Strategize the guesswork
out of estimating

Plan to know where you stand so you can be in command.

By Charles Vander Kooi

Business, in many respects, is like a war. You, as the owners and managers of a construction company, are the Joint Chiefs of Staff, making plans for an approach to the battle called "getting and doing" construction jobs. Over the years, as I have worked with contractors, I have discovered the extreme importance of making these plans; of having an "estimating strategy."

A good strategy does 4 things for you

A good strategy enables you to know how every dollar you spend is going to come back to you through the categories on the estimates and bids you produce. One of the most beneficial things about having an estimating strategy is that costs that do not occur on every job, or those that are hard to pinpoint, will not fall through the cracks between what you pay out and what people pay to your company. A well-thought-through strategy will allow you to track each item in your checkbook carefully and completely, and to recover costs in the best possible ways.

Should you recover a certain cost through job costs, labor burden or overhead? The decision should not be based on which is easiest for you - though that is a consideration - but according to where the cost can be recovered in a proper way. Sometimes, mathematically, it will not work to put certain costs in certain areas. I have found contractors losing tens of thousands of dollars per year because they have put things into a wrong category, or have combined certain things that should not be combined.

One Example: Estimating the costs of equipment has always been a big problem in construction. If these costs are considered part of overhead, jobs that use very little equipment are penalized and have to pay-through overhead-more than their "fair share" of the equipment costs of the company. If you estimate your equipment costs on a job-by-job basis, you must still put any equipment used for overhead purposes (e.g., the owner's car or truck, the field manager's car or truck, etc.) into your overhead figures. If you don't figure your equipment costs this way, you will have money falling through the cracks.

A good estimating strategy will compensate for the variables that exist from job to job. You must recognize that no 2 jobs are exactly alike. Every job has different site conditions, requires a unique approach, and entails different costs, regardless of whether or not the materials are the same on one job as they are on another.

A good strategy will give you the flexibility to compensate for the variables. I have worked with contractors who have made money on one job at certain unit prices, but when they used those same money-making prices on another job they lost money. They knew things were a little different on the second job, but did not know how to compensate properly for those differences.

A good estimating strategy will give you the ability to control your jobs after you get a contract. That is, you will be able to make what happens in the field prove your estimate. This business is no less than a 2-punch business. Punch number 1 is putting out a good competitive bid. Punch number 2 is getting the work done for the amount of money you estimated in your bid.

A good estimating strategy will give you the ability, right from the estimate, to make that estimate become reality in the field. It really all begins with an estimate done in such a way that it can be used to control the job in the field quickly and accurately.

A good estimating strategy will give you the ability to make sound business/financial decisions. That's right! Your estimating strategy is one of the most important places to gather information for those types of decisions.

To make this happen, it's important to set up an overhead budget for a year in advance of the current year. Then set up overhead recovery percentages to recover those costs based on how much work you expect to contract and complete with your work force and the budgeted overhead. Those kinds of projections and plans give you a plumb line of where you are going.

Adapt, improvise and overcome

Unfortunately, things never work out exactly as we plan. Therefore, a good estimating strategy helps us determine what changes we will need to make in overhead costs, labor burden benefits, or salaries so our company will remain profitable and competitive in our marketplace.

Just as in battle, officers and infantrymen observe signs telling them to change tactics, you will see the effects of owners' budgets, other contractors' bids, and shifts in the economy that tell you to adjust your strategy in order to be successful. You will not be able to establish one estimating strategy and expect it to work for you year after year. In fact, the most successful companies rethink their strategies annually and monitor them after several bids.

Stop short-sighted decision-making

Even with change, an estimating strategy will help you make sound financial decisions. So many management decisions are based on emotions or on short-term situations.

For instance, a manager may want to hire additional people, or pay more benefits to his people, or give them raises because his employees come in and ask for these things. The manager, based on feelings and without proper ability to explain why these things can or cannot be given, grants or denies the requests.

Other times, a manager or owner may go out and buy a computer or other pieces of equipment without basing the purchase on any sound decision-making process. A good estimating strategy will give you such a system, such a process.

For example: Let's say you want to hire another office person. Everyone seems busy and it seems you could use her services. This "apparent need" should not be the major reason to hire her. Instead, you should base your decision on what you know from your estimating strategy:

You established an overhead budget that did not include additional office staff, and you are acquiring jobs based on that budget.

Will hiring her allow you to get enough additional work done to pay her salary?

Or, can you raise your prices enough to pay for another office person by doing the same amount of work with an increased overhead charge. And if you raise prices, will you still get your projected amount of work for the year?

If your estimating strategy shows that you cannot meet your goals if you hire another office person, you know you need to reconsider the workloads of existing staff, and whether some work needs to be done at all. An estimating strategy will help you make sound decisions based on numbers, not emotions.