Tag Archives: market pricing

Conceptual estimating, client capture or wasted time?

Where do projects come from? As estimators we’re often less concerned with the steps that came before plans landed on our desk that we should be. Everything starts with a client and their idea. There’s an awful lot that has to come together to translate a clients idea into a reality. The American Institute of Architects (AIA) has outlined the Best Practices for architectural design into three main phases.

Basic concept

Schematic design (SD) is the earliest phase and it’s where the required functions of the project are defined and refined. A lot of effort goes into the research and due diligence necessary to ensure that the project will conform to zoning, jurisdictional requirements, etc.  Estimators often refer to these as the “napkin sketches” because the intent is to convey the magnitude and orientation of major project features without necessarily providing much detail. Smaller projects may feature a narrative which can be as simple as a list of required functions, assumptions, and minimum requirements. The SD drawing set may be put out to contractors as a “gut check” to level the project requirements against the client’s budget. More on this later.

Conceptual estimating, client capture or wasted time?

“It may not look like it, but I’m here to help…”

Rough draft

Design Development (DD) is the next phase and it’s here that more detail is slowly added. Generally, (but not always) these plans lay out the Mechanical, Electrical, Plumbing (MEP) details as well as the structural and architectural details. It’s at this stage that signature elements are typically selected, often based on comparison between one or more schemes. When these plans are sent to contractors, you’ll often see them referred to as “Pricing plan” (PP) or clearly marked “NOT FOR CONSTRUCTION”. The DD phase is typically concluded with a formal presentation to the client in hopes of getting approval to proceed to the next phase.

Final plan

Construction Document (CD) phase is the final phase of architectural design. Complete CD’s are sent to contractors for final bidding and subsequent contract award. Many clients and/or architects require contractors to bid on incomplete CD’s which are marked with the percentage complete.

Concept to contract

Estimators are frequently asked to price SD and DD drawings as a courtesy to the client or the architect. It’s understood that designs must progress in order for there to be work for GC’s to do. Beyond simply aiding a design development, many GC’s seek to lay the groundwork for contract award or negotiated agreements by making themselves indispensable to the client and/or architect.

Conceptual estimating, client capture or wasted time?

Savvy bidders are quick to lock their competitors out

This tactic is called “client capture” and there’s a lot to recommend the practice because GC input early in the design can reduce prices, and increase the odds of project success.

Refine by bid

The GC’s motivation to capture the client is understandable, however their effort can stray into becoming an unpaid construction consultant.   There are clients who limit their design team’s scope of work to SD or DD level drawings, which are then sent out to bid with requests for “complete” proposals. Estimators pricing these projects balance between hard-bidding and design-build as they attempt to fill in the blanks. Each round of bidding provides the client with information to refine their drawings for re-bidding.   Bidding GC’s will find their good ideas incorporated on plans sent to their competitors to bid. It’s entirely possible to spend so many labor hours in conceptual bidding, that the subsequent contract work is no longer profitable!

Conceptual estimating, client capture or wasted time?

Window shoppers

Competitive bidding is the most reliable and consistent means to ensure market pricing. Clients who find their budget’s blown on bid day are getting valuable feedback on their projects. There are some clients who continually re-bid their projects hoping to “beat the bushes” for a better price. If the client can’t raise their budget to market-value, or reduce their scope to suit their budget, they’re not a real client. These “window shoppers” have no concern for the time and money they cost their markets. There are always more window shoppers than real clients, so estimators are well-advised to bid judiciously.

Some clients find themselves debating between two or more different addresses which require tenant improvement (TI). Metro areas often feature design firms that specialize in tenant planning for leasing negotiations. These firms specialize in drawing plans that facilitate conceptual pricing, but never lead to construction contracts. In fact, there’s little reason for these design firms to involve contractors because historical data coupled with some basic estimating skills would provide their clients with sufficiently accuracy to negotiate leasing terms.

Signs to watch for

Estimators looking to maximize their chances of success must develop judgment to pick the best opportunities to bid. There’s an old maxim that states : “Good judgment is based on experience you can only get through bad judgment”. As a logical starting point, estimators must understand that functional relationships are based on reciprocation. Bidders understand that submitting the lowest complete proposal (for free) by the deadline is their obligation, and awarding the contract to company with the lowest complete proposal is the client’s obligation. Bidding for “free” is the contractors commitment, awarding a contract on the basis of those bids, is the client’s commitment. Moral flexibility separates the window shoppers from the real clients.

Conceptual estimating, client capture or wasted time?

Here are couple examples of how life is better without gray areas.

