Reverse Auction Floor Price Calculator

Your floor price is your walk-away price: the lowest figure at which winning the contract still leaves you better off than losing it. It is built from your own cost base, it is never disclosed to the buyer or to the other bidders, and it is the only number in the auction you fully control.

Three published numbers get confused with it, and none of them are it.

• The estimated cost put to tender. The department's own estimate of what the work should cost. It tells you what the buyer thinks, not what you can afford.
• The start price or ceiling in the auction. The figure above which bids are not accepted once the auction opens. The auction terms of the specific tender state how it is fixed.
• A reserve price. A buyer-side limit, the most the buyer is willing to pay. It faces the opposite direction to your floor.

Two firms bidding the same work will have different floors, and that is correct. One has a crew already on that stretch of road, one has half its guarantee limit consumed by an ongoing contract, one is a micro enterprise exempt from the EMD. How the auction itself runs, decrement by decrement, is covered in reverse auction in tenders. This page is only about the arithmetic behind your number.

Floor price = direct cost + site overhead + head office allocation + financing cost + minimum contribution.

• Direct cost. Materials at quoted rates with their validity dates noted, labour, plant, subcontract packages, and any tax you cannot take credit for. A quote that expires before the contract does is a risk rather than a cost, and it belongs in the contribution or in a price variation position.
• Site overhead. Everything the job needs that no BOQ line pays for: site establishment, supervision, insurance, security, testing, utilities. Cost it over the period the contract will actually run, not the period printed in the notice.
• Head office allocation. The share of your fixed cost this contract should carry. A contract carrying none is being subsidised by the contracts that do.
• Financing cost. The next section, because it is the line most build-ups leave out entirely.
• Minimum contribution. Not a habitual percentage. The answer to one question: what does this contract have to earn to justify the crew, the guarantee limits and the bid capacity it will occupy for its whole life?

Do this once, on paper, before the auction opens, and treat the answer as fixed. The wider costing method sits in how to price a government tender. Every figure you type into the calculator above stays in your browser.

Each of these is the same arithmetic: the amount held, multiplied by your cost of capital, multiplied by the months held divided by twelve.

• EMD, from submission until refund. Not until award, until the money is actually back in your account. See EMD and working capital and the EMD calculator.
• The performance guarantee, over its whole life. Commission at your bank's rate per annum, plus margin money that is lien marked and unusable, for the contract period plus the defect liability period plus the claim period. On an eighteen month works contract that is comfortably more than two years of both. Use the bank guarantee cost calculator.
• Retention. Deducted bill by bill and released only after the defect liability period, which usually makes it the longest held of the four. See retention money.
• The gap between doing the work and being paid for it. You fund materials, wages and subcontractors from the day work starts until the running bill is certified and paid. See delayed payment.

Deducted taxes belong here rather than in cost. Income tax TDS and GST TDS are creditable, so they are not an expense, but you finance them until you claim them. See TDS and GST on government contracts.

The percentages behind all of these vary by department and by contract. Read the EMD, guarantee and retention figures from the notice and the conditions of contract rather than assuming a standard rate.

The floor is only as good as five or six numbers, and the same ones go wrong repeatedly.

• Cost of capital set at the wrong rate. Use what the next rupee actually costs you, normally your cash credit or overdraft rate, not a deposit rate. Money locked in an EMD is money not available to the business.
• Contribution taken as last year's margin percentage. That is a historical average, not a decision about this contract. Set it as an amount that reflects what the work occupies.
• The guarantee costed for the contract period only. It has to stay live through the defect liability period and a claim period, so its cost is set by its validity, not by the construction programme.
• Creditable and non-creditable taxes mixed up. A credit financed for a few months is a small number. A cost treated as a credit is an under-recovery on every bill.
• Today's material prices assumed for an eighteen month contract with no price variation clause. If the clause is absent, the risk is yours and it belongs above the floor.
• Bid preparation cost included. It is spent whether you win or lose. It belongs in your bid or no-bid judgement, not in the floor.

One more, which is not arithmetic: the bid stays binding through the bid validity period. The price you set is a price you have to hold.

It does not tell you the price at which you will win. It is a limit, not a forecast, and nothing about your cost base predicts anyone else's. If you want evidence on where prices in a category actually land, published award results are the closest thing available, and reading award data before you bid explains what to take from them.

It does not tell you whether to bid at all. A price that clears your floor by a rupee still consumes a crew, a guarantee limit and a slot in your bid capacity for the contract period. That judgement sits before this calculation, in the bid or no-bid decision.

It does not price the tail. A thin contribution absorbs nothing: one rejected batch, one stoppage, one extension of time refused, and a contract at the floor is a contract at a loss. Where the programme is already tight, put your liquidated damages exposure next to the contribution and compare the two.

And it gives no credit for anything other than price, because in a lowest-price auction the buyer is not offering any. Where the evaluation is QCBS rather than L1, a technical point can be worth more than a decrement, and discounting as though every tender were L1 is a habit worth breaking.

Two statutory preference mechanisms can present you with a price that is not the one you bid, and both interact with your floor.

Under the Public Procurement Policy for Micro and Small Enterprises 2012, an MSE that quotes within the price band the policy specifies of the lowest bid may be given the opportunity to supply a share of the requirement by matching the lowest price. Under the Public Procurement (Preference to Make in India) Order, a local supplier of the specified class has a comparable right to match, where the conditions in the Order are met. The mechanics of each are in the MSE procurement policy and purchase preference under Make in India.

For a bidder holding a floor, the consequence is the same in both cases. The price on offer becomes L1's price, not yours. If L1 has closed below your floor, matching is a decision to work below your own walk-away price, and it should be refused on exactly the arithmetic that produced the floor.

The preference also cuts the other way. A micro or small enterprise registered on Udyam is exempt from EMD and tender fee under the same 2012 policy, which removes a line from its financing cost and genuinely lowers its floor. That is an exemption on production of a current certificate, unlike relaxation of prior turnover and prior experience under the General Financial Rules 2017, which a buyer may grant but is not obliged to. See MSME benefits in government tenders.

You stop, and you lose the tender. That is the outcome the floor exists to produce, and it is a result rather than a failure.

Only two things can be true of the price that beat you. Either the winner's cost base is genuinely better than yours, which is worth finding out and worth doing something about, or they have priced a mistake, which is not worth copying. Neither is a reason to move a number you set with a calculator and no clock running.

Chasing a price below the estimate is not free either. Where the conditions provide for it, an unusually low quote can attract a demand for analysis of rates and often additional performance security before award, rather than a straightforward letter. See abnormally low bids.

Afterwards, record two figures in a file you keep: your floor, and the price at which the auction closed. Over twenty auctions that file answers a question no single bid can. If you are consistently a few per cent above the closing price across one category, you have a cost problem worth attacking at source. If you are close most times and beaten occasionally by outliers, your pricing is sound and your discipline is what is earning the difference.