The Science of Estimating
For most contractors estimating is an art, they have the experience and know what to estimate right on the spot… This is not only incorrect, but a potential disaster for your bottom line.
Estimating is a science, you must be methodical about it. Every number must be broken down to its basic components and reanalyzed. You must do this for every job, it will become a company procedure - a sequence of steps on how to conduct a business process. Your company should have a set of procedures for estimating written down and documented.
I’ve witnessed so many contractors estimate without fully understanding the numbers they include on their proposals, what if you don’t estimate enough to cover the costs of your project? Budgets become over run, constant calls from your subs demanding payments, clients asking why you aren’t on the job site, your head spinning so fast you can’t see straight - does this sound familiar? Are you going to go back to the client and ask for more money half way through the project, of course not. The client will look at you like you are crazy. Estimating must be taken seriously and never be half assed.
Change orders and RFI’s (Request for Information) are common on projects for unforeseen factors on a job, but they should be minimal since you’ve already reviewed all the project information and asked the necessary questions before completing your estimate, right? Excessive change orders in most cases will leave the client dissatisfied and end your business relationship post haste.
A better way to start estimating is to break down the variable costs you already know including labor, transportation (to and from the jobsite), vehicles, insurance, overhead, temporary jobsite costs (toilet, office, fencing), etc. These costs can be broken down into a per hour basis and entered into a spreadsheet.
Labor costs can be tricky, you aren’t just dealing with the hourly rate that you pay an employee. There are a number of costs associated with employing someone including payroll taxes, workers compensation insurance, health care, benefits, etc. All these costs must be broken down to an hourly rate to effectively be used in your new style of estimating. Your bookkeeper should have the relative numbers to each labor cost and your job is to break these numbers down to an hourly rate.
Materials including lumber and hardware can be obtained from your local lumber yard, grab a list of common lumber and hardware items. I keep a sheet of 2x4, 2x6, 2x8, 4x4 lumber in douglas fir, pressure treated, redwood, etc. The lumber yards are happy to give you these price lists, especially if you follow through and buy their products. Material lists will need to be updated at least monthly, but nowadays a quick email to a sales associate and your pricing is updated. Part of being a contractor is establishing a network of support for your business including material suppliers. Just as a supplier needs to build a relationship with you to buy their materials, you need to make sure that supplier can supply your jobs without delay.
Custom homes or jobs with material specific details, pick up the phone and make the calls. Nothing will make up for due diligence in creating an accurate estimate. Estimating is time consuming and hard when you are a business owner wearing multiple hats it is easy to cut corners. Do not cut corners with estimating, your business cash flow will thank you.
Deconstruct The Project
You must deconstruct and reconstruct the potential job in your head while estimating. Disassembling a project to its base components will ensure you are keeping track of all base components, remember to think of the project from a ground up perspective.
If you are estimating a single family home, think about each phase of construction from site preparation to foundation to rough framing and on. In each phase break it down further, foundations include layout, trenches dug, forming, rebar, anchor bolts, etc. Knowing the base components will help you estimate more accurately.
All About the Tips
The following are tips I have learned over the years:
1. Information is Key: Collect all information for the project you are estimating including building plans with contact information for the architect/engineer, onsite measurements, pictures of the site, site visit, material descriptions, specialty work involved, projected timelines. The more relevant information you have will establish your proficiency as a contractor when it comes time to submitting a proposal.
2. Presentation!: Your estimate reflects your business, spend time on how your estimate looks. A cover page and letter about your company is always a great idea. I worked for a bigger contractor in the city when I was younger, my employer would make a full power point presentation with every estimate, complete with paper copies for the client and go over the estimate with them face to face. We worked hard on these estimates and we won way more jobs than we lost. Make your estimate presentation your own, set yourself apart!
