Straight Answers to Tough Questions
Q: I enjoyed your article Accurate Estimating Systems Are Accurate. You made some excellent points for contractors to consider. I would suggest two other points for your consideration regarding estimating and job costing:
1. Some contractors would argue about all the job cost records you recommend. They probably claim they don’t have time to keep and watch detailed field reports. What they don’t consider is the wasted cost of estimating. Contractors don’t get 100 percent of work they bid. Most average 25 to 30 percent bid success rate which means 70 to 75 percent of estimates are wasted effort. What is the cost of wasted bids? Few contractors know that number. If estimators focus on jobs they’re more likely to win they can raise their bid success rate.
2. Your discussion seems to assume contractors can raise their bid price and still get jobs. This isn’t the case in a competitive world. There is another way to approach it by applying the targeted cost approach. In this approach, the contractor starts with what it will take to win a job. While this may not be known, most experienced estimators have a good idea of what this number is. Subtract from that number the profit target required by the company. That yields the targeted cost which would include overhead and the direct costs of doing the job. Most estimators get upset at this approach because they feel it would be impossible to hit the targeted costs without cutting corners or compromising quality. By giving the field a target cost, both overhead and field installation costs can be reduced and still maintain quality. Most contractors still operate from the old paradigm that costs must keep going up. Most estimates seek to reflect the actual costs of doing the work, but that means they reflect the poor productivity and much waste that exists in most construction work. If you can reduce costs, you can lower your bids while still maintaining profit margins, which will allow contractors to capture more work.
Dennis Saur
Quality Service Systems
A:
Thanks for your ideas. I am a contractor, not a consultant. We bid work and then our crews must perform it with within the estimate. IF construction companies are using an ongoing integrated training program and job cost tracking system, they can operate at 90 percent efficiency. The problem is that most contractors do NO training or tracking, and therefore, only operate at 50 to 66 percent efficiency. The other big problem is most contractors don’t market to customers or select the right jobs and clients to work with.
My markup philosophy is to bid at the market rate you need and can get to achieve your company overhead requirement plus your profit goal. Overhead is fixed. So to make your profit goal, adjust your sales volume to hit your profit target based on the markup you can get. Estimating costs are not a waste. They’re included in overhead as a fixed amount of money spent to get a return. Estimating is no different than electricity for the office. It is and must be paid for. Improve your estimating return by bidding the right jobs and marketing customer relationships.
Construction Business Owner, November 2007