Many ethical clients see conceptual estimating as an expected courtesy, if not an outright prerequisite for future invitations. If the client isn’t promising to select a contractor based on the outcome of a conceptual bid, the GC’s are forewarned that they can expect additional rounds of competitive bidding before the contract is awarded. Estimators are well-advised to pay particular attention to what is and isn’t promised at the “final” bidding opportunity. There are clients and design teams who expect “do-overs” whenever there’s hope of capturing some additional savings. An awfully old trick is bid the job before submitting plans to the building department, then re-bid the job after they’ve got inspector’s comments. Lots of value-engineering (VE) ideas from the bidders get rolled into that last set. This effectively gives your competitors a chance to capitalize on your good ideas for the client.

Clients who consider conceptual estimates to be a prerequisite to inclusion in the final bidding should be starting with a short list of pre-qualified GC’s. Pricing all the SD, DD, and CD revisions can range from three estimates, to dozens of pricing exercises that could take place over many months. Clients who expect this courtesy should reciprocate by limiting competition to a short list of qualified competitors.

Clients who demand extensive competition throughout conceptual bidding will generally accept any bidder on the final round. These clients may pay lip-service to GC’s making themselves indispensable but they’ll only award after they’re sure there’s nobody cheaper on the market.

Estimators should be especially wary of bidding projects which have different deadlines for participating GC’s. Sharp-eyed estimators will pay particular attention to the dates on the plans. It’s very rare for a legitimate conceptual bid to have plans that are more than a few days old at the time of the request for proposal (RFP).

Often Architects will revise the plan legend as progress is made on the sheets. “Final” or “Pricing set” drawings that aren’t quite 100% complete are fairly typical for hard-bidding, however estimators should consider the timeline of the updates in the context of the final set’s date. If there was steady design progress between updates however the “Pricing set” you’re looking at is several months old suggests that this isn’t the first time these plans have been out to bid. Especially long gaps between “Pricing” and “For Construction” sets, begs the question “why didn’t they award the job on the pricing set?”

Never underestimate the value of direct communication with the client and their design team. Job walks are a vital social opportunity to gain insight into the project and where it’s heading. Clients may freely admit that a project has been out to bid previously. Design teams may drop hints about expected changes, budgetary issues, or client expectations. GC estimators should cultivate their leads in the subcontractor community. Reputations are earned, and people have long memories when it comes to hard-earned judgment.

It’s much easier to close a deal with a client when you’re well-informed.

Tips and techniques

Conceptual estimating, even as a courtesy carries a certain amount of risk. Regardless of what qualifiers, clarifications, or exclusions you might make, the one thing that every client remembers, is the lowest number they heard. Estimators need to be VERY careful about how information might be misconstrued especially at the earliest stages of design.

We all understand that complex assemblies are built of smaller parts and pieces. Clients tend to think of these pieces as individual and uniform when it comes to cost. The cost to furnish and install any given thing seems like it’s an easy enough question. The problem with this thinking is that it’s simplifying the context, and ignoring the impact one part has on the larger system. For example, adding one more faucet may require another sink, which may require another drain which may exceed the design’s capacity in numerous ways.

To the estimator, “menu pricing” conceptual elements is not only risky, it’s potentially never-ending. It’s important to pull back a little, to get perspective on what the client is actually trying to achieve. Rather than indulging in micro-managing breakouts, the focus should be on guidance to achieve the clients project goals within their budget. Identifying cost centers and their proportional contribution to the total gives meaningful feedback on incomplete designs. Estimators looking to capture a client through conceptual pricing should look beyond pricing every request to address the clients root concerns. Helping a client with their problems should not give them the tools to hire your competitor. A pattern of brute-force low-bidding on multiple rounds of conceptual estimating isn’t a substitute for strategy either.

Conceptual estimating, client capture or wasted time?

Hitching their wagon to the wrong horse is a recurring trend in the estimating field…

Not every client will be interested in selecting a GC during the conceptual bidding. In many cases the courtesy bidders find themselves losing to firms that didn’t bid the conceptual rounds. If conceptual bidding won’t lead to client capture, it should at least lead to successful pricing strategies. There’s never an end to going-nowhere conceptual pricing requests because clients and their design teams are getting free construction consultants. It’s hard enough to win profitable work as it is without giving our best efforts away for free.

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© Anton Takken 2016 all rights reserved

 


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.

Where do estimators get their prices?

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.

Where do estimators get their prices?

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.

Where do estimators get their prices?

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.

Where do estimators get their prices?

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

 

 

 

 


Making Bidding Fun!

A much overlooked aspect of what it takes to be a successful in business is the fun of actually doing the work.  Estimating need not be boring, anti-social, or frustrating.  The key is to maintain some perspective on what you’re actually doing.

Making Bidding Fun!

