A Modest Suggestion to Improve Budget Checks

I’ve written before about conceptual estimating and some of the challenges that it presents.  We conceptually estimate whenever the plans and specifications are too incomplete to facilitate a normal contract.  This means that conceptual estimates do not constitute a binding contractual obligation the way they do on a “real” or “hard-bid” situation.  Correspondingly, the client is typically under no obligation to award a contract, or even select a contractor for future award based on a conceptual bid.  It’s supposedly mutually understood that conceptual bidding is a courtesy that contractors extend to clients and their design teams to facilitate future work.  Many General Contractors (GC’s) see conceptual bidding as an opportunity to get in front of the client.  They hope that their investment in conceptual bidding will lead to contract before all the drawing stages are completed.  This is known as client capture.

A Modest Suggestion to Improve Budget Checks

You’ve got to enjoy those victories

The Architect knows more than they’re letting on

Before we go much further we need to address some of the misconceptions about what’s really going on.  First and foremost, we need to understand that the professional with the most information, and the most authority to make informed decisions to align the design with the budget is the Architect.  The American Institute of Architects (AIA) has recommended policies and procedures for the project process.  These policies aren’t shy about demanding not only budgetary information, but insight into how the budget gets approved, who might be opposed, and what can be done to ensure the job moves forward.  The Architect knows what features must be included and they know the budget they’ve got to hit in order to get the job approved.

Further, any Architecture firm with sufficient experience has an impressive backlog of information for the costs of past projects.  This information is far, far, superior to what any individual GC might have because they have access to not only the awarded bidder’s proposal, but the losing GC’s bids as well.  This is profound feedback on their design that they can collect every single time their plans are bid.

Not only are the Architects sitting on competitive bids for their plans, they’ve also seen the change order costs for all the projects they’ve built.  They have a uniquely accurate insight into how costly missing, incomplete, or changing information can be on an issue, by issue basis.

Inflection point

This brings me to one of the most canny contractual moves I’ve ever seen.  The AIA writes the vast majority of construction contract templates.  It’s therefore not surprising that these contracts absolve the Architect of any responsibility for the financial outcome of their work. So when the lowest bid they received blows the client’s budget, the Architect isn’t responsible.

This makes a certain degree of sense because the Architect is independent of the GC’s bidding the job.  They can’t be held responsible for market conditions, or contractor business decisions that are outside of their control.

A Modest Suggestion to Improve Budget Checks

However, this absolution of responsibility has opened the door to corruption.  Architects and their design teams can, and do, sole specify vendors who inflate their prices because they’re protected from competition and transparency.  Everyone in the distribution chain realizes that exposing the corruption to win a single job, may cost them competitive pricing on everything else they’re bidding.

Playing dumb is a costly game

It’s obvious that an Architect can’t do their job without knowing the clients budget as well as their project expectations.  It’s also obvious that an Architect couldn’t be expected to balance the project expectations with the clients budget, unless they had a sense of how much their design would cost.  This working knowledge is a function of the Architects experience.  Taking this one step further, it’s therefore obvious than an experienced Architect has very little excuse for blowing a clients budget.

GC estimators receive Request For Proposals (RFP’s) from the client or their architect which outline the expectations and obligations for the bid.  These vary in formality, however the basics of the bid and subsequent project are provided to all invited bidders.  Some government projects are required to show the estimated project cost on every RFP.  It’s very rare to see this information provided anywhere else.

Conceptual estimating requires the bidders to fill in the gaps in the documents.  This means that a conscientious bidder is forced to make design decisions and price them in a competitive setting.  While there may not be a contractually binding obligation to honor their conceptual price, a bidder is aware that it is unprofessional to provide erroneous or misleading information  Experienced bidders know that clients and design teams virtually never remember the qualifiers, clarifications, or exclusions.  The lowest number they got is what they’ll remember.   In tight markets, clients may have several GC’s bidding each stage of plan development.  This can mean three or more rounds of competitive bidding before the final contract award.  Every GC may have two dozen trades, with three or more subs per trade.  The collaborative cost of all these estimators pricing a project through its document development is staggering.

