As a contractor, it’s critical that you keep an eagle eye on a multitude of tasks. But, one task in particular that’s susceptible to being overlooked is how you handle your estimates. If you aren’t careful, you might just find yourself digging a hole into your profits.
Fixed price or approximate estimates?
The first thing to review when looking at your estimates is how they’re being generated. Estimating methods tend to fall into two categories: fixed price and approximate.
Because they incorporate detailed information, fixed-price estimates are typically the most reliable method. Of course, as you well know, the contractor bears a bigger portion of the risk than the owner does because the job is set at a fixed price — even if costs rise higher than expected.
Many construction companies prepare fixed-price estimates on a lump-sum basis. That is, estimators compile a job’s price after closely analyzing drawings, specifications and other bidding documents. They then calculate the costs of materials, labor, equipment, subcontractors, overhead and other job-related expenses before applying a markup to the total cost to obtain a lump-sum estimate.
You may also produce fixed-price estimates on a unit-price basis. Here, you submit the bid based on the individual line items. As with a lump-sum estimate, the result determines the total project cost. Your estimator, however, segregates expenses according to each line item’s unit price.
The second method — an approximate estimate — is a shortcut that gives you only a rough idea of a project’s cost. Estimators primarily look at expenses derived from previous jobs, refining their figures as they learn more project specifics.
Over a selected period — one calendar year is sufficient, though a two- to three-year sample size is best — look at how your construction company’s estimates were generated. Are too many approximate estimates creeping in and hurting profitability? Are your fixed-price estimates using updated materials costs and realistic labor data?
Are your estimations accurate?
Estimates are math — and the more complex the calculation, the more likely it will account for the many variables involved. Failing to apply an evolving profit margin calculation algorithm can reduce the value of jobs over time.
For example, if you estimate profitability on a flat, 10% sales price across most projects, you could lose money as changes and delays occur. Breaking down costs more specifically can prevent such losses. And there’s no better way to do so than with today’s estimating software.
Construction-specific estimating applications reduce errors and create a historical database to help you refine procedures and generate more accurate data for future projects. They can also relieve much of the drudgery associated with routine, repetitive and time-consuming calculations. So make sure your software is up to date.
Are your estimators qualified?
Your first and last line of defense in generating accurate estimates is the people doing the job. When reviewing estimators’ performance or when hiring new ones, make sure you’re employing professionals who can visualize project phases in great detail. They should also have good organizational and communication skills, a thorough knowledge of construction materials, processes and software, and the ability to understand today’s more detailed drawings and specification documents.
No matter how skilled your estimators or what methods they use to prepare bids, it doesn’t hurt to have another party occasionally check their work for accuracy. This person could be you, a project manager or even an outside consultant. When reviewing estimates, verify that the projected gross profit of each job is in line with your profitability objectives and the current bid market.
To help ensure accurate reviews of estimates, encourage estimators to work transparently; you must know how he or she arrived at the quoted job price.
Keeping your bottom line healthy
After you complete projects, go back and compare estimates with your actual job costs. Investigate projects that went under or over the original estimates to find out what went right or wrong and to learn from the process. Remember, the more accurately you estimate projects, the more precisely — and profitably — you can quote prices for quality workmanship.