Estimating & Pricing

estimating and pricingThe ability to acquire profitable work differentiates contractors from their unsuccessful counter parts. Getting work means building work. The primary step for turning a profit. Submitting a profitable but competitive price consistently is key to success.

Below are the steps of a superior estimating and pricing process. Most construction firms must follow this to arrive at an acceptable bid for both the contractor and the client.

Quantity of work – quantity takeoff is one of the most tedious and risky steps of contracting. It demands that the quantity of work be derived from pictures and the written word. It has to be accurate. As we know, words are inaccurate. A picture (or a set of plans) is worth thousand words. Again, words are inaccurate.

Technology has helped tremendously to improve accuracy, consistency and speed. Digitizers, Software, CAD etc all contribute to cut hours out of the quantity take off process. However, it is still a human endeavor. To insure excellent performance, a thoughtful and disciplined process should be followed.

The quality of plans and specifications over the last two decades has diminished. Unfortunately, this trend will continue. There are many reasons. One is that design groups are forced to design in less time with lower fees. This lends itself to less time spent in creation and review of the bidding documents. Construction professionals have to have a process to address this issue.

Cost of work – Without accurate cost numbers, a company will be either too high or too low. It will get work at a loss or not win any work. Predictable cost data can be derived from several sources:

Field Experience
Company Cost Records
Observation of Crews

Certainly, your cost figures should be unique to you. The use of costing services such as Mean’s or Walker’s is a last resort. These services can be valuable and should be used in certain circumstances. However, day in and day out, your costs structure cannot be public information.

Overhead – The labor content of a project directly affect overhead costs. In other words, field labor causes companies to hire payroll clerks, safety professionals, operations managers. With it are associated office space, vehicle, technology and miscellaneous costs.

How to allocate this overhead can make the difference in taking projects cheap or with the appropriate amount of overhead. A company’s cost has to be recovered otherwise we pay for finishing a project.

Overhead allocation depends on several factors. The most important is an accurate budget. Besides the overall numbers, it must delineate the direct cost content. An accurate budget leads to better bidding results and / or negotiated outcomes.

Profit Margin – what is a reasonable markup on a project? What factors increase it or decrease it? How can we determine this before a bid? There are several factors to consider. Below is a sample:

Length of Project
Your Backlog.
Competitor’s Backlog
Labor Content
Which Competitors are bidding
How many Competitors are bidding
Client’s Character
Subcontract Content
Location of Project

With each factor, we should be increasing or decreasing our price. Improper pricing makes us miss opportunities or win jobs we will regret getting.

Beware that contractors who do use bidding models to give themselves the best opportunity to win. Said another way, we can never predict what will happen on one particular project but we can on a group of 100 projects. Over the long haul, good practices will give us superior results.

Average Contractors in the United States make 3% net profit before tax. Given these tight margins, doesn’t it make sense to use superior estimating and bidding processes to increase net margins by 1, 2, or 3%? Construction firms have found that they can increase profits at the bid table.

The Result of a solid estimating and pricing process is:

Less money left on the table
More of the work that the company does well
More predicable profits

We are a resource for firms in the construction business. Please contact us if you have an interest in improving the way you operate your firm. After our initial conversation, we will tell you how we can help.