Tag Archives: Perspective

September 17, 2020

Would you recommend estimating as a career?

I was recently asked if I would recommend estimating as a career. This being the first time anyone ever asked me this question, I was unprepared for how complicated it felt to answer. I find myself between two competing perspectives on this vocation. On the positive side, most people who major in Construction Management do not voluntarily pursue estimating. As a result, there is usually a tremendous amount of competition for Project Management positions, which in turn, limits the individual’s ability to move up the ranks.

Project Managers multiply like…well you get the idea!

The Good

Estimating in contrast, has very little competition. It’s very common for successful estimators to get rapidly promoted to senior positions. A quick survey of construction contracting will reveal that estimators are well represented at the ownership level. Estimators are in a unique position to witness market and industry trends. If they’re paying attention, they can see what’s going on both inside, and outside of their firm to make better decisions. Estimating is a wonderful way to network with professionals in your market. Bid deadlines can be very short, so coordinating everything and everyone requires a lot of direct communication. That direct communication provides lots of opportunities to stand out as an individual. Being perceived as a real contender attracts market leaders, which can make you a winning bidder. These are the proven connections between your integrity, your reputation, and your success.

Plus you’ll be surrounded by some good company!

The Bad

The construction industry has some serious challenges that will factor heavily into your daily life as an estimator. It’s entirely possible to be the lowest complete bidder and still lose the job. Major economic trends cascade through the industry upending everybody’s plans. It is very frustrating to see hard-won projects getting postponed or abandoned when your firm badly needs work. Oftentimes there will be lot of pressure to generate results when work is scarce. People tell me that they wouldn’t want a job that depends upon their day to day performance. I see it differently. Just about everyone’s job depends on their day to day performance. The same transparency that exposes all the bids I lost, will equally showcase all the jobs I won. I can see, and more importantly prove my value to my employer.

The Ugly

Desperation encourages a lot of bad behavior on all sides of this industry. I often remind people that it’s not the job you lose that puts you out of business, it’s the job you win. All of the very worst projects of my career had one thing in common; dishonesty. You will encounter a lot of people who will rationalize dishonest and unethical business practices as being somehow necessary. “The thing you gotta understand…” is the familiar preamble, cheating is the inevitable conclusion. It’s presented in terms of negotiation where the arrangement just so happens to require cheating the winning bidder out of their contract award. If they didn’t want to work with a firm, why did they accept the bid? As crazy as it might sound, I’ve had clients who claimed they had a lower bid than mine and asked me to beat it after the fact. When I declined their request (called their bluff), they went quiet for a while, then sent me a contract for my full bid amount. Some days, it can be very difficult not to take it all personally.

“Jim does his best to stand out from the crowd, but sometimes the job eats at you…”

So where do I start?

I could list off all the education and work experience stuff, but it won’t lead to success on it’s own. Estimating is a unique profession in that I meet very few who pursued it intentionally. The vast majority of beginning estimators go on to pursue other lines of work. It’s my belief that this career misalignment is largely due to two things; clarity of purpose, and perspective. When people don’t really understand what they’re supposed to achieve, they make poor decisions that prioritize process over production. This kind of thinking is how we end up with “bid mills” where firms push their estimators to recklessly bid everything in hopes that it will increase their odds of winning. It doesn’t work, it never worked, and it’s always been a very bad practice. The estimators purpose is to secure profitable work by managing risk. If you want to be an estimator, you’ll need to maintain clarity of purpose. Chasing everything to appear busy is confusing motion with progress. Aiming at the opportunities you can actually hit is where perspective comes in.

“Jared was all eyes and ears which is why he’s always running around”.

There’s a meaningful difference between perspective and opinion in this context. Perspective comes from the honest observation of what’s going on, driven by the curiosity to determine what actually matters to success. Since we know that our success is defined by securing profitable work, we can focus our attention on the variables that affect that outcome. A word of warning here, make sure that your focus is proportional to the indicative value of a given variable.

Here’s an example of what I mean. Let’s say you’re competing on near-identical projects like retail chain stores. If you find that you’re losing by 5%, it makes sense to find a way to trim 5% from your bid on the next one. However, if you make that cut (or more) on each successive bid, yet continue to lose by 5%, you should focus your attention onto other variables. Find out how it’s possible to “miss” with such precision. Are you working with the same people as the wining bidders? If so, there may be relationships you need to build up, or work around, to improve your odds of securing profitable work. If the work in question is outside of your efficiency of scale, your company will need to make structural changes to profitably secure that work.

