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
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
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
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!
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
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
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.