You know what I really hate? It's negotiating an easy project to build, with a great customer, who doesn't question our costs, and gives us the job at our fair price. Then, several months later, discovering the estimator didn't have enough in the budget for labor to complete the work. This scenario is my worst nightmare.
All the time and energy invested in building a trusted customer relationship to get them to negotiate a construction project with our company are wasted. Then, after working on the project for several months, not making any money.
I ask the estimator, “What happened?” He blames the project manager, or the superintendent, or the weather, or the architect, or the engineer, or bad plans, or his childhood, or whatever.
Has this sorry situation ever happened to you?
I get many different responses to the question, “What is the estimator's #1 priority?” when I speak at conferences and conventions:
- Bid many jobs
- Get lots of profitable work
- Maximize sub-bid coverage
- Be competitive
- Know what everything costs
- Make a profit.
I believe that the top priority for an estimator is to arrive at accurate job costs. I don't want a bid to be an estimate of what it might cost, plus or minus 1%, or 2%, or 10%. Accuracy is the key.
The only variable on any bid should be the profit mark-up. Excellent estimators know what everything costs. They estimate to within less than 1% of the final actual cost.
1. Time Cards – Excellent estimators know the process starts with accurate information from the crews who actually do the work. Insist that the timecard be divided into the cost codes the company wants to use for estimating. It is the estimator's responsibility to ensure field workers are filling out timecards correctly.
2. Labor Burden Rate – Do you know how the labor burden rate is calculated? Is it accurate or an approximation of what the accounting department thinks it should be?
An accurate labor burden rate is essential for estimating. If the rate is padded, the company is too expensive; and if it's not complete, the bid is too low. Review the rate for accuracy and include taxes, workers' compensation, medical, liability insurance, vacation, union dues, safety training, small tools, overtime, and downtime.
3. Crew Bid Rate – Excellent estimators use various crew rates to bid different projects, based on what the job needs. A crew on a difficult job needs more experienced people, while a larger, simple project can use less trained members. Figure different crew sizes and make-ups to determine an accurate man-hour crew bid rate.
Calculate bid rates for 2, 3, 5, 10, and 20 people crews. The rate varies considerably for different configurations.
4. Equipment Rates – Excellent estimators know what equipment really costs. Calculate the expense for each piece of equipment the company uses. Total the purchase price, interest, maintenance, gas, and insurance over the life of the equipment. Divide this total cost by the expected number of billable hours to arrive at an accurate cost per hour.
5. General Conditions – Most estimators either guess at the actual costs of job start-up, managing, supervising, temporary facilities, and closing out projects; or use a percentage to figure general conditions. Often, the unit prices used are outdated and inaccurate.
I find that on a typical eight-month project our general conditions vary from $10,000 to $25,000 per month. Accurate estimating must include a review of what the general conditions really cost and then budget based on input from the field.
6. Overhead – Company overhead is a fixed (not percentage) amount. Divide total projected annual overhead by total projected annual job costs (not sales volume). This percentage equals the actual overhead recovery markup to use.
For example, $800,000 projected annual overhead/$5,000,000 projected annual job costs = 16% markup for overhead recovery. Don't get trapped into using an industry average, such as 15% or 20%.
7. Profit Mark-Up – Profit markup is not determined by what the company can get. It is a fixed amount of what you want.
To determine the profit markup required to hit the company's goal, divide total annual projected costs by the annual profit goal to determine markup. For example, $400,000 annual profit goal/$5,000,000 projected annual job costs = 8% markup to hit the profit goal.
If the company can't achieve 8% profit markup, the only solution is to adjust the volume up and the markup down until the $400,000 profit target is attained.
– George Hedley owns Hedley Construction and Hardhat Presentations. He is the author of “Everything Contractors Know About Making a Profit,” and speaks on the “Business Success Blueprint” his step-by-step system to build profits, people, customers, and wealth.He can be contacted at firstname.lastname@example.org.