“Give me a lever long enough, and a fulcrum on which to place it, and I shall move the world“

Archimedes

These are just some of the many reasons that estimators must have the perspective to know what is and is not, a viable opportunity to pursue. With clarity of purpose and the right perspective, you will be well equipped to recognize the risks and rewards of any given “best practice” in estimating. There are a lot of “solutions” that are worse than the original problems. I worked for a company that painstakingly measured every square inch of each paint color where painting was consistently worth less than 1% of the total project cost. When I started, this same company used crude, square foot costs for complex trades like structural steel and Electrical which were consistently worth 12% and 20% respectively of the total project cost. Over 30% of their project value was guesswork because the estimator never found time to learn how to quantify and estimate the more complex trades. The rationale was that the painters weren’t very good bidders, compared to skilled trades so they needed fine detail to verify the painters bids. While this was generally true, it ignored the relative risk versus reward. Any error in a skilled trade bid was probably worth more than the entire paint scope. Simply put, there was no reason to even measure the paint because we could plug in double the average paint contract value without materially affecting our odds of winning the overall bid. In fact, most of their jobs were won or lost on the basis of six critical trades.

Learn from your losses

Careful readers have likely noticed that there’s a lot of valuable information to be gained from losing a bid. Depending on the internal bureaucracy of a given firm, it can be difficult for an estimator to know how successful their wins really were. There’s a built-in delay on this feedback because you must wait for the project to conclude before the full story is revealed. Estimators working in booming economies may not lose enough jobs to keep their perspective honed. When things slow down (and they always do), these estimators are often blindsided by layoffs. Savvy estimators who know the market value of, and market leaders in hardscrabble work are in a much better position to weather a downturn. Wherever possible, seek the tutelage of a senior estimator who has weathered recessions. There is no greater test of an estimators skill than to consistently land profitable work in a recession.

Walk tall

Estimating is a humbling pursuit because it’s impossible to achieve your potential without experiencing some failure. There are however, many moments where you’ll know your worth with a clarity that is undeniable. That confidence adds to everything you touch, and inspires the good people you’ll work with.

There will be opportunities to help people who may help you in a time of need. In so doing, you can change your corner of the world for the better. If all of that encourages you to become an estimator, I hope to see you out there!

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1 Comment | tags: Estimating process, Perspective | posted in Uncategorized

February 21, 2020

Growing pains

By Anton Takken

Time is money, the customer is always right, estimates are free, every company wants and needs to grow. These expressions are so familiar that they sound like universal truths. Life has a way of being more complicated than we’d like it to be. I’ve definitely encountered rare situations where costly time was squandered, customers were wrong, and estimates cost a fortune.

Is growth always good?

To answer that question, I’ll ask another one. What puts more companies out of business, losing too many bids, or winning too many? This isn’t a trick question, and it doesn’t require any extensive market knowledge to answer. Consider the following. If a company doesn’t win any work, they’re not getting any income which means their overhead is consuming their capital until they’re insolvent. The overhead and the existing capital are known entities to the firm. This means that it’s possible to accurately define how long the company can remain in business without landing work. More significantly, it defines how the company can fail without owing anyone.

If a company wins more work than it can complete, it’s in a very dangerous situation. Contractually they’re obligated to complete the work and penalties for failure are severe. In real life, things don’t fail in a neat and orderly manner. One bad job has a way of taxing resources on all the others, systemically spreading the failure to everything the firm touches. A company that might ordinarily be able to weather one bad job is now facing the prospect of losses on all their projects at the same time. Taking on that one additional job might well doom the entire operation. The knock-on effects of this are severe. Clients and subcontractors are often left in serious financial jeopardy. It’s difficult to know the total downside risk, but it’s clearly much worse than having to close up shop for lack of work.

Risk versus reward

Businesses operate on risk versus reward relationships. Growing a successful business is often assumed to be a low-risk, high-reward proposition. After all, you’re just copying whatever worked to capture more of the market.

There are two assumptions underpinning this plan that have the potential to upend the whole risk to reward relationship. I’ll pull them out here.

“…copy whatever worked…”

and

“…more of the market…”

Let’s start with copying “whatever worked”. On the surface, it might seem like any entrepreneur or professional would have a solid handle on what they do, why it works, and how it can be copied. In my experience, this sort of corporate self-awareness is extremely rare. Quality control efforts tend to focus on detecting the signals and causes of failures. People just aren’t that curious about their successes. If something is working, there isn’t much incentive to push boundaries in search of weaknesses.

With their heads in the clouds, management keeps tripping on molehills

I worked for an entrepreneur who proudly told me that “big and clean” ground-up construction projects were the bread and butter of the company. A quick review of the accounting would show that “ugly and small” remodel projects constituted 85% of the annual revenue, and well over 95% of the annual profits. Simply put, the “ugly” remodels didn’t attract as much competition, so we could win with higher fees. Since they were smaller, we could do more of them per year with the same size workforce. This entrepreneur is by no means an isolated case. I regularly encounter professionals whose company “identity” has little resemblance to reality. Projecting the image of what they think they are into new markets rarely works out for them.

So, what’s the assumption with the “more of the market” part?

