Improving Your Cost Estimating
by Roger Huntsinger, Vice President
Manager of Cost Estimating and Claims
As a contractor, estimating is one of your most important functions and accounts for a large percentage of your home office overhead expense. If you are estimating too high, you don’t get the job. If you estimate too low, you get the job, but lose money. Either way, you will soon put yourself out of business. Avoid this by implementing a Standard Estimating Procedure and using Historical Cost Data.
Standard Estimating Procedure
Developing a Standard Estimating Procedure within your company is an important step toward producing consistent, accurate estimates.
Because all estimators seem to have been trained differently, you encounter problems when checking their estimates. Did they carry working 4M, non-working 4M, or pick-ups with directs or indirects? Unload and stockpile material, distribute material, clean-up? Were these handled as separate sub-items, included within crews and production rates, or forgotten? Did they estimate MH/ units, units/MH or some combination? Does switching back and forth create problems?
Answering these questions takes valuable time and creates cracks through which something, inevitably, will fall. To save review time and eliminate oversights or duplications, you need to develop a Standard Estimating Procedure with standard forms for quantity takeoffs and estimate preparation.
The benefits are immense. A Standard Estimating Procedure for one of my clients, a medium-sized, heavy / civil contractor, enabled us to put together twice as many bids, more accurately, in the same amount of time.
Another client, a large general contractor in Southern California, discovered the need for a Standard Estimating Procedure after hiring outside consultants to support an overloaded estimating staff. Each estimator had a different way of preparing and organizing his estimate. Checking and reviewing them became difficult, time-consuming, and very nearly led to a large error. All this could have been avoided by everyone following a Standard Estimating Procedure.
Developing a Standard Estimating Procedure involves organizing your methods and procedures into written form. This can be time-consuming, and many contractors obtain outside help. The results will be well worth the effort. This is true whether you’re bidding buildings, mechanical! electrical, utilities, or heavy / civil construction.
Historical Cost Data
The best way to ensure an accurate estimate is to use your historical cost data from previous, similar, completed projects. To develop an Historical Cost Database, you must first install a job cost accounting system. You establish work items and you track costs, manhours, quantities, and production rates. This job cost data is then used to help you prepare future estimates. As you add more jobs to your Historical Cost Database, the variance between job estimates and actual job costs will begin to narrow.
No two jobs are the same. A key element in the analysis of your database is a Final Job Report. This allows your project people to identify differing project conditions and to provide their insights – both positive and negative – into production rate and cost variances.
All successful contractors have a job costing system and use an Historical Cost Database. The surety bonding industry reports that over 80% of all contractor failures in 1994 involved companies without an adequate job costing system.
If you plan to employ an effective job costing system and want to use Historical Costs Data for estimating, you should have a systems audit performed on your Estimating, Job Costing, and Bookkeeping procedures. Pinnell/Busch often provides this in conjunction with hardware and software support.
In summary, of the many elements that work together to comprise a good estimating system, two of the most important are developing a solid Standard Estimating Procedure and using your Historical Cost Data to produce consistent, accurate estimates.
In future issues, we will provide you with tips on how to integrate computerized estimating with your Standard Estimating Procedure and Historical Cost Data.