Government contracts account for as much as 18% of GDP which makes them a lucrative source of revenue for small and medium businesses (SMBs).or are they? Are they really as attractive for SMBs as the GDP share indicates?
TenderScout is a SaaS platform that enables SMBs to compete for these contracts, however the no.1 objection our sales team encounter when prospecting into new clients is that “it’s just too hard to win government contracts”.
And they’re not wrong. In fact, the European Union estimates that the average win rate of an SMB is around 26%. [CLICK HERE TO DOWNLOAD PDF]. To put it another way, SMBs win just 1 of every 4 proposals that they write.
How to make government contracting worthwhile
The pertinent question is whether winning 1 in 4 is actually good enough. What number is the ‘right’ number that makes government contracting both profitable and worth the effort?
To answer that question, we first need to set some parameters around the cost of competing for a tender and the resulting value of the contracts won.
|The average value of each contract across the European Union||€60,000|
|The average cost of compiling a proposal||€2,700||3-6% of the contract value depending on the maturity of the SMBs government contracting operation. We use 5% in our calculations.|
|Average Win Rate||26%|
|Profit||€6,000||Profit margins are hard to find, but 5-10% of the contract value has been cited for larger firms. We use 15% in our calculations.|
Average tender win rates
Actual figures vary widely from industry to industry, but it is indicative that using these figures we can determine, on average, whether SMBs are spending more on compiling proposals than they are earning from those proposals that are successful.
|Cost of Proposal||€3,000||Total Cost||€12,000||€12,000|
|Number of Proposals||4||Return on Investment||(-€2,640)||€600|
Furthermore, the figures reveal that an SMB needs to win 35% of the contracts that they compete for just to break-even on their tendering activities.
Over the past few months we asked over 250 SMBs to reveal their win-rates to us. The most common answer we received from 80% of SMBs is that they simply don’t know what their win-rate is. They don’t know whether they’re making or losing money on their government contracts.
Is Government Contracting worthwhile for my SMB?
Many SMBs make significant and impactful revenues from government contracting. To figure out if government contracting is right for your SMB:
- Determine how many opportunities are in your sector and in the regions you want to do business in. You may end up competing for less than 10% of all the opportunities available for you, so you need a reasonable amount to start with – 100 opportunities is a good number to work with.
- Determine your average value of the contracts that you want to compete for. The average for all tenders is €60,000 but it can be significantly more (or less!).
- Determine the cost of compiling a proposal. If you’re just starting out, it’s likely to be in the region of 6% of the contract value; if you have lots of repeatability in your proposals it will be closer to 3% of the contract value.
- Use the formulas above to calculate the total cost of competing and whether it is affordable to the business, bearing in mind that there can be several months between writing a proposal and getting paid!!
- Again using the formulas above, calculate your break-even win-rate, the minimum %, where you’re not losing money. Unless you’re lucky enough to work in a sector with high profit margins and low competition, it will most likely be in the region of 35%.
Having completed this exercise, you will now have a good idea of the potential costs and potential tender success for your business. Compare this with your current costs and win-rate.
Contact us if you’re not happy and you want to realise the potential for your business. Our dedicated Customer Success Team love to speak to you about a winning tender strategy for your business.