This is a two-part problem. First, if the firm doesn’t know what they’re good at, they’re unlikely to be aware of the market factors that influence their success. Very few companies are “good at everything” so there will only be a select few market segments that are viable to any specific firm. Those segments can have many factors that influence the quality, quantity, and frequency, of opportunities to seize upon. Simply put, there might not be “more” of the target market to pursue. This is especially true for niche contractors in depressed economies. Just before the last recession hit, there were lots of companies boasting about their growth into diversified client bases. After the recession hit, most of those firms had layoffs.

The venturi effect

Giovanni Venturi discovered the venturi effect which is visible with a simple experiment. Blow at a right angle to the opening of a straw placed in a glass of water. The venturi effect will cause pressure in the straw to drop, drawing the liquid up the straw.

During an economic boom, it’s not particularly hard to win bids. Companies quickly decide that they need to grow in order to capture more of the expanding market. So, they hire more people, buy more equipment, and generally take on more overhead. Now that they have this overhead, they need to win even more work to pay for it. The constant expansion creates a venturi-effect on overhead. Some readers have gotten this far and figure this is all normal growth.

The bids aren’t just placeholders in the process of converting opportunities into profit. Bids freeze the value of the project before it’s begun. Adding overhead to the company post-bid is effectively trading profitability for growth. During a boom, the revenue can be expanding so rapidly that it’s hard to tell that the individual job is actually getting less profitable. Eventually, many such firms reach a point where their very survival depends on growth because none of their jobs were won with sufficient overhead to pay their own way. Some readers might be asking themselves why the estimators at these firms didn’t react by raising the overhead in their bids.

While I’m sure that some of them do try, they’re often obliged to prioritize the more immediate problem of staying competitive enough to keep winning work. Estimators should understand that businesses in general, and managers in specific, tend to prefer a flawed but executable plan over an effective strategy that requires constant judgement.

Strategy versus planning

As individuals, it’s impressive how easily professionals can spot the unfortunate outcomes of rigidly following a plan. When personal accountability is threatened, many will claim “their hands are tied” by these selfsame plans. People respond to incentives. A “plan” sounds much less risky because people assume, they’ll be rewarded for following (or at least appearing to follow) the plan. A strategy that requires judgement means you might be solely responsible for anything that goes wrong, even if your reasoning was sound.

Longtime readers of this blog know that estimating isn’t about a plan or a process. Estimating is about controlling risk which requires good judgement. In my experience, the better your judgement, the less you have to fear in terms of accountability.

“Matt spends a lot of time looking for a place where his reflection matches his image.”

Where do you start?

Estimators need to understand the power of perception. Hard-charging entrepreneurs hire estimators to control risk, so they can focus on growth. When sports cars are advertised; the horsepower, the speed, the looks and the luxury are all prominently featured. Nobody’s talking about the brakes. Race car drivers know that better brakes slow the car in less time which means they can maintain higher speeds for a bit longer before they must brake for a turn. This means that they’re covering more distance in less time. As odd as it might sound, it’s entirely possible for a car with better brakes to win a twisty race against a car capable of higher top speeds.

Estimators looking to gain traction with leadership need to illustrate the effect of controlled risk. How does winning a given bid relate to securing a better position for the company in the future? Mindless assumptions should be challenged. I had a boss who wanted to “really impress” a municipal client with a very low hard-bid in hopes of securing no-compete contracts for future work. The city in question has charter rules expressly forbidding city contract award without a competitive bid.

Strategic thinking looks beyond the client-retention platitudes. In this example, there will always be competition, so the focus should be on maximizing profitability at the market-leading price point. In practice, we found that we were able to profitably win work in a handful of cities. Looking deeper, I was able to determine that a longstanding culture of bid-shopping among the local General Contractors (GC’s) in one city had created an incentive for the local subcontractors to work with out-of-town contractors. By being honest and forthright about everything including bid results, I was rewarded with better subcontractor pricing than my competitors.

Since repeat business depended upon winning bids, we had an incentive to reveal any design-driven chicanery that threatened to exceed the client’s budget. On one such project, there was a sole-specified vendor for window coverings that was three times the cost of their competition for a plain “white goods” product. From a strategic standpoint, the estimator has three options. They can bid per plans and specs hoping that everyone else does too. They can carry the cheaper product in their bid in hopes that it will be accepted by the Architect, and finally, they can expose the cost difference to the client on their bid form.

Options one and two depend heavily on the integrity of others for success. Option three risks angering the Architect by exposing their chicanery. When weighing the strategies, compare the relative risks. Any one of them might fail, thus losing you the job. Option two might still anger the architect when you submit on the “wrong” product. If the alternate material is rejected, option two could result in winning a job at a loss which is worse than not having a job at all.

Option three presents the least total risk and most potential reward. If the base bid is per plans and specifications, you’re not violating any trust or instructions. The alternate is voluntary and can be truthfully presented as an alternate equal. If presented as a way to achieve their design intent within the client’s budget, the Architect can accept your alternate and save face.