A modest solution

The entire point of a budget check is to verify that the design cost won’t progress outside of the clients ability to pay.  If things aren’t adding up right, it’s easier to scale back earlier in the process so the final Construction Documents (CD’s) attract acceptable bid amounts.  The budget checks are tied to plan development stages which are known to the design team and the client.

For example, a 50% design set may only have the major  Heating Ventilating, and Air Conditioning (HVAC) equipment located on the plans.  The Mechanical Engineering consultant may need to run some calculations to make their final specification selections, but they know the magnitude of the final system and how it will correlate to the mechanical portion of the project budget.

If the 50% drawings don’t provide the estimated magnitude of the system so the HVAC bidders are forced to fill in those blanks to conceptually bid the job.

A Modest Suggestion to Improve Budget Checks

Efforts to improve engineering transparency are ongoing…

Basically the conceptual bidders are pricing their vision of the project rather than the design teams vision of the job.  Design changes implemented on the conceptual pricing feedback aren’t actually based on universal comprehension of the original plan.  If the HVAC bidders filled in the gaps with unnecessary or inefficient selections, they’re pricing a completely different design than the design team had in mind.  Since conceptual estimators are wary of angering clients when the low-cost assumption is shot down, they may skew to higher cost answers to guard against the unknown.

We have a situation where Clients are asking if the design is on track, and the bidders are playing guessing games with the designers intent.  None of the answers are meaningful because the most insightful information isn’t provided.

I propose that RFP’s for budget checks include a design-team estimate breaking down the clients budget into Construction Specification Institute (CSI) Masterformat divisions.  The Mechanical Engineering consultant in the above example would provide rough magnitude descriptions of their planned equipment along with budget allowances for each component.

The context of the RFP completely changes because the design teams budgetary assumptions become the baseline of conceptual estimating.  Instead of asking what some poorly rendered thing costs, the RFP asks if their plan is on track.

The GC’s responding have a uniform means of quantifying the scope, and they can identify budgetary inaccuracies on a line-item basis.  This not only improves the design teams understanding of what’s driving their budgets, it also reduces the GC’s risk in answering conceptual questions.

This also resolves the ticking time-bomb of last round changes to the plans that suddenly reveal costly items that were always expected but never communicated during earlier budget checks.

A Modest Suggestion to Improve Budget Checks

“We found a few concerns in the Landscaping budget…”

What would need to change

For starters, Architects would need to become more transparent and accountable for the impact of their decisions.  Currently, budget checks are like a theatrical production intended to feign concern for staying on budget, while collecting the means to blame GC’s when the job comes in over budget.  Budget checking doesn’t need to be a charity effort in an Architects theatrical production of “The budget is blown” starring “The angry client”!

Budget checks are not offering a fair contract award to the lowest bidder in exchange for a free bid.  Since there is no legitimacy without reciprocity, the bids shouldn’t be free.  If we can agree that it’s a professional courtesy that’s necessary to foster market growth, we should be able to agree that Design teams need to be more respectful of the markets time.  Basically, if the design team knew what they were doing, checking their budget should be a simple process.

There is an obvious need for Architects to have their own in-house estimating, scheduling, and management professionals.

Likely resistance

The fundamental link between design intent and cost outcome cannot be waived aside in the context of a budget check.  Either the Architect is a responsible and capable professional, or they’re just hoping whatever they draw will pass budgetary muster.   Architects may feel they have little to gain by transparency in inverse proportion to their professionalism.

Admitting that to their cost knowledge may lead to clients demanding that they pay for design errors and omissions.

A Modest Suggestion to Improve Budget Checks

Even when they’re spiraling out of control, Architects will color coordinate!

