Where do estimators get their prices?

This simple question is complicated because the answer depends on the application. Just as fruit comes from plants, it also comes from soil, water, and sunlight. The more specific the answer, the more it will involve larger, and more complex factors.

Pick any two; Fast, Complete, Cheap,

The way an estimator proceeds will be balance their client’s needs against their firms risk.

If a client wants a fast answer with no margin for error (complete), an estimator will reduce their risk by raising their prices, and padding their bids with contingencies. The bid-day price is high, but the client is relatively safe in assuming it won’t cost more than that amount.

If a client looking for fast and cheap pricing, should expect lots of exclusions on the proposals. Expensive and necessary items may not be included so client takes a risk in relying on this information.

Complete and cheap pricing only comes from a dedicated effort to find only what’s needed, and get the best pricing possible for it.

Balancing act

Estimators must weigh the likelihood of being awarded a profitable contract against the effort to price the work.

Artistic rendering of a conceptual bid

Conceptual or budgetary exercises are often done as courtesies to clients and architects. Historical pricing of past projects is the most useful resource for this work. Comparing the proposed project against past projects gives the estimator a project-level price comparison.

By taking each projects cost and dividing its square footage, an estimator can compare square foot costs across differently sized projects. Experienced estimators exercise great caution here because some costs are not proportional to the area.

For example, restrooms and kitchens are very cost intensive because they require the work of so many trades. A large and a small office might have the same number of restrooms and kitchens. The contributing cost of these rooms is spread over a higher square footage in the larger office.   This leads to a lower square foot cost than would be reasonable if the exact same finishes were used in a smaller office.

Estimators lacking historical data may refer to annual publications of cost data such as the RS Means books. There are reference books ranging from building use cost data, to trade-specific unit pricing. Every book includes adjustment tables meant to factor for regional cost variations, project size differences, and so forth. The important thing to understand about these resources, is that they’re national averages driven by audits of last year’s work.   It’s very precise for comparison, but not very accurate for bidding.

Accuracy versus precision

Accuracy and precision are not interchangeable terms. Accuracy is an approximation of how close a measurement system is to the subjects actual value.  Precision is an approximation of a measurement systems repeatability.

It turns out that Baxter is a precision instrument…

So to apply this to estimating, the contract is awarded to the lowest bidder. Any significant difference between low and second low benefits the client by driving down the project cost. Therefore estimators seek to just barely beat their competitors to maintain profitability. The degree to which an estimator is able to hit that mark is their accuracy. Winning a job with a 5% spread is substantially less accurate than a 2% spread.

Mistakes in the bid can easily make winning the project, a fate worse than losing. The estimators ability to reliably deliver an error-free bid is their precision. Successful estimators must be accurate and precise.

Think of it this way, you could theoretically win a profitable project by guessing on every bid until you were successful.   The win was not repeatable so the methodology is rarely accurate because it not precise.

Now if you come in within 3% of the low number on every bid, you know with 97% accuracy that your methodology is precise. Figure out how to cut 3% on the next bid and you’ll probably win.

Relevant detail in the big picture

Earlier I referred to the cost data books as precise for comparison but inaccurate for bidding. The market price for work is constantly changing according to prevailing economic forces. While each participant is a rule unto itself, as a collective, the market will follow fairly predictable trends.

Downward trends are easy to spot…

General Contractors (GCs) typically subcontract (sub) portions of the project scope. The GC writes a subcontract laying the responsibility to furnish and install whatever is stipulated for that scope on the sub in exchange for the subs proposal amount. The GC isn’t concerned with tracking the changing price of a wing-nut because they aren’t responsible for buying them, the sub is. GC estimators focus on quantifying scope items that will help define what to expect of their bidders. They use these expectations to scope the subcontractors proposals on bid day.

Professional subs in the skilled trades will conduct detailed estimates down to the literal counts of nuts and bolts. The advancement of computerized Quantity Take Off (QTO) systems has made it possible for subs to estimate with greater speed, precision, and accuracy than ever before.

It’s important to take a moment to point out that granularity does not correlate to accuracy or precision.   Square foot cost’s can be just as accurate and precise as a detailed estimate. What changes is the uncertainty. Detailed estimates allow minute changes to address uncertainty related to the smaller issue. In larger firms, estimators have their work checked by the department head who doesn’t have time to conduct their own detailed estimate to check the work. Instead, the totals for meaningful scope areas are compared on a square foot basis. Detailed estimates require great focus and attention to compose properly. Many estimators end up reviewing their work many times before it’s completed. By then the numbers become familiar and it becomes harder to see when something is wrong. Estimators who don’t have anyone to check their work are well advised to review old bids to improve their ability to identify square foot costs. Being able to switch perspective from micro to macro without losing accuracy or precision is a critical estimator skill.

Detailed estimates are used to reduce uncertainty within the bid. However the bid is only accurate and precise through the crucible of competition. Market value is typically provided by only the base bid amount. This crude metric must be interpolated to define how things added up to that number. The only things not subject to opinion, are the Construction documents, bid amount, and the square footage.

But…

Market leaders set market prices. The only accurate estimate is the profitable win. Estimators who spend all their time looking for stuff to include aren’t considering what the market leaders are doing. Their common excuse is that the low bidders are giving the work away.   This excuse is rooted in the notion that market leaders get the same sub prices as everyone else. In fact, market leading subs may decide to only bid to the best GCs. GC estimators with stagnant bid-lists may go their entire career without ever seeing a market-leading subcontractor proposal.

Estimating is about controlling risk. Counting stuff and ringing up the tally is a cashier’s job. Estimating demands much more than tidy spreadsheets and vigorous accounting. Controlling risk requires judgment, strategy, communication, and relationships with market leaders. There are estimators who fall short on these factors and they lose a lot of bids.

It’s probably a let-down for some people to learn that there isn’t a set price for anything. Even if you’re self-performing the work and you know with great certainty exactly how much it should cost. The going rate may be more or less than the amount calculated due to the economic forces of the local market. The best we may do is to stay current on pricing to maintain an informed opinion.

It’s much easier said than done

Summing up, Estimators get their prices from their from a combination of QTO’s, estimate templates, subcontractor proposals, proprietary software systems, historical data, direct vendor quotes, market conditions, and brute-force accounting of what their company needs. All of which are constantly re-evaluated and adjusted to reflect market insights and field conditions. Every price is subject to change, so be wary of trusting any resource that promises otherwise.

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© Anton Takken 2015 all rights reserved