The “savings” presented can be whatever you choose to offer. Strategically, it’s smarter to allow yourself greater profitability to counterbalance the potential difficulty in getting an alternate approved. As an estimator speaking to leadership, this strategy is a win for the client and the contractor.

A journey of a thousand steps

Strategic growth is more difficult than it sounds. During the ebb and flow of larger market trends, it can feel as though a perfect strategy has no priority over your daily concerns. There will almost certainly be times where the best course of action is to simply press onward, making the best of what you have to work with.

Quick story. I started working for a company that chased hard-scrabble projects for low budget General Contractors (GC’s). Every client who put us on their bid list was treated like an unassailable gift from the heavens. Bidding was miserable because deadlines were short, bid shopping was rampant, and the work was virtually worthless. Things weren’t much better in the field where most of the jobs ran late, over budget, and suffered from chronic mismanagement.

Strategy was regarded as a nicety we never had time for. Since the jobs were small, I was constantly inundated with bids to keep everyone busy. Chasing larger projects with the same class of client didn’t improve my fortunes. By one year in, it was clear that our three “best” clients were a financial illusion. They hired us for more work than anyone else, but all of their work was so poorly managed that we lost productivity and profitability on everything else we had going at the same time.

I was deeply frustrated, and at an annual review, I presented a list of the top 100 GC’s in my area to my boss. I insisted that we make an earnest effort to get ourselves invited to bid on their work. Some put us on their “small projects” list which was a feeding frenzy of projects identical to the work we were trying to escape. Others only invited us to bid on work that was too far from our market. Eventually, we were invited to bid on a modest job with a major GC. It was a rousing success! Every single project since has been awesome. We met with their pre-construction managers where we learned that they were very selective about who they’ll invite to bid.

Mesas and Buttes

Mesas and Buttes are often confused. A Mesa is flat topped land mass where the width is greater than the height. In contrast, a Butte is a flat-topped land mass where the height is greater than the width.

Submitted without comment.

It’s pretty easy to spot market stratification in the construction industry. Some projects command higher prices than others, even when they are very similar. When we see “price point” markets, there’s a wide selection of mostly standardized offerings from similar providers. I once bid a job which had a tremendous number of bidders in each trade. Plotting the bid amounts on a continuum from smallest to largest, it was plainly obvious that the bids clustered around three separate values. Broadly speaking, the clustered bidders had strong similarities in terms of market share. Among peers in their cluster, all of the bidders were strong competitors.

Comparing individual bidders from one stratum to the other, it didn’t seem probable that they were looking at the same scope of work. For the most part, the bidders in a given stratum had similar economies of scale relative to the scope of work. At the cheapest stratum, the bidders were neither too big, nor too small, they were just right.

Bid invitations that are open to all comers will generally result in an award to the stratum that best matches the scope of work. We can visualize the market stratification as if there are populations living atop mesas of different heights. Everything is organized roughly the same on each mesa, but they’re too far apart to bridge the gap between them. Moving from one mesa to the other requires painful transformation because there are no resources at the valley floor. It’s dark down there, and there’s no one to guide you so only the determined, or desperate dare to try.

Markets can stratify in less obvious ways as well. Elite clientele may decide to solicit bids from only the most qualified general contractors, who in turn, will only solicit bids from the most qualified subcontractors (subs). In many cases, the business is conducted with such discretion that only the most observant of the mesa dwellers can tell that it happened at all.

Getting to this level is a formidable struggle, which is why there is less competition. We can visualize this kind of market stratification as a butte. The butte can be at the same height as a mesa, but the butte dwellers benefit from a completely different client base.

An island in the clouds

Chasing elite clients sounds like a foolproof plan, and honestly, there’s a lot to recommend it. However, there’s a big difference in the relationships that underpin every opportunity. Going back to my butte metaphor, it’s significant to realize that while the height might seem familiar, the boundaries are sheer cliffs. Any failure to perform, even the perception that you might fail to perform, may be all it takes to be kicked out. It’s critical to understand that these rules apply to virtually everyone on the butte. A GC with a sub that’s not performing, is an existential threat to their livelihood.

The greatest advantage of life on the butte is that you can’t exist here without doing construction management right. Half-baked, absentee Project Managers (PMs) doing their best to maintain plausible-deniability are not tolerated at all. This is a huge improvement for all concerned, including the GC, because the client is willing to pay the going rate for qualified leadership.

So what’s not to love?

Elite clients have different motives than commodity level consumers. Time and money may not be their primary concerns. For example, bank tellers require a lot of costly in-house and on the job training. Once a given teller has the necessary skills, they can easily work for a competitor. The bank was much more concerned about inconveniencing tellers, than time or money.

Elite clients know that they’re paying a premium, so they expect the build team to do whatever it takes to make the project successful. Design teams aren’t appraised by their construction documents (CD’s), or the efficacy of their management, but by their portfolio of built projects. The quality of the finished work may not reflect the quality of the original design. Astute readers will note how this “cuts both ways” for every professional involved.

