Efficiency of Scale; How to be Goldilocks and not the bears.

“We can build anything” is a very positive and team-building mindset that you hear in many companies.  Clients tend to take a less optimistic view of the companies they choose to work with.  If the General Contractor (GC) falls down on the project, the client will likely have some serious problems to solve.  Litigation aside, it’s no easy task to replace the build team on a project without adversely affecting the schedule, quality, and budget.  Many clients could find their businesses in jeopardy while the work grinds to a halt.  Time is money has a more literal meaning to companies that are unable to open while a construction project drags on.  So feel-good optimism aside, all companies are not created equal and the client is very aware of that.  Pre-qualification forms are geared towards ensuring that only those firms that are the most likely to succeed will be invited to bid.  Past performance is the best indicator of future success.

So what would you say you’re good at?

Knowing what you’re good at is all about knowing where you’ve been.  Every company will have a market segment where they are especially competitive, productive, AND profitable.  As projects range further from this ideal market segment, they become harder to win, harder to complete, and harder to profit from.

As an estimator it is important to have a full feedback loop from project management on the work completed.  Right off the top it’s important to establish some guidelines of what you’re looking for.  Success is going to be defined first from the perspective of the As-Bid project.  That excludes change orders which might have influenced the project outcome.  Getting at this information is directly proportional to the firms commitment to accurately track the projects in accounting.  “Common pot” accounting where original contracts and change orders are dumped into the same job account serve to conceal a lot of information.  Similarly, cagey Project Managers (PM’s) who don’t want to reveal how they moved money around tends to obscure what went on as well.

The objective isn’t to conduct a personnel audit, it’s to determine if a specific project was a good fit for the company.

Efficiency of Scale; How to be Goldilocks and not the bears.

Keep it casual, maybe compliment them on their haircut…

Too big

If the PM and their staff were way over on their hours for the project, they may have struggled to meet the demands of a job that was too large.  Large projects often have large design teams capable of cranking out immense amounts of bureaucracy.  It can be difficult to tell on bid day how intense that will be on the build team.  Review the day 1 schedule and compare it to the as-built schedule.  Did the project develop a “cascade” where the last quarter of the project had 50% of the production?  It’s really common to see overtime escalations and working weekends piling on at this point.  This may be an indication of a build team that’s in over their head.  Did any of the subcontractors fail to perform because they couldn’t staff the job?   Did the project conclude with the as-bid profit?  Talk to the build team.  Did the job go well?  Did the client pay in a timely manner?  Difficult, demanding, and late paying clients can wreak havoc on a company.  In the case of municipal clients, the “owner” is often composed of several individuals who may not have a vested interest in resolving departmental conflicts that halt production.  This can dramatically impact the “float” time between paying your overhead and being reimbursed by the client.  Smaller subcontractors may not have the credit to wait months on end for payment.  Performance inevitably suffers.

Too small

“Quick hitter” or “fill in work” are key terms that you’ll hear about jobs that are too small.  PM’s will typically find that they couldn’t get a little job to end fast enough.  These jobs are punctuated with similarities to bigger work like submittals, permits, inspections, and closeout procedures that serve to interrupt production.  Any minor issue threatens to consume the job profit, as do any loose ends requiring extensive follow-up.  PM’s may report difficulty staffing a small job because there’s never a full day’s work for the subs.  The pace of these small jobs often requires great attention to the schedule as any delay is magnified against the already short duration.  A great indicator that a job is too small for your firm is when it’s not possible to competitively win the work with sufficient overhead and schedule duration to reflect the actual cost and time of building it for your firm.

Just right

These projects tend to elicit little drama when you review with PM’s.  These jobs are always on time or early.  They’re always profitable, and they’re always productive.

Efficiency of Scale; How to be Goldilocks and not the bears.

