One typical and often-overlooked way construction businesses lose money is an estimate. Although estimating is
no doubt a “bread and butter” skill of any contractor, accuracy can slip over time without an occasional check-up on this critical process. Check out our advice before beginning your construction estimate review.
Regular Construction Estimate Review Process
The first thing to review when evaluating estimates is how they are being generated. Estimating methods tend to fall into two categories: fixed price and approximate price. Fixed-price estimates incorporate detailed information and are typically the most reliable method. Of course, the contractor bears greater risk than the owner because the job is set at a fixed price — even if costs are higher than expected.
Many construction companies prepare fixed-price estimates on a lump-sum basis, meaning that estimators compile a job’s price after closely analyzing drawings, specifications, and other bidding documents. Lump-sum estimates calculate the costs of material, labor, equipment, subcontractors, overhead, and other job-related expenses before applying a markup to the total cost.
Some fixed-price estimates are on a unit-price basis where the bid is tied to individual line items cost. As with a lump-sum estimate, the result determines the total project cost. An estimator, however, segregates expenses according to each line item’s unit price.
The second method, an approximate estimate, is a shortcut that gives only a rough idea of a project’s cost. Estimators primarily look at expenses derived from previous jobs and refine the estimate as they learn more project specifics.
Review a construction company’s estimates from a selected period of time every so often to determine if there are too many approximate estimates appearing and hurting profitability. This periodic review can also determine if fixed-price estimates are using updated materials costs and realistic labor data.
Benefits of Technology for Completing Construction Estimates
Estimates are math. The more complex the calculation, the more likely it will account for the many variables involved. Failing to apply an evolving profit margin calculation algorithm can reduce the value of jobs over time.
For example, if profitability is estimated on a flat 10% sales price across most projects, then financial loses and delays could occur. Breaking down costs more specifically can prevent such losses, and there’s no better way to do so than with today’s estimating software. Construction-specific estimating applications reduce errors and create a historical database to help refine procedures and generate more accurate data for future projects. They can also relieve much of the drudgery associated with routine, repetitive, and time-consuming calculations.
Consider the Human Factor
The first and last line of defense in generating accurate estimates is the people doing the job. When reviewing estimators’ performance or when hiring new ones, make sure to employ professionals who can visualize project phases in great detail. They should also have:
- good organizational and communication skills,
- broad knowledge of construction materials, processes, and software, and,
- the ability to understand today’s more detailed drawings and specification documents.
No matter how skilled an estimator or what methods they use to prepare bids, it doesn’t hurt to have another party occasionally review this work for accuracy. This person could be a project manager or even an outside consultant. To help ensure accurate reviews of estimates, encourage estimators to work transparently, and no matter how experienced the estimator or accurate the estimate, they must know how they arrived at the quoted job price. When reviewing estimates, verify that the projected gross profit of each job is in line with the company’s profitability objectives and the current bid market.
Construction Estimates Diagnosis
Construction estimates are a tricky balancing act, and estimators need to account for the company’s need to generate profits while respecting each customer’s desire to pay a reasonable price. Regularly reviewing and, if necessary, adjusting the estimating process is an important risk management task. Do you have questions about your construction company’s estimates? Then call CRI’s construction CPAs for a heart-to-heart.