To justify a £250,000 increase in investment in a typical bid team requires either a 0.15% increase in win rate or for the bid team to produce 5 extra bids a year. This paper breaks down the maths of bid investment.

## Overview and simple example:

To justify a £250,000 increase in investment in a typical big bidding function in a large corporate requires either:

1) an increase in winning percentage of less than 1%; or

2) for the bidding function to be able to produce fewer than 10 extra bids a year.

## Simplifying assumptions:

Bid teams cost money. Let’s call the additional amount spent on a bid team X.

Bid teams produce bids. Let’s call the number of bids produced Y.

Those bids have a certain average chance of winning. Let’s call that P.

Each of those bids generate a certain average amount of margin. Let’s call that M.

If X > YPM then the additional bid team spend is profit reducing.

If X = YPM then the additional bid team spend is profit neutral.

If X < YPM then the additional bid team spend is profit enhancing.

## A worked example

A bid team costs £1 million.

They produce 20 bids.

They win 50% of bids.

Those bids produce, on average 0.5m margin.

X = £1m

YPM = 20 * 50% * 0.5 = £5m

The bid team costs £1m and generates £5m and is a very good investment.

## Increasing investment, increasing return

We can now start to explore some of these relationships. To simplify, I am going to assume that bid teams cannot influence contract profitability. (This is obviously not true in the real world).

If you invest 500k in a bid team currently producing 20 bids and winning 50% at 0.5m margin then to make your 500k back you need to either:

- Increase your bid production from 20 bids to 22 bids (0.5m = 2 * 50% * 0.5); or
- Increase your win rate from 50% to 55% (0.5m = 20 * 5% * 0.5); or
- Some combination of the above.

## Approximating the average margin on a won contract

If bid team costs 1m and the average margin on a won contract is £100k then the bid team needs to win 10 contract a year to break even.

You can approximate the average margin on a won contract for a business by looking at its EBITDA and the number of contracts it delivers.

Organisation X has an EBITDA of 100m and delivers 1,000 contracts. 100m/1,000 = £100,000.

To justify a £250k increase in business development spend in this organisation you would need to win at least 2.5 more contracts a year.

## The number of won contracts = YP (The number of contracts bid multiplied by the probability of winning)

Assume current P is 50%.

Number of won contracts is currently 1,000.

We can work out that the organisation is currently bidding 2,000 to win 1,000. (1000/50%).

To win 1,003 and justify the additional 250k spend would need to increase P from 50% to 50.15%

Alternatively, you would need to bid 2,005 contracts rather than 2,000.

## Basic Conclusion

For large bidding functions, in big contracting businesses, very small increases in winning chances and/or number of bids produced easily justify significant investment in those teams.

## Further Work

This is a very basic framework that ignores time, margin enhancement/dilution, risk premiums for investment and various upside and downside analyses. Further articles will explore some of these issues.