Principles of Estimating

“So…how do you figure out how much it’ll cost?”

There’s a lot to it but everything builds on one concept; estimating is about systematically getting closer to the answer.  The most simplistic method is bounding the answer.  By defining the range that contains your answer, you’ve reduced the problem.  The next step is to determine what you need to know to reduce that range further.  As counter-intuitive as it may seem, asking yourself what you don’t need to know can be very helpful.  The idea is to reduce uncertainty by systematically answering questions that divide the range sort of like playing “I spy”. For example: a client asks for conceptual pricing on an office remodel.  The number of occupants and what paint colors they’d choose are irrelevant.  The square footage of the space won’t change in a simple remodel and the cost of paint isn’t typically driven by color choice.

Right off the top it’s important to understand that it’s very hard to remove all uncertainty.  Better design, or past-project similarity can help to reduce the uncertainty but some will always remain.  I like to think that estimating is actually about controlling risk rather than pricing stuff.  There are lots of ways to arrive at a price – heck you might even win a competitive bid by throwing darts at numbers.  But here’s the thing that makes the estimating mindset different from an Entrepreneur.  It’s never the job that you lose that puts you out of business, it’s the job you win.  Look at it this way, the total bid amount is the company’s minimum risk for not completing the job.  That risk goes down as the project reaches milestones, and only goes away entirely after the warranty period.  All the projects a company has underway have risk which added together amounts to running risk.  More than one company has had to drop everything to jump on a project that was going badly.  That can make every job suffer which is why it’s important for someone to be thinking about this at the bid stage.  Every time I think about the risk to reward ratio in the construction market, my respect for the entrepreneurial spirit grows.

Principles of Estimating

Especially the cat washing contractors…

 

So how do you reduce risk?  As a bidder there are several approaches.  The most common is to define what is included and what is excluded from your bid.  Contract parlance refers to these as inclusions, and exclusions which appear on the bid proposal.  These can range from standards like “daytime working hours”, to more project specific details like “excluding carpet on floor two”. Remember they’re called “General Contractors” instead of “Builders” for a reason!

Another way to reduce uncertainty is to put part of the work out to bid. Things go out to bid for several reasons.  The first and most obvious is to use market competition to keep the price down.  A  less obvious reason is to reduce risk.  Let’s say that three subcontractors bid on a project.  The two low bidders are 3% apart.  If you win the bid with the low bidder amount and later learn they’re missing something huge, or they back out, you can hire the 2nd low for 3% more which makes your minimum risk 3% for that trade.

A good principle of business is to have a policy of “the record is always on”.  Anything you put in writing, you should expect to be saved and used later.   The subcontractor bids will have inclusions and exclusions on them.  Comparing them against each other is very illuminating.  It won’t take long to see that exclusions are the embodiment of the expression “The devils in the details“!  I’ll get more into reading bids which is called “Bid scoping” in a later post.

For now, it’s important to see that risk is contained by knowing the spread (difference between bids), and  knowing the differences in the exclusions.  Sometimes the high bidder picked up on something significant that the competition didn’t which spells disaster if you’d hired the low bidder.  Remember to call your clients attention to anything you’ve included that was tricky to see, or understand.  For example: the plans may show something is existing that you find missing during your job walk.

It’s a terrific illusion that the construction documents will provide enough information to know every quantity, every time.  In the commercial construction world, the owners and architects expect the estimator to “make reasonable assumptions” often based on “standard means and methods” when a design fails to cover something.  The consequence of these expectations is the practice of stating assumptions via inclusions and exclusions on the bid form or proposal letter. Control risk by clearly defining what you are and are not including in your scope of work.

This brings us to the Estimators Paradox which is:

When you win you worry about what you overlooked, but when you lose, you worry it’s because of something you shouldn’t have included.