Of course, there would be fewer change orders if the budget-check process was actually grounded in a meaningful process to correct the Architect’s course via contractor feedback.  Also, the budget-checking may provide sufficient pricing information to later argue that change orders are overpriced.

Incompetent design-teams won’t likely be any better at estimating than they are at Architecture.  Budget checking an obviously flawed estimate isn’t going to be fun for GC’s looking to impress the client.  However GC’s will benefit from having a real black-and-white illustration of the Design teams competence to refer to on bid day.  Clients may fail to recognize the nuance of a complex architectural depiction, but they’ll be able to see how their Architects work fell short of what they promised.  It’s politically difficult to tell a Client they’ve hired the wrong team, but a red-lined estimate showing where and why things were wrong may send the same message.

Adding estimating and management staff to a design firm may be seen as an onerous obligation. Many design teams have been able to operate on fuzzy program designs that fall well-short of being an accountable estimate.  Plausible deny-ability is built-in via sloppy and opaque documentation.  Nevertheless, design firms are selling their clients a promise to responsibly translate their clients vision and budget into a successful project.  Clients looking for a qualified architect should focus less on computer-aided design innovation, and more on sound business practices.

Likely blow-back

The entire concept of client capture via conceptual estimating would be effectively turned on its ear.  Rather than telling the most compelling story of how the job might be done, conceptual bidders would be editors to the Architects narrative.  For firms that have been successful with client capture, the budget check as I’ve proposed would offer much less latitude to sell the client on your companies abilities.

There’s nothing about my proposal that addresses the possibility that the final round of bidding could still exceed the clients budget.  Market factors like seasonal rushes or shortages can have profound impacts on the bid-day amount.  We all have to cope with factors that are outside of our control.  However, it’s worth pointing out that GC’s could inform their potential clients of changing market conditions that would affect their budgets.  Additionally, the Architects estimate defines the limits of the scope intent which reduces risk, which in turn lowers pricing from the GC’s.

By a wide margin, the group most likely to oppose my proposal are the cabal of corrupt professionals who would find it harder to maintain their business practices.

A Modest Suggestion to Improve Budget Checks

Derek is just trying to build the only way he knows how…

If Architects were to reveal the actual cost of corrupt vendor material, it would immediately attract the clients attention.  Even having a placeholder for a future sole-specified product would attract the bidders attention leading them to offer more cost-effective options.  If the Architect attempted to add the sole-specified vendor in the final round of bidding, the budgetary impact would be easily audited. GC’s who participated in earlier rounds of budget-checks would be quick to identify the chicanery to the client to explain why the budget jumped.

Some GC’s may be opposed to my proposal because it indirectly illustrates their faults.  If the architects estimate is based on contracted amounts of similar work, they’re providing accurate information about what market value pricing is supposed to look like.  There are some GC’s who’ve never actually seen a market-value subcontractor bid because their approved subcontractor roster is so limited.  These GC’s will initially inform the Architect that their budget for that scope is too low.  Architects with several GC’s checking their budget may find that they can tell when a GC has an overpriced sub on their roster.

The next round of budget checking would tell all the bidders how they compared to the winning team.  This neatly side-steps the insidious nature of GC’s who withhold bid results from their subs.  It won’t help the GC’s who prefer to avoid transparency, but it will help the industry to be better informed about the going rate for work.

Final thoughts

If the market is helping the client to achieve their goals, it’s only fair that the process should help the market to be more successful. Estimating should never be free.  If you’re not winning a contract award, you should receive feedback on how to win the next time.

Lots of subs would be far better off by bidding to a more competitive GC.  GC’s need to know when they’re failing to attract market leaders so they can correct course.  Bureaucratic inertia and dysfunctional relationships lead to lots of wasted opportunities.

Architecture firms seeking to market their abilities to potential clients would have a market-proven means to show that they can design within the clients budget.  Undermining this fundamental concept is where our industries contractual adversity takes root.  True professionals must raise the industries standards to shed daylight on the scoundrels operating in their shadow.

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© Anton Takken 2016 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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