Are govt tenders worth an SME’s time & money?

Each month there are more than 75,000 government tenders that are released which include both state and central government tenders. These government tenders make up around 10% of the country’s GDP. Most of the government tenders that are released come from state PWDs, MES, Indian Railways, etc and their value ranges from two lacs to one thousand crores. SMEs can find more business opportunities in such government tenders. Have a look at Government tenders

Business units from various industries like chemicals, garments, textiles, organic oils, packaging, etc can make the best use of this opportunity. Evaluating if investing in such government tenders is worth the time and the money is important. The average cost incurred in gathering the proposal falls between 0.5- 1% (1% is for calculation purposes) based on the value of the tender. The profit margin falls between 5-10% of the entire value of the tender. (10% is for demonstration purposes). The lower win rate is 15% and the Average win rate is 20%.

When the tender value is high, the preparation cost for the proposal will be lower. Moreover, it will also have an impact on the number of tenders that SMEs bid for. To know if the government tenders are worth it for SMEs, there are a few checklists. Below is the simple checklist to make an examination:

• Sort and pick the relevant government tenders which are available in your SME province where you would prefer to do business.

• The average value of the contract that you wish to bid for. Following this simple thumb rule, if the size of the tender is 25% or higher than the company’s annual turnover, it would be a better choice to drop it.

• The cost of preparing the tender proposal must be considered. When you are fresher to government tender contracting, the give-and-take cost must be greater than or equal to one percent of the government tender value and for the tender values that are less than twenty crores and between 0.1 to 0.5 percent for all the other tenders.

Arriving at the Break-even cost

Tender value (based on various government sites)

Value 1,00,00,000

Proposal making cost (%) value 1%

Proposal-making cost (INR) value of 1,00,000

Profit (10%, INR)

10,00,000

Total proposal submissions/year(#) 24

Win-rate (%) 15%

Total Cost (INR)  24,00,000

Total Profit (INR)  16,00,000

Return on Investment (INR) 67%

From the above-mentioned figures, to break -even, an SME must at least win 10% of the government tenders. Many times, SMEs are ignorant of whether they make any profit from the bids of such government tenders. The above table can be used to determine if SMEs can make a profit. But, there is a time gap of a few months from the actual bid for the proposal and receiving the payment for the tender. Hence, it is vital that SMEs have to decide carefully whether to bid, the right percentage to achieve breakeven, and to make a profit.