There are many unique challenges to working for elite clients, but the biggest risk by far isn’t obvious to most people. When things are going well, life on the butte is pretty awesome. As a company, you can be doing less revenue for higher profit with less overhead, and manpower than you’re used to. When an elite market slows down, your company may face some really difficult adjustments in order to successfully pursue hard-bid work.

Estimators love to think that they’re constantly diversifying their client base in case of a turnaround. In reality, the butte work is always the highest priority. Coming down from that height and climbing back up the hard-bid mesa isn’t as easy as it sounds. Even if the estimating department is up for the challenge, the leadership and the workers all need to adjust to very different priorities.

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Leave a comment | tags: Accountability, Perspective, Risk | posted in Uncategorized

March 28, 2019

Who pays the price for being wrong?

By Anton Takken

I’ve spent most of my working life in the construction industry and it’s a rare day when everything goes to plan. Mistakes, misunderstandings, or simple lack of thinking things through causes a whole lot of negotiation about what comes next. Change orders can be immensely profitable, indeed many businesses depend on them to be profitable. That being said, negotiations don’t always land in your favor so it’s important to understand what’s at stake.

I’ve seen situations that escalated because one or more parties’ lost sight of the bigger picture.

“You know, I think we’re looking at this negotiation all wrong, we’d love to have you for dinner tonight”

For example, let’s say the client is on a shoestring budget. The design team didn’t get paid to investigate existing conditions, so lots of surprises are popping up. Further, let’s say the client decided to purchase salvaged materials that turn out to be different from what they told the design team to include.

So far, it sounds like this is all clearly the client’s fault, and they’ll have to pay to remedy the situation.

Let’s say this client is desperate to open on time because they would otherwise miss out on peak season that accounts for nearly all their annual revenue. To protect themselves, the client required a payment and performance bond for everyone on the job and stipulated liquidated damages of $10,000 per day for being late.

The client is in a tough situation, so they’re particularly concerned about overpaying on change orders. This leads to squabbles that go on much longer than they should. To be efficient and productive, the work at issue needs to happen before other tasks so the job doesn’t progress like it should. A lot of low-budget construction clients aren’t very experienced. They’re not concerned with how this squabble is affecting the overall job because they have contract terms and bonds ensuring their deadline.

So, who pays the price for being wrong? In situations like this, the immediate answer depends on timing. If the squabble drags on long enough, the client may call in the bonds to replace the contractors and get their project built. The replacement contractors aren’t going to be cheap because they’re getting paid for by the bonding agency who can (and likely will) seize assets to settle the exorbitant tab.

Now I’m not a lawyer, nor do I play one on TV, so none of this should be misconstrued as legal advice. I suppose it’s possible that a contractor could win a case against the client, but that will take a lot of time and money. Keep in mind that said legal battle would probably take place after you’ve had assets seized by your bonding agency which likely preclude you from conducting business anywhere else.

For most contractors, getting their bond invoked is an “extinction level event”. I’ve seen situations where a particularly malignant client drove the project into delays, then used the threat of invoking bonds to demand extreme discounts. Over the years I’ve had several situations where it was considerably cheaper to pay for the clients mistake so we could avoid more costly problems. That’s something to consider the next time the client wants to change something on the project.

I’ve found that more contractors go out of business because of problems with a job they won, than from all the jobs they lost. Don’t let it happen to you!

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1 Comment | tags: Perspective, Solutions, Uncertainty | posted in Uncategorized

June 29, 2018

The market changed, what do I do?

By Anton Takken

The daily tasks of an estimator involve a lot of repetitive measurements, processes, and conversations. For some, the estimators job is almost a ritual, complete with the enduring faith that “this time it’ll work”. A losing streak sends estimators in search of answers. The most common conclusion is that the market has changed. Ok, now what? Sadly, many estimators figure they should do whatever they usually do just faster and cheaper. If that sounds familiar, you probably know what comes next.

The Bid mill

Bidding more leads to winning less because there’s never any time to focus on the opportunities you could actually win. High-speed cost-cutting generally comes down to lowering your personal, professional, ethical and moral standards. Many of the most significant problems in our industry have roots in this practice.

Advancements in estimating technology are still in testing…

Obviously this approach isn’t a solution to the problem. Now what if I told you that we’re trying to solve the wrong problem?

Estimators have an image problem

On the surface, it seems pretty simple. Estimators are supposed to win work. When they don’t, it seems reasonable to focus on production. After all, what else can you measure?

This is where estimating bites itself. Everyone outside of estimating figures that the estimator should be able to “count stuff” and report back with a semi-obvious answer. Another way to phrase this would be to say that an estimators credibility is directly tied to the generation of “charts and graphs”.

Summing up, estimators are perceived as process drones whose credibility is directly proportional to how much they prove their faith in the aforementioned processes.

