construction estimating process

Construction Estimating Process Starts Earlier than you Think

Construction estimating process: Mistakenly, many construction professionals believe that the estimating process starts with the take-off. In reality, the estimating process starts much sooner than that, and it requires careful thought and consideration of many factors. So before you unroll that set of plans and uncap a highlighter, consider the following.

Start with knowing your business

It would stand to reason that contractors know their own businesses, right? Yet every day, we speak with owners and managers of businesses that do not know their overhead, labor or material costs, or even how much money they made (or lost) on a project. We’ve even met a few contractors that think that if there is money in the checking account at the end of the week, all is well!

Realistically, a contractor should not even consider bidding any projects, until they know the costs of running their company, and how much revenue they need to generate in order to cover their annual overhead. This is where a good relationship with your accountant comes into play. Quite frankly, if you don’t have a good relationship with your accountant, try to make it better or find a new one! Your accountant is the person that can help navigate your business into successful waters. That starts with knowing your overhead costs, and how to apply that to your estimates to make sure that your costs are covered. You can apply your overhead as a percentage rate at the end of your bid, or you can carry a “fully burdened rate” when you apply your labor rate/costs to an estimate. Either way works, but your accountant can explain the benefits of using one method or another for your company.

construction estimating process

Analyze what project size you can handle

What types and sizes of projects have you successfully managed in the past? Many projects require bid, payment, and performance bonds, so another person critical to your company success is your insurance/bonding agent. Each company should understand its bonding capacity, both per job and the aggregate amount. If you cannot bond a project of a certain value, why chase it? Your insurance agent can also advise you on the steps to take to raise your bonding capacity over time.

Consider your labor force

In the construction estimating process, labor is the biggest variable in a construction project because of the human factor. You can estimate and predict material prices, but you cannot always ensure that your field labor will perform to the standards that you have estimated. Labor composition is important to your success! Both union and non-union contractors have unique circumstances with labor. Union contractors rely on the union labor available at the start of the project. (That isn’t to say that a union worker cannot be employed continuously by the same company for many years and many projects, just to clarify.) Non-union contractors must be able to continuously employ or recruit qualified workers. In either case, company management must evaluate the level of experience and competency of the workforce, when deciding the type and size of projects to bid.

It would stand to reason that a company will bid on projects on which they have the experience to complete the project and turn a profit. If a company has absolutely no experience in a type of project, they should probably think twice about bidding it. Of course, the only way to get experience is to take a project to gain the experience. A company may make a strategic decision to do this to break into a market, knowing that for the first few projects, there will be a learning curve and the anticipated profit may be low.

The labor component also includes subcontractor labor. A general contractor estimator will solicit bids for various pieces of construction such as site/civil, concrete, structural, mechanical, electrical and more. Having good relationships with subcontractors will ensure that a fair price will be reached, and that the work will be performed to the specifications. In many cases, the work of the subcontractors will make or break a project. The better the relationship and the communication between parties, the better the process goes.

Finally, estimators of every trade have their own methods to determine the cost of material on their projects. An important part of that is making sure that commodity material pricing is constantly updated in the construction estimating process to ensure that your estimate includes realistic prices, whether you are estimating a project yourself or putting together an estimate based on a multitude of subcontractor proposals.

You know your company now! Do your customers (or potential customers) know you?

Getting to the point of knowing your business, its costs, and its strengths leads to the point of wanting to find the right work for your company. One thing that your company should consider is: Do your potential customers know you? This is probably something that a lot of company management doesn’t think about too much because they may be fortunate enough to work for a long-term, well-established company with a great reputation. However, every company starts somewhere. What if a company is young? How does that company gain a reputation that will enable them to get more work?

The power of relationships

When a company solicits a bid from several companies and they have knowledge and/or experience with two out of three companies, guess who has the better chance of project award? It’s probably going to be one of the two companies with a relationship. Relationships can also help your company find private projects and jobs that the customer already has. Contractors who put time and effort into building and maintaining relationships with their client base, making it an integral part of their business, are generally more successful than those who don’t. On the whole, this is an advantage in the construction estimating process.

Also, do not underestimate the power of advertising! Granted, advertising has changed a lot over the years, and it is much easier to been seen and known within the realms of social media. That’s a good thing. However, the old “tried and true” methods of industry events, trade shows and the like are still viable ways to build your brand. It really does make a difference! Industry associations, such as NECA or IEC (union vs. non-union electrical associations), Associated Builders and Contractors (ABC), Associated General Contractors (AGC), American Society of Professional Estimators (ASPE), the Consulting Estimators’ Roundtable (CERT), and even local civic organizations are all great networking options. Pick the organizations and advertising methods that you think will work best for your company and can support you with the construction estimating process.

When to bid, when not to bid…

Company management must decide what to bid based on the size and scope of each project as it is important for the long-term success of the company. Some of the factors that a contractor must consider determines whether the project will be desirable to bid, and ultimately be profitable. Where is the location? Is it close to the contractor’s office or will a significant amount of travel time be required, adding extra expense to the cost of the project? Does the company have a relationship with the entity soliciting the bid? Are they reasonable to work with and do they pay their bills? What is the size of the project? Can the contractor handle a project of that size and do they have experience in that type of work? Does the contractor have the manpower, equipment and materials required to complete the project on time and within budget? What is the estimated time to complete the project? If a schedule is compact, labor efficiency will be lessened due to possible overtime work and stacked trades on the project. Finally, what are the liquidated damages if the project is not completed on time?

Ultimately, a contractor must decide if the potential rewards outweigh the risks of the project. And, the “right” project for one contractor may not be the right fit for another contractor. The ultimate goal is for each contractor to know their strengths (and their weaknesses) and to capitalize on projects that can ultimately earn a profit. After all, isn’t that why we are all in business?

Is it worth it to sink time into the “budgeting” phase?

When a project is in its infancy, a company may decide not to engage in the project because a project is rarely awarded in the budgeting phase. A company may expend a lot time and effort into a budgeting a project, while running the risk of never being awarded the project. It is frustrating for contractors who budget the same project many times in hopes of an eventual project award, to only then find out that the construction documents are issued and they are bidding against companies that did not put any effort to get the project to that point! Certainly there are no guarantees of a project award, but when a company budgets the same project several times, it would stand to reason that the company would receive some special consideration in bidding the project. The only way that this is guaranteed is in a design/build project where the entire construction team works together to design and build the project.

Construction contracting can be tricky. Knowing your company’s strengths and weaknesses will guide your company to bidding the “right” projects, and ultimately make a profit. Relationships with your customers, vendors, subcontractors, accountant, and your bonding agent enhance the estimating and construction process, and will lead to a more successful business.

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