Business News and Notes
Content provided by the accounting firm of Dorfmann-Robbie specializing in construction accounting.

How accurate are your estimates? A brief review of this critical process

Accurately estimating construction costs lies at the heart of your long-term success. If an estimate is too low, you may win the contract but lose money on the job. And if it’s too high, the work might go to a competitor.

All estimates must consider labor, equipment, material, subcontracts and other direct costs, as well as indirect costs, such as insurance, permits and taxes. Omitted or incomplete items will result in inaccurate bids.

2 categories of estimates
You can generally group estimating methods into two
categories: fixed price and approximate. The nature of the work you’re bidding on usually determines which method you should use.

Since they incorporate detailed information, fixed-price estimates are typically the best and most reliable method. But you bear a bigger portion of the risk than the owner does because the job is set at a fixed price even if costs rise higher than expected.

Many construction companies prepare fixed-price estimates on a lump-sum basis. That is, their estimators compile a job’s price after closely analyzing drawings, specifications and other bidding documents. They then calculate the costs of material, labor, equipment, subcontractors, overhead and other job-related expenses. Finally, estimators apply a markup to the total cost to obtain a lump-sum estimate.

You may also produce fixed-price estimates on a unit-price basis. Here, you submit the bid based on the individual line items. As with a lump-sum estimate, the result determines the total project cost. Your estimator, however, segregates expenses according to each line item’s unit price.

The second method — an approximate estimate — is a shortcut that gives you only a rough idea of a project’s cost. Estimators primarily look at expenses derived from previous jobs, usually refining their figures as they learn more project specifics.

Tools of the trade
Because estimating often involves complex mathematics, computers play an integral role. That’s why a good software package is a must-have. If you’re still using pencil and paper, it’s time to get connected!

Construction-specific estimating applications reduce errors and create a historical database to help you refine procedures and generate more accurate data for future projects. Although you can’t use these systems for the entire estimating process, they can relieve much of the drudgery associated with routine, repetitive and time-consuming calculations.

Estimator qualifications
Obviously, a prime ingredient in successful bidding is a qualified estimator. When hiring yours, look for professionals who can visualize projects’ various phases in great detail. They should also have good organizational and communication skills; a thorough knowledge of construction materials, processes and software; and the ability to understand drawings and specification documents.

Yet no matter how skilled your estimators or what methods they use to prepare bids, have another independent party thoroughly check their work for accuracy. Additionally, instruct managers to also review estimates, verifying that the projected gross profit is in line with company objectives and the current bid market.

An ongoing process
After you complete projects, go back and compare estimates with your actual job costs. Investigate projects that went under or over the original estimate to find out what went right or wrong and to learn from the process. Then share this information with estimators and project managers so they can refine their methods and keep the next job in line with anticipated profit margins.

Remember, the more accurately you estimate projects, the more precisely — and profitably — you can quote prices for quality workmanship.