Did you ever get the feeling that people just weren’t listening to you? This is probably why.

OK, so everyone thinks we’re drones. What can I do about it?

Well, for starters we could consider the credibility of the information we are working with. I typically check in with the trade publications for Realtors, Architects and Contractors to see what’s going on at least once a month. In my experience, the most accurate information is bad news which is typically reported in retrospect. Construction trends track over time from Realtors to Architects to Contractors as clients move from speculation to occupancy.

The American Institute of Architecture’s past reports have suggested that an average commercial project takes a design firm six months to get to construction documents. This is a particularly important factor to the construction estimator because downturns are bad news which aren’t prominently reported when they happen. What I have found, are articles published months after the downturn began, predicting growth in comparison to the first month(s) of said downturn. By the time an estimator is reading actual figures on the downturn, they have effectively lost six to nine months of prospects. I’ve read Realtor reports indicating several months of stagnation on the very same day that contractor publications were predicting a boom.

From the estimators desk, none of these problematic trends will be visible until there’s suddenly a whole lot more competition for whatever is bidding.

We’ve got competition coming in HOT!

People in hard times tend to present their favorite excuses to explain what’s going on. False conclusions will limit your options.

Please keep in mind that it’s entirely possible that the aforementioned Realtor’s report and the contractor publications prediction will prove to be true. That’s difficult to act upon without context which is why it’s important to track the trends from Real Estate, to Architecture, to Contractors over time.

You can’t plan without strategy

So everybody’s got a plan to trade work for money. We like consistency so we tend to repeat whatever worked last time. No matter what the break-room poster says, in most companies the “plan” is one part repetition, and several parts reaction. The success of the plan is dutifully tracked in accounting, scheduling, signed change orders, etc. Process is built around those metrics, bureaucracy happens, next thing you know, everyone is in meetings reporting on the metrics of the processes.

With thinking like this, it’s inevitable that market shifts will be a huge problem.

Priorities are the foundation of strategy

Estimators often overlook one of their most significant skills; prioritizing information. Measuring stuff generates a lot of data points. Some of it is really important, some isn’t. There are often relationships between data points that pull out a unique circumstance that influences everything that follows.

For example, open to structure ceilings. When the Mechanical, Electrical, Plumbing, etc. trades are all exposed to view, the installation will be more expensive. HVAC return-air lines have to be ducted with attractive material, exposed electrical is generally required to be in costly conduit compared to inexpensive cable. Structural supports for these systems have to be better-looking which takes more time and material. In some cases, the total cost impact would exceed the price of a ceiling.

A savvy estimator anticipating a budget blowout might suggest adding an acoustical ceiling to save money. This naturally leads to bargaining against the design intent. “How much (or little) ceiling would it take to save money?” That’s a tough question to answer for your competitors. In this example, prioritizing cost-effective options gave the estimator a viable strategy to succeed.

Priorities should be defined, ranked, and consistent.

I’ve encountered a lot of construction marketing that placed three words below the logo suggestive of priorities such as “Integrity, Excellence, Vision”.

Nobody working for such a business could prioritize integrity over excellence without guidance from whoever picked those words.

The estimator trying to fill in these gaps should start by doing something uncommon. The estimator should determine what the company is actually good at. In most of the companies I’ve worked for, the leadership overlooked the successful nature of boring, difficult, or small jobs. Next, determine what makes them good at that work.

“Chris is a snazzy dresser but that’s not what makes him a good boy”

It may sound counter-intuitive but working from successful outcome to requisite priorities is a more productive approach. If so, consider what you’re likely to get by asking why pure intentions and brute force were unsuccessful!

With clear priorities, the next step is ranking. If every priority has equal standing, there’s no strategy beyond placation to whoever set the priorities. Consistent priorities encourage accountability because everyone is working with the same standards. Inconsistent priorities are a major source of conflict between marketing and estimating. Everyone has to be pulling in the same direction.

Growing pains

In many companies, growth is a major priority. A lot of contractors in a boom figure they can pay today’s bills with tomorrows growth. When times get harder, there’s a huge push on estimating to “grow” into new markets as the old ones falter.

Much harm can be done in blind pursuit of a single priority. It doesn’t get mentioned very often but the majority of contractors fail because of contract work they won, but couldn’t complete. This happens in good times and bad.

Many firms find it’s relatively easy to land work in a boom so they simply add staff to pursue more contract work. Every addition increases the overhead. Most construction contracts include a retainage provision which withholds 10% of the contract total until the project is completely finished. In most cases the contractors profit margin is below 10% which means that every active job is contributing to an overhead deficit for your firm. An average commercial ground-up construction project has a six month duration. Which means…

We need more work to pay for all this overhead!

Now the firm will have to fund the retained portion of their overhead out of their earnings to date for the duration of each job. Every job added to the ongoing work queue has the potential to magnify a cash-flow problem. The smart way to proceed, is to increase the overhead on all bids going out during a boom, before additional staff are hired.