Next I’d like to cover a few principles of effective estimating.  It’s hard work to count and measure everything on a project.  Conceptual or budgetary efforts for a client or an Architect are “free” services that consume valuable resources.  Many times historical data, allowances and minimal research will provide adequate accuracy for the purpose.  Having Subcontractors price conceptual work should be studiously avoided whenever possible.  Every bid should be retained for use as historical pricing.  I’ll get more into how to track your files to make this easier in a later post.

Historical pricing is only as useful as your records, and your efforts to improve on what you’ve learned.  At the General Contracting level there is a tremendous range of acceptable detail  for estimating measurements called Quantity Take offs.  (QTO).  In my experience, a more detailed QTO is a more useful QTO provided the detail exists on the plans.  For example, If the plans resolution is to the nearest foot, there is no advantage to QTO’s carried to the nearest inch.  While on the topic of inches, it bears mentioning to those inclined to the metric system that a decimal foot is a far more useful system for QTO’s i.e.twelve feet, six inches would be notated as 12.5′.  No accuracy is lost and the spreadsheets are immensely simplified.

Measurements alone are not useful without showing how they relate to cost.  I’ll provide some simple template ideas in a future post.  Speaking of units, the unit of measurement for materials aren’t always obvious.  For example carpet is measured by the square yard whereas floor tile is measured by the square foot.  The “RS MEANS” series of books will provide valuable insight into both the units of measure, and what ballpark price to use.  There are other similar resources, but I’m most familiar with RS Means.  Beware of trusting one source implicitly.  There are many factors that must be adjusted to reflect the exact situation you’re facing.  Anything that strives to be all things to all people fails on both fronts.  Get used to the idea that you’ll have to use multiple references to check accuracy.

 

.Principles of Estimating

 

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© Anton Takken 2014 all rights reserved

 

 

About Anton Takken

I chose to focus on estimating for a few reasons. Chief among them was that it's a position that's hard to fill in most companies. Job security and advancement is easier as a result. Unique to this job is a higher vantage point over the company and its place in the market. Bids are generally over in a few weeks which keeps things from getting boring. The reasons few of my colleagues pursue estimating comes down to a few misconceptions. The first is that it's the builders version of accounting - perceived as a lonely and quiet life among the charts and plans. The second is that it's not engaged in the construction process. Lots of the appeal of the construction industry is the sense that individual effort brought a plan into reality. The teamwork and camaraderie present among tradesman seems conspicuously absent at the estimators desk. Finally, I think the last reason is that it's daunting to be responsible for setting the price of something that's never been done. The good news for folks in estimating is that it's much more social than advertised. An estimator's phone is constantly ringing. Taking the opportunity to build relationships with the bidders creates a positive atmosphere and encourages everyone to do their best. It can be too much of a good thing which is why it's common to arrive at their voicemail when you're calling with a question. A strong rapport with the bidders can be invaluable. Subcontractors have much more exposure to what's going on in the market and they're often eager to share their knowledge. Learning from these experts is a priceless opportunity that's often overlooked. More on this in a bit. I decided to start this blog because I noticed that estimating has applications in many arenas. Over the last few years I've helped estimate in fields ranging from software development to blacksmithing! The more I thought about it, the more I realized that it's not about knowing what everything costs, it's about knowing how to figure that out. I believe the very first step to knowledge is to seek it, the second is to retain it, and the third is to pass it on. I hope to share some insights into how estimating is done and hopefully have some fun doing it. My experience is mostly commercial construction, but I'll try to make everything as generally applicable as I can. There are many aspects of business that all markets share yet it's remarkable that one of the most consistent is the failure to recognize that estimating is the very first step to a successful project. So if you're frustrated that work isn't profitable, or exasperated that there's never enough time to get the job done, this blog will be worth your time. Feel free to email me at: estimatorsplaybook@gmail.com View all posts by Anton Takken

2 responses to “Principles of Estimating

  • Thanh Le

    wow… such an indispensable and eye-opening blog. 4 years in a top university studying quantity surveying and 2 yrs practicing quantity surveying, why no one made estimating practices such an interesting profession like this before :O

    Like

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