A different take

In most offices, the estimator’s role is stiffly defined as “pricing stuff to win work”.  While there’s certainly some truth to that, there’s a lot missing as well.  For example, most entrepreneurs would view every invitation to bid as an opportunity.  Every opportunity is a chance to further their goals.  Every success opens new avenues to further opportunity.

The entire entrepreneurial plan is based on cultivating excellence from what’s available.  Estimators  interpret challenges in terms of risk versus reward.  Reward often get’s narrowly defined as profitable.  By limiting the appraisal of reward to profit exclusively, much of the entrepreneurial mindset is lost in the exchange.  Along those same lines, estimators  frequently interpret “unknown” to mean:  “not worth it“.

Estimating becomes drudgery when you’re grinding through pricing exercises without any focus beyond covering your hind end.  Estimators control risk and there will always be risk on an estimate.  Certainly there’s more risk in doing something new.  Quantify the risk and make it possible to push your boundaries.  Don’t squander opportunities with unqualified pessimism.  Eagles and Moths share the gift of flight, but Moths use it to bang into windows.

Winning bids is more fun than losing them but finding a perfect client is better still.  Finding that rare profitable niche where your firm offers some unique value to the client is a watershed moment for a business.  You’ll know when you’ve found it because you’re able to beat market pricing, exceed market value, and make more profit for work in that niche.  It’s a great feeling to be at the top of your game.

Making Bidding Fun!

 Like this guy for example…he’s having a great time!

Getting there from here

Before you go off thinking that happy estimating is simply optimistic bidding , there are a few points to be made.  First off, let’s start by making everything you bid rewarding.  Every bid must have a primary, secondary, and tertiary reward.

The primary reward is to professionally represent your firm, your vocation, and our industry.  In a perfect situation, you profitably win the job.

The secondary reward is to gain knowledge about the bidding environment.  The bidding environment is a complex intersection of clients, design teams, competitors, market conditions, and local factors.  Success is going to hinge on your judgment which is informed by paying attention to what happened on every bid you participated on.  Just as estimating is often about taking a huge amount of unknowns and systematically filling in the gaps, so too must the post-bid investigations.  Track what you can and interpolate the rest.  You absolutely must gain new information from each bid, otherwise you’re going through the motions which is depression with spreadsheets.

The tertiary reward is networking.  To many estimators this is largely limited to clients and design teams.  New subcontractor talent is a market control that can not only ensure competitive pricing, but market value.  Institutional inertia is a potent force in the construction industry.  Many new technologies, techniques, products and services get stymied because established firms don’t face serious competition from companies that are doing everything they can to gain market share.  Many estimators seek to reduce risk by focusing exclusively on “their team” of subcontractors.  Somehow it escapes their notice that low risk bids are often long-shots in the competitive market.  Get new talent involved whenever you can.  Figure out which subcontractors are doing work for your competitors and not for you.

Over the course of your career, the bid list is a silent marker of the professionals you’ve encountered.  Nobody wants to bring more confusion into their world.  It often seems like every group has a few difficult characters.  Herein lies a quiet advantage.  New contacts are fragile things.  If a new subcontractor turns out to be a turkey, you’ll have little regret taking them off the invite list.  It’s much harder to be rid of difficult people with whom you’ve had a long working relationship.  But once again, new competition might solve that problem for you.

Making Bidding Fun!

 Yeah, this guy definitely needs to go…

 

Turning things on their head

Lots of people hear “estimators must control risk” and think that means putting money into the bid equal to the dollar value of the uncertainty.  That’s entirely wrong for a variety of reasons.  First of all, it’s an estimate which means there must be risk. If there’s no risk, there’s no reason for an estimator to be pricing it.  Second, bidding is not done in a vacuum which means that competition forces the winner to be the best market value so padded bids are often losing bids.

Third, if you actually know the value of the uncertainty, it’s not a risk, it’s the cost of making a decision.

For example:  If a low bidder is 5% cheaper than 2nd low, you firm’s risk in hiring them is 5%.  If the low bidder fell through (or raised their price) before starting the job, your firm would have to come up with the 5% difference to hire the second low.  The greater the price gap, the more likely that is to happen.

That’s all fine but it assumes that all the risk is resolved prior to contract award.  If a subcontractor “falls down” on you during the job, it will cost much, much, more to get the job back on track.  This is because you can’t simply sever a contract with the first subcontractor, then hire the second contractor for the bid-day difference in their proposals.  The first Subcontractor has legitimate pay applications up to the point they fell down.  The 2nd subcontractor has to price the amalgamation of new work using whatever they can salvage of the first guy’s work within the now-compressed timeline for project delivery.  Basically, you’re asking the 2nd guy to take on a much harder project than the bid day proposal addressed.  Their price might be less than their bid day amount, but the sum-total spent on that scope of work will be much more than the low bid amount.  Notwithstanding the inevitable court costs.