That includes interns

This leads to a lot more work for fewer people. Growth is slower but it’s “paid for”. So when the market changes (as it always does), the firm isn’t running a line of credit to fund cash-flow issues with overhead. I’ve witnessed market downturn situations where firms that grew exponentially during a boom laid off entire estimating departments without notice. One week they were hiring new people, the next they laid off 30 percent of the firm. “Growth” is not a sustainable plan.

Strategy is neither a task, nor a goal.

Earlier I outlined how an estimator could determine the priorities that guided their firms through and to their most successful projects. Seasoned estimators with a lot of successful bids would call this “good judgment” or “wisdom”. These estimators have incredibly valuable insights to share but as I mentioned before, their credibility is often tied to a pile of charts and graphs. In many firms, wisdom and judgment are downgraded to opinion which is dismissed when some shiny thing captures leaderships attention.

I thought I had a lot of things worked out until I actually did the priority development for the companies I worked for. I made a lot of surprising discoveries. For example, the single most definitive feature of a successful project that was visible from the estimators position was client honesty. The second was client competence. Opportunities that resembled our bread and butter work came in third.

I suspect a lot of estimators reading this figured an honest or competent client would go into the nice to have category, well behind important stuff like contract value, duration, or proximity.

This is where we unlock the real value of strategy. Mindlessly chasing whatever is worth the right amount, at a convenient time, within range of your business isn’t a strategy, it’s a reactionary plan that’s very likely shared among all of your competitors. That means that every ideal job will have increased competition pushing profitability down. We don’t have equal odds of winning bids. That’s a loathsome myth ranking up there with “free estimates“. There is no sense in shooting at stuff you can’t hit. There’s even less sense in winning work that threatens your company’s survival.

“Never interrupt your enemy when he is making a mistake ”

Napoleon Bonaparte

With the right priorities, the real opportunities become clear. Chasing the ugly little project that’s out-of-town might well be the very best strategy for your firm. The goal is to be successful. Estimators need to link their credibility to results rather than reports.

So what do you do when the market has changed?

The plan starts with credibility. No amount of busy-work will offset a plan built on misinformation. Estimators need to see market trends before they arrive. Major trends should chart through related industry publications over time. Think about what these trends will mean to each industry. Follow up to see what actually happens in your market. How these trends actually affect your situation is what matters.

Figure out the priorities that lead to successful work. Make sure the priorities are visible from the estimators position during the bid. Work out the ranking, and lock them in so everyone involved is pulling in the same direction.

Apply these priorities to what’s available on the market in the context of oncoming trends. This is where strategies form. Patience, courage, credibility and commitment will be tested. If this was easy, someone else would be in charge. Learn from mistakes and do the best you can with what’s available right now.

“I’m just not sure the grass will be greener on the other side of the fence”

Above all, stay informed of oncoming trends. Unpleasant (but critical) information is often delayed or downplayed which can leave little time for reaction. Conversely, good news is reported immediately. Keep in mind that positive changes in the market can take a long time to materialize at your level.

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Leave a comment | tags: Estimating process, Losing, Perspective, Strategy | posted in Uncategorized

December 17, 2017

Power tool safety for estimators Part 2 : Headaches and Hard hats

By Anton Takken

In part 1, I touched on some of the dangers presented by estimating software along with some advice on how to work and bid safely. In part 2, I will be looking into estimating hazards that are uniquely human. A lot of frustrated and unsuccessful estimators get that way by overlooking human nature. While estimating involves lots of facts and figures, we must keep in mind that we are working with, and working for, people.

Submitted without comment…

In my experience, people define organizational policies according to their outcome. Bureaucracy generates lots of work that is peripheral to the task at hand. In contrast, Leadership aligns people and resources with the task at hand. Within the context of competitive bidding, effective leadership involves communicating expectations that are aligned with the interests of everyone involved. This starts with considering the interests of parties outside of the estimators office.

The four P recipe

Perspective What do people expect to see? How does that compare with what they actually see?
Predict How could people do things differently than you might have planned?
Prepare What can you do to accommodate the inconsistencies, differences, and individual choices of others?
Perform How can you coordinate the interests of everyone involved to maximize your odds of delivering a successful outcome?

Schools, academies, and trade associations promoting “best practices” in estimating tend to put great emphasis on process uniformity, deference to design professionals and obsequious devotion to every client request. While tidy spreadsheets and good manners are part of being a professional, they hardly define the estimators purpose.

Losing estimators are often telling me how they were “just doing their job” because “their hands were tied“. While some contractors do micro-manage their estimators, this mindset is more common among estimators who prefer to believe their job security is a function of avoiding accountability. If they were making and communicating the right decisions, they’d win more profitable work which is why the job exists in the first place. When a process interferes with your purpose, it won’t be the best practice to follow.