It’s a good place to be

In some firms, they’re mistakenly viewed as  boring or routine.  More than one company I’ve worked with failed to recognize that an uninspiring market segment was actually their “niche” because they didn’t get enough change orders on a job.  Change orders influence an outsized amount of opinion in this industry.  I think this is an ill-informed approach because change orders are never assured.  At the bottom line a GC is under contract to build the base-bid project.  If you can’t expect a profitable outcome from what you’re bidding alone, you’re not bidding the right work.  Companies that focus on pursuing work that’s reflective of their efficiency of scale enjoy a competitive advantage because the base bid is profitable work.

Expand the focus

The PM feedback in hand, it’s time to compare that to estimate tracking.  Correlate the past projects to past bids.  If some portion of the market is easy to win, but you’re losing money on those jobs, it’s time to review and correct course.  If restoring profitability pushes you out competition, this may be an indicator that market segment isn’t profitable without re-vamping how your firm builds those jobs.  The objective is to define what your target projects and markets are without changing anything.  If there’s good work outside of these targets (there usually is), try to define what can be done to make those projects viable.

Correcting course

Every case will be unique but generally speaking if the job is too small, the solution is to staff it with low overhead, diligent workers.   Many firms believe their identity is tied to a proscribed level of service.  This admirable perspective overlooks the practical problem of bringing big job bureaucracy to smaller work.  Smaller projects typically require looser standards for changes because there’s neither the time nor the budget to generate formal documentation of everything.  Firms that develop more on-the-fly record keeping and rapid communications are better equipped to stay on top of things.  Many firms at the smallest end of the market have a part-time superintendent who handles all the project management duties for the job.

If the job is too big, it often behooves a firm to have high level staff dedicated to keeping that job on track. Don’t forget to consider how the bid list can dynamically affect your ability to compete and perform.  The one-size-fits-all mindset is a liability on all but the “just right” jobs.

Getting the wind in your sails

Everything here is about optimizing the profitability of the available work.  Even if you know exactly what the “just right” job looks like, chances are good that market disruptions will leave slim pickings at some point in your career.  In hard times it’s important to be flexible and willing to adapt.  By knowing what your firm is made of, you can better advise ownership and project management of what’s available and what must be done to succeed.  Knowing what to look for can substantially reduce the struggle to survive in hard times and can substantially accelerate the ramp up when the market improves.

Providing meaningful feedback to marketing and business development colleagues  can mean the difference between a long slog and steady improvement.  Meaningful information would include the specific project budget range within a defined geographical area, doing a particular type of project.  An example would be: “Restaurant remodel projects between $50,000 and $500,000 in the metro area.”

If similar work doesn’t go as well, try to define what characteristics affect the outcome.  Be open-minded about what you’re seeing.  Often firms get so focused on a particular market segment they overlook the driving characteristics of what made it profitable.

For example, let’s say your firm just built a chain of Laundromats  and the work went particularly well.  That success might have been due to peculiarities of Laundromats that your firm excelled at.  It could also be due to how well your team worked with the design team, the client, or the building departments.  Some firms are quick to overlook working conditions like night shifts, working weekends, phased construction, etc. as contributing factors to success. 

Try to be objective because there’s a strong tendency to over simplify or broadly categorize projects as good or bad.  This can result in situations where the firm overlooks fruitful leads because of institutional inertia.

For example if those Laundromats were successful because of the combination of a strong design team and a specific region, it would be wise to maintain contact with that design team to see what else they’re doing in that area.   

Don’t hit the reef!

Lots of firms find themselves growing when the market is good.  It can be very difficult to accurately assess the peak efficiency of the firm as it’s taking on additional overhead and work.  The natural tendency is to attempt to repeat whatever was successful on parallel channels.  Often that market gets saturated so the firm starts chasing bigger work.  When the downturn comes around, the firm has completely changed its key market segment.  Estimators must understand the seriousness of their task and stay committed to a sober view of what’s going on.  Wherever possible, estimators should seek to test out different market segments even during boom times.  Knowing what’s going on, where the work is, and how your firm can win it during a recession is what being a rainmaker is all about.

 

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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

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