that looks good on paper but isn’t built to last.

It’s a broken model — and the cashflow pressure it creates is enormous.

The Client Mindset is Part of the Problem

What really gets me is this belief (especially in the public sector) that forcing contractors down to the lowest possible price somehow delivers “best value”.

It doesn’t.

All it really does is create a system where the job only gets finished because the contractor is relying on variations or cross-subsidising from private clients just to survive.

How is that a healthy and sustainable model?

Maybe it’s time clients rethink what “value” really means, because the current race to the bottom isn’t serving anyone in the long run.

Risk vs Reward is Completely Skewed

And beyond that — the risk/reward balance is completely skewed. Contractors are taking on huge financial and delivery risk:

• Design changes
• Delays
• Supply chain failures
• Cost inflation

But the margins don’t even come close to reflecting this risk. If it all goes wrong, the contractor carries the pain, not the client.

At some point, contractors need to ask themselves: Why am I doing this?....

Because if you’re taking on a multi-million-pound project in risk and stress, carrying cashflow, and working for 2% profit at the end of it — is it really worth it?

Your experience, your people, your business — it’s surely worth more than that!?

The Hidden Cashflow Killer

Finally, just to expand on the cashflow pressure this model creates…

On projects like this, contractors are usually the ones funding the job upfront; paying suppliers, subcontractors, staff — long before they see a penny from the client.

That means they need serious cash reserves or they’re forced to borrow, racking up interest costs that hammer what little margin they’ve got left.

Let’s say the contractor needs to carry £1m in working capital throughout the project. Right now, they could stick that £1m on a 12-month fixed deposit and get 4.5% annual return — earning £45k a year for doing absolutely nothing:

🥱No sleepless nights
❌No chasing payments
🏗️No running a site
📉Much lower risk

Compare that to taking on a £5m+ project:

🤔Managing the risk
😓Dealing with the stress
🙇🏻‍♂️Managing cashflow headaches

All for the chance of making £130k if it all goes perfectly.

The numbers just don’t stack up.

Final Thoughts

In my view, it’s time for contractors to start saying "No" to unsustainable tenders, and it’s time for clients to rethink what they mean by “value” - because right now the system is broken and it’s not working for anyone in the long run.

Perhaps the harshest truth of all? Far too many contractors chase these large projects because they’re chasing big turnover (often to sustain them) when really, they should be focusing on profitable work. As the saying goes:

Turnover is vanity, profit is sanity, but cash is king.

If you’ve experienced this or have a view, I’d love to hear it.

At Augment, we help construction clients understand their true costs, improve profitability, and protect cashflow. We don’t just report numbers after the fact—we help you price work properly, assess risk, and focus on sustainable, profitable growth.

Because winning work at any cost isn’t winning.