Words: Corey Adams
Ask any question to a group of people, and you will receive a wide array of answers. The business side of a construction company is no different. Ask 100 business owners what the most important process within a business is, and you will undoubtedly get more than a few responses. Hiring, sales, quality work, just to name a few. But what is the specific, number one skill that every business owner needs to understand to create success?
Recently I was having a conversation with some friends. It was a mixed bag of sorts, but we all had one thing in common, construction. We all had the experience and a love for creating things. As the conversation progressed from one topic to another, we fell into the same discussion most of us do with like-minded individuals, business. What one of them said next is where the whole mood shifted.
Estimating is the steering wheel of the entire ship. Wow, it hit me like a ton of bricks that night. Without proper estimating, the business cannot succeed. If the bids are too low, we lose money. If they are too high, we lose the bid. Proper estimation can steer our company ship in any direction we choose. If we decide to ignore the facts, we crash into the rocks.
It surprises me how many small businesses struggle with estimation. It is even more startling how many small business owners do not even know they are not estimating correctly. The fascinating part is that many do not understand what goes into a proper estimate. It is a basic formula, but many try to skip steps to get their price down.
Materials + Equipment + Incidentals + Subcontractors + Labor + Overhead + Profit. That is estimation brought down to the bare bones.
So why do many estimators struggle with accurate and equitable estimates? Their mindset. We find this in many small business owners that are doing the estimating themselves. They estimate jobs trying to win them. Always looking for ways, or excuses, to get the number down, so the client has no choice but to use them; this is wrong. Stop trying to estimate jobs just to get them. If your numbers, and estimates, are accurate and equitable, and your work is average at worst, you will win more jobs than you can handle.
Therefore, as a side note, sales commissions should be tied directly to net profit and not sales alone.
Back to the estimate. Below are just a few tips of many that can help any estimator steer the ship in the right direction.
- Do not race to the bottom. Correct estimation is not about lowering your prices. It is about being accurate and equitable.
- Your labor rate is not a wage replacement. A company’s labor rate has taxes, worker’s compensation, benefits, and other add-ins that can double or triple the wage fast.
- Staging and storage on a site can get expensive. Know how they affect production.
- Keep items out of your overhead number by applying line-item charges for them to your bids. This includes small tools, equipment, etc.
- Do not forget the Project Management cost.
- Do not rely on others to tell you what your overhead and profit should be. The old 10/10 rule is obsolete and not an acceptable way to add overhead and profit.
- Know the difference between markup and margin.
Just keep in mind that our job in estimating is to be as accurate and equitable as possible. If we do our due diligence, we can submit our bids with confidence and negotiate properly. Maybe, more importantly, accurate and equitable bids will prevent us from questioning why or why not when it comes to project award day. It is an estimator’s job to put out the best estimate for the company, not for the client.