Successfully controlling risk is about judgment far more often than monetary padding.

If you find it’s not possible to define the value of an uncertainty you’re almost surely out of your depth, don’t bid.

So how does this apply to me?

If everything in the estimators purview is defined in terms of dollars and fears, there’s no light of opportunity making the job something meaningful.  Estimators have a wonderfully unique position in the market that gives them information, insight, and leverage that’s profoundly influential.  The key to unlocking this worldview is exercising judgment.

Go faster, good tools make everything but excuses.

In order to “buy time” to do all this thinking, investigating, interviewing, and planning you must understand the continual need to accelerate your QTO’s and estimate building.  It’s incredible how many estimators are choosing to short-change their success by spending so much time with the phone off and door locked trying to pound out a take-off.

Market leading software solutions are plagued with poor input systems, frustrating file management, and stodgy workflow arrangements that are seemingly  “optimized” for befuddled pensioners.

Get used to the idea that you’re going to have to push the envelope by adapting to this adversity.  Take the time to learn keyboard shortcuts, menu sequences, and drop down lists.  In some cases, it’s possible to learn entire shortcut “phrases” which quickly move through routine tasks.  Speed is your friend and flexibility is critical for swift progress.  Inexplicably systems continue to be developed with monstrous lists to represent every variable of a construction project rather than allowing the input to be logically derived by the user.  Get to a point where the “counts and measures” aren’t consuming the lion’s share of your time.

Rise to the challenge

Estimating is an executive position that bridges sales and production.  Embrace the opportunity to thoroughly understand the job and what drives the cost while aligning the job’s needs with the best your market has to offer.  Be a market leader, and motivated professionals will flock to you.  It’s a lot more fun.

Making Bidding Fun!

Maybe not as fun as bear walking, but still… pretty good!

In most places, the construction market experiences severe fluctuations in roughly ten-year cycles.   Many firms find it’s tough to quickly adapt to a downturn and few professionals feel the pressure so acutely as the estimator.  The furious tempest of chasing every bid opportunity is starkly contrasted by how  little work goes to contract.  It’s a sad and predictable fate for the unprepared.  Estimators should take heart, there is always opportunity for the willing.

Knowing the market, and knowing the market pricing means you know what it takes to win.  These informed insights are invaluable to the firms decision makers.  As an observer, you should be on the constant search for quiet market sectors.  The more diverse these sectors are, the better.  Market downturns are not always uniform and many firms find themselves uniquely positioned to expand during such times.  Be sure to maintain a long list of clients to call upon when that happens.

Judgment is all important

Much of the joy in work is about having a purpose to what you’re doing.  Fear, survival, and inertia are the three leading reasons miserable estimators reply to: “why are you bidding this job?”  All three options are passive acceptance of a very corrosive notion.  The idea that winning a bid is little more than simple chance  barring some bidding error.   The overwhelming focus on “not missing anything” obscures the much bigger picture.  By and large, most competitive bids come in quite close between bidders.  That isn’t a function of luck or missing something huge.  Most of that difference is professionals doing their best with what they have.  After all the adding, calculating, scoping, and measuring, take a moment and look at the job and it’s cost.  Find a past bid that’s similar to this one.  Is this job’s cost in line with the winning amount on that project?  Now think!

If your total on this bid isn’t looking competitive, it’s time to figure out why.  Maybe the schedule could contract, maybe you carried the 2nd low sub on something expensive.  Resist the urge to simply tinker with the profit percentage until no other options are available.

What you’re doing right now is controlling the risk of losing the bid.  You’ve put a lot of yourself into this effort, make sure that you finish strong.

You should know exactly why you made whatever changes you made so you can connect your actions to the outcome.

This is where estimating steps into its purpose.  Estimating is not simply harried mathematics, plan reading, or typing proposals.  It’s not just guessing, bargaining, or gambling either.  It’s about hitting the mark in a complex, dynamic, and demanding environment.  Picking an opportunity, positioning yourself properly, and landing a profitable job for your firm is a wonderful rush.  There isn’t much room for “fat dumb and happy” on the hard bid market.  Stay sharp and you’ll find that even in a crowded market, you can make it happen.

Final thoughts

To recap a little: an estimators purpose is directly tied to the entrepreneurial mindset.  In place of optimism, the estimator brings market knowledge, and nimble problem-solving to turn opportunity into success.    The estimator is a scout, a guide, and an adviser to help direct the firm’s actions.  Personally, the estimator is a well-known professional who can earn a reputation that opens doors at every level of their career.

In many ways, seeing “the job” for what it really is (or should be), fundamentally changes how it feels to work every day.  Be the change you want in your life.  Make bidding fun!

 

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© Anton Takken 2014 all rights reserved