How to Get Estimating Right
Written by Randy Blount
January 16, 2022
As a finance major who finds himself in construction, Blount loves numbers. He actually enjoys estimating. That need to estimate will cross all roles: foremen, supervisors, and, well, even estimators. But how do you get estimating right, even if you are (or aren't) a finance person by nature?
To begin, it’s crucial to know what your costs are. What does your labor cost? How much do you pay by position? And then add another 38% to account for FICA (payroll taxes) and benefits your workers are paid. Someone you pay $25 an hour costs you more than $25 an hour.
The same issues arise in the event that you choose to rent, rather than purchase, your equipment. The rental fee does not include the costs of operation and wear.
Material costs are easier to estimate by requesting a quote. Then factor your production costs into your estimating. As Blount said, “Some don’t, because they know their unit costs. They can move dirt for $3 a yard. But there are way more variables than that. It can be double or triple.”
Give your profit room to happen.
There’s one mistake he sees “all the time:” managing to a conservative budget.
After adding up your cost inputs, you’ll add your indirect costs. Perhaps you have a budget for a safety manager or safety tools like PPE and cones. Or there’s business development to fund. When you finish that, you’ll ask, What’s our overhead? What’s the profit we want to make?
Often, said Blount, the profit seems kind of tight. As a result, the risk Dirt World businesses run is that they'll be overly conservative on everything. “Don’t bid conservative on everything. Get your team in and push the comfort level. Don’t put conservative production in and then have your profit margin be small.”
Because what happens is that you’ll manage to that conservative production and you’ll hit it, but then your profitability’s gone.
Out in the field, the team just looks at the scoreboard and sees that they’re winning. They did what they were supposed to do: They hit the budget. “So, you have to calculate your true input costs by being analytical about them,” Blount said. “But don't put fluff in your items. It's probably one of the biggest mistakes I see.”
Blount and his team do things a bit differently: They start by saying, “This year, we will do this much in revenue,” Blount said. “Here’s all of our costs — people who aren’t getting charged to the job, insurance, home office costs. We took all those costs and divided them by how much revenue we wanted to do.”
Beware of relying too heavily on historical data.
Figuring production costs is another challenge. Some estimating software makes it easier by tying into your operational system. While historical data is important, you can’t always rely on past data. It may not be enough to simply answer "What rate did we do it for before?"
If you don’t have accounting and job costing/estimating software, the process is going to be harder. “To get your business from $5 million to $20 million, you have to make those investments,” Blount said. “Sooner or later, you’ll have a really bad job and lose thousands or even millions of dollars.”
Getting your operational team involved is really important. Run through the numbers and the timing to be sure that the field and the office are aligned. If they’re not, then ask them to help you understand why: “If it can’t be that fast, can we go with smaller equipment?” Blount suggested. There’s no value in making this a case of estimating vs. the field, or the office vs. the field: “Make sure there’s collaboration” and set your teams up to win.
Also be careful of the man-hour factor: this many units of whatever task with this many man hours. This “doesn’t allow for innovation,” Blount noted. “If we never take into consideration our improvement, then we always let our costs stay the same.” So many of their processes have been taken from paper to digital, creating additional efficiencies.
“Don’t get so reliant on historical data that you don’t allow for the innovation and efficiency in your company to be manifest in your budgets,” said Blount. “We should be trying to drive down our costs, we should be trying to be more efficient, on a regular basis. Because we’ll win more work at the same profit margin or we can win the same amount of work with more profit. Ultimately, both make you more profitable.”
Because they have less historical data on which to rely, smaller companies often can be more disruptive when it comes to estimating. Blount believes, “If you rely on historical data, you’re gonna find that you’re off more and more. Trailing data takes a long time to catch up to the changes you’re making.”
Estimating is a tough call. You want to strike the right balance: between costs and profitability, between likely outcomes and the unknown. It’s also challenging when estimating jobs gets caught up in practicalities like keeping your teams busy during a slow couple months. Be careful not to bid something at cost, just to keep people busy. By doing so, you may be hurting your ability to capitalize on more profitable opportunities moving forward.
“Staying disciplined is really, really important,” Blount said. Watch your own process. Analyze the costs, know you can be competitive while keeping people safe. In conclusion, “Ignore the noise and keep moving forward.”
Estimating is foundational to profitability. Learn helpful estimating principles and common mistakes every contractor should avoid.
Written by Randy Blount
January 16, 2022