Many engineering firms underbid projects to remain competitive, only to find themselves struggling with low profit margins, tight cash flow, and unsustainable growth. While winning bids is essential, pricing projects too low can ultimately harm a firm’s long-term financial health.

The key to sustained success and profitability in engineering is not just securing more contracts but pricing them strategically to ensure profitability. This article explores the risks of underbidding and provides actionable strategies for engineering firms to optimize project pricing and financial performance.

The Risks of Underbidding in Engineering

Firms that consistently underbid projects often face financial instability and operational challenges that limit long-term growth and stunt profitability in engineering firms. Common risks include:

• Eroding profit margins – Underpricing work leaves little room for reinvestment in talent, technology, and business expansion.
• Cash flow constraints – Insufficient revenue from projects can create difficulties in covering payroll, overhead costs, and unexpected expenses.
• Operational strain – Underfunded projects place stress on employees, leading to overwork, burnout, and decreased efficiency.
• Difficulty raising prices – Consistently low pricing can set unrealistic expectations with clients, making it challenging to increase rates in the future.

To avoid these challenges, engineering firms must move away from a volume-based approach and develop a structured pricing strategy that aligns with financial goals.

How to Price Engineering Projects for Maximum Profitability

A well-defined pricing strategy ensures that projects are competitive and financially sustainable. The following steps can help firms achieve this balance and ensure profitability in engineering.

1. Identify the True Cost of Labor

Labor costs account for a significant portion of project expenses, yet many firms fail to fully account for the total cost of employment. It is essential to calculate:

• Salaries and wages
• Benefits, including healthcare, retirement contributions, and paid time off
• Training and certification costs
• Indirect expenses, such as software, equipment, and administrative support
  
  

Without a clear understanding of labor burden, firms may set hourly rates too low, leading to reduced profitability.

2. Develop a Strategic Bid Pricing Model

Rather than focusing solely on offering the lowest bid, firms should use a pricing model that ensures profitability while remaining competitive. Key approaches include:

• Cost-Plus Pricing – Establishes a base cost for labor, materials, and overhead, then applies a markup to ensure a reasonable profit margin.
• Market-Based Pricing – Benchmarks pricing against industry competitors while considering the firm’s unique capabilities and reputation.
• Value-Based Pricing—This pricing method involves evaluating services based on the specific value they deliver to the client, such as efficiency, expertise, and innovative solutions.

Each project may require a combination of these pricing strategies to achieve optimal results.

3. Implement Accurate Job Costing and Financial Forecasting

Without precise job costing and financial forecasting, firms risk underestimating project expenses. To improve accuracy:

• Utilize real-time cost-tracking software to monitor project expenditures.
• Standardize estimating processes to ensure consistency across bids.
• Regularly analyze project profitability to refine pricing strategies and avoid repeated underbidding.

By integrating these financial management practices, firms can make data-driven decisions that enhance profitability.

4. Adjust Billable Rates to Reflect True Costs

Many engineering firms set hourly billable rates based on industry standards rather than their actual financial requirements. To establish a profitable rate, firms should:

• Calculate total labor costs and overhead expenses.
• Determine a target profit margin that aligns with long-term business objectives.
• Adjust rates based on the complexity and specialization required for each project.

After working with The Cash Flow CFO, an engineering firm was able to identify its true labor burden and adjust its pricing structure. As a result, the firm increased its hourly billable rate by 15 percent, significantly improving profitability without losing clients.

Strengthening Financial Performance for Long-Term Growth

Underbidding may secure short-term contracts, but it often leads to long-term financial instability. Engineering firms must take a proactive approach by evaluating costs, refining pricing strategies, and implementing financial management systems that support sustainable growth.

The Cash Flow CFO specializes in helping engineering firms develop data-driven financial strategies that optimize profitability. Schedule a free strategy session today to learn how to improve cash flow, maximize margins, and position your firm for long-term success.