3. Spreadsheet Organization: Take the first step in better estimating by creating an excel spreadsheet. Do your best to break down individual job components to their base numbers including labor, materials, travel, overhead, profit, etc. Each job item can be broken down such as labor: insurance, taxes, hourly pay and benefits - each cost must be quantified and added back up to know what your labor cost per hour is. I can help you break down all your costs to their basic components to make your estimates as accurate as possible.
4. Interviewee and Interviewer: Just as if you were going to an interview and a prospective employer asks if you have any questions of your own, have questions ready for your client. Every single client should be interviewed because you will be working together if you are awarded the job (interviewing your client will be expanded on in our customer expectations section).
5. Measure Me Three Times: Be as precise as possible, measurements should include fractions and decimals. This principle should be used with all materials, labor and anything else furnished for the job. Rounding numbers or “getting close enough” will slowly eat at your margins. Be precise.
6. Recycle, Reduce and Reuse: Count your waste, keep track of the waste from previous jobs, find your average waste. I found on our jobs, our average waste was about 9-10% of materials. Before I started keeping track, I always “assumed” my waste was closer to 5-6%. If you are not keeping track of your waste then how do you know what to account for in your current estimates? Once you know the numbers, you can start working on game plans to reduce your project waste.
7. Niche Efficiency: Customize your estimating templates for your niche. What jobs do you consistently do or jobs that you excel at? Formulating your spreadsheets for your particular jobs will help with efficiency. If you concentrate on decks, you can line item specific decking materials you normally use and keep costs updated on those specific materials. I can help you customize your estimating templates, simplify the process and make you more efficient.
8. Pick Your Platform: Estimating software is great if you actually need it. Estimating software such as Stack or RSMeans can pull pricing data for you and help streamline the process. Good estimating software does cost money and should be utilized only if you are a high volume company. These software companies charge subscription fees that will add up if you are not using them regularly. By setting up your own spreadsheets you can customize how you present the estimate, if you need help making your estimates presentable we can help.
9. Connect With Your Subs: Ask your subcontractors for any questions they’d like to propose to your potential client. Having as much information for your subcontractors as possible will help them give you a more accurate bid with detailed information. Including as much pertinent information on your own estimate to the client helps establish professionalism and trust.
10. Pick Your Battles: Before you sit down and spend your valuable time on every estimate that crosses your desk, evaluate the risk of each job. In construction, more risk does not always mean more reward. Potential jobs need to be worth the effort and if you do choose to estimate a job - give it your all! Put the time into the estimate and present the construction experience you can give your client.
Is Excel right for me?
I do want to point out that estimating with excel templates can be great for small companies, the cost is low and you can customize your template for your company needs. If you are a larger company and need to establish company processes over multiple job sites - excel is a limitation.
Spreadsheets can also be custom made at relatively low cost, so you don’t have to worry about being a master at Excel. Check out websites like Fiverr.com and Upwork.com to have your company’s personalized estimate spreadsheet made. If you need help with how you should set up your estimating spreadsheet you can also talk to us. Bill@BWBuilder.com.
Take Your Time and Get it Right
Your business depends on accurate and professional estimates. Double check your numbers, review the information one last time before you submit. Just as we took the Contractors State License Board test and reviewed each question before submitting, that is how we do our estimates. Due diligence in reviewing plans, material spec sheets, specialty labor, proper permitting, and all the little details that are unique to a job need to be double checked.
Waiting in my manager’s office, when I was a young assistant project manager for a real estate development company, I’d watch my boss slowly scan the project budget spreadsheet. It was mandatory that I sit and wait until he was finished reviewing my work. Even at that age, my responsibilities included estimating, project management, draw schedules and bookkeeping. If I missed a detail, a number was wrong on the draw schedule, even if I had a spelling error - he’d let me have it. Intimidating as heck to a young buck like me, but very effective.
The point is, the numbers on your estimate are important, be ready to reexamine, rewrite and review your estimate before submitting to your client.
I’m always happy to answer any estimating questions or if you have suggestions you’d like to share, please let us know.