Construction estimating and bidding is one of, if not the, most important factors for contractors to consider when taking on a new project. As a contractor we are constantly playing the balancing act when estimating and bidding jobs. Here are a few of the most common errors in estimating, and ways to make sure you win the work while staying profitable.
1) Estimating Labor Costs: Since labor is not based on a fixed rate, it is more difficult to estimate than the cost of materials and subs. Many contractors take a SWAG (Scientific Wild-Ass Guess) of how many days it will take their crew to do the work. I know contractors who make a good profit doing this, but the method is just as likely to produce a loss. A better way to estimate labor costs is to develop productivity rates for work your crew performs. I know what you are thinking, “time card data is impossible to measure because no two days are alike for a carpenter”. Check out this simple method for Developing Labor Productivity Rates by Bob Kovacs.
2) Improperly Priced Materials and Supplies: Making sure that the project’s materials and supplies are correctly described as to kind, quality, size, and dimensions is extremely important for estimating effectively. There are three main ways contractors protect themselves from this pit-fall.
- Working cost plus: meaning the customer pays the cost of materials and labor, plus a fixed amount or a percentage of the cost as profit.
- Padding the estimate: this may work, but it can lead to higher bids and a loss of jobs.
- Or you can do a real-time analysis of material costs before turning in your bid, and build an escalation clause.
An escalation clause in your contract simply states that if certain things happen and the cost of materials or labor go up, you as the contractor will not be stuck and the customer will be responsible. What goes into that clause is up to you, but for some good information visit Managing Material Costs with an Escalation Clause by Quenda Behler Story.
3) Failure to use a checklist: Overlooking items when doing an estimate, or omitting items that are considered minor can kill a profitable job. MAKE A CHECKLIST! I cannot say it enough. It does not have to be a spreadsheet (though a spreadsheet can simplify the process), but just a simple checklist that you work through on every job will help you stay organized and remember those detail items throughout the project from breaking ground to finishing work.
4) Failure to review building codes, permits, and inspections: Cost estimates and bids on construction projects are subject to local, state, and federal building codes, permits, and inspections. A great way to make sure you are including all of these factors into your bid is by contacting your local building official. Code can be interpreted in different ways depending on the official, so discussing the job in detail (especially if you are working in a new jurisdiction) can really help you estimate time and cost before you turn in your bid.