There is no more important safety rule than to wear your reading glasses

Estimates are used to compile and condense a great deal of information into a single number. Even the spreadsheets illustrating what’s going into the single number can be densely packed with information. Since everything must balance utility against clarity, the location of the information in an estimate is almost as important as the quality of the information.

Estimators working by hand are used to categorizing the information according to Construction Specification Institute (CSI) Masterformat guidelines. The Masterformat assigns a unique serial number to commonly encountered building materials arranged so that the materials generally align with similar materials that broadly align with trades. As anyone with experience in actual general contracting could tell you, the CSI divisions aren’t a good indicator of how the work is actually divided among contractors. For example, division 9, finishes may involve a dozen or more trade-level subcontractors, whereas division 14 Conveying systems will ordinarily involve only one.

There are a lot of estimating programs which are configured to organize the Quantity Take Off (QTO) according to CSI divisions. While this is great in terms of adhering to a standard, it doesn’t lend itself to compiling the relevant information to scope subcontractor bids. For example, there are a lot of “flooring” subcontractors (subs) that will install vinyl flooring as well as carpet, but they won’t do any ceramic tile or wood flooring.

The CSI codes place vinyl flooring and carpet in separate areas of the estimate that are often surrounded by completely unrelated trades. This means that on bid-day, the estimator is figuring out how to make one bid apply to two scopes of work which might be separated by hundreds of lines of information. When the deadline is fast approaching and low bids trickle through the door, this creates an arbitrary obstacle that can trip the estimator when they least expect it.

Lizzy was following the instructions perfectly, but then everything went sideways

If you’re using a spreadsheet program to compile your estimate, it’s possible to temporarily move relevant divisions to conform with the sub proposals that are coming in the door. Time invested in building a “working” worksheet that is linked to a “formal” estimate worksheet can make it possible for the estimator to have a streamlined layout for bid-day revisions, without sacrificing the uniformity of a formal layout.

Make sure it works seamlessly because spreadsheet errors on bid-day are serious problems. The “old school” approach to this problem was to print separate pages for every CSI division including a row for bidders and columns to verify, add, or subtract relevant scope items. Each of these sheets were put into binders with tabbed dividers. “Bid tabs” is industry slang for these comparison sheets which “show the math” for how the estimator scoped the bids of every relevant subcontractor on bid day.

Combo bids: Two for one, or double the trouble?

Subcontractors rarely specify which CSI divisions they’re bidding which means the estimator must not only sort the CSI divisions being bid, but must attribute them separately to their estimate. Despite all the heated rhetoric, the subcontractor (sub) is not an employee of the General Contractor (GC). GC’s can “demand” pricing breakouts from subs in direct proportion to the goodwill they’ve cultivated from fair dealing. GC’s cannot afford to ignore competitive bids from subs who are reluctant to provide breakouts that may be used to help a competitor win the job.

This means that GC estimators must be prepared to take the best subcontractor number they can get, even if it combines several “separate” scopes of work. Estimating programs will often generate error messages for any CSI Division that is left empty. If one bid applies to multiple divisions, most programs won’t allow the estimator to group them together. Instead, estimators are forced to use workarounds.

Let’s say a flooring sub’s bid for carpet and vinyl flooring is cheaper than any combination of independent carpet and vinyl flooring bids. They didn’t provide separate prices for vinyl or carpet because they want an “all or nothing” award.

The GC Estimator needs to enter the “combo” bid into the estimate but this raises several issues. Everything they enter in as a quoted value will be documented which means the Project Manager (PM) running the job will expect to find a subcontractor bid for the exact same amount in the bid file. If the estimator arbitrarily divides the quoted amount into plausible-looking amounts for carpet and vinyl respectively, there’s no bid in the file that actually matches either number. Now the estimator could put the entire bid amount into just one of the CSI divisions. That solves the problem of quoted numbers matching bids in the file. However, this causes two new problems. First, the default of most estimating programs is to “select” the lowest available bid in each entered quote. If the combo bid was entered into the carpet division, it would likely be higher than the carpet-only bidders because it’s also including vinyl flooring. This means the default setting for that division must be overridden in order for the estimate to select the combo bid. The second problem is that the vinyl flooring division needs to have a quote entered and most programs will not accept zero as a valid bid. Some estimators enter $0.01 for the quote as a workaround because no PM would go looking for a one penny quote for the vinyl flooring.

CSI Masterformat is tremendously helpful for design and management professionals who want a uniform system for coding information. Many Project Management programs include estimating functionality which not only imposes the CSI structure, but also includes the accounting structure for the job that follows. The estimating program’s lack of flexibility means that on bid-day an estimator might enter a one penny bid for a subcontract amount which later causes administrative issues in accounting and project management.

Breakouts are the leading cause of breakdowns

Alternates can multiply the estimators labor to an incredible degree. In their simplest form, Alternates are a request to add or subtract something to the project. In their most complex form, they’re a multi-dimensional problem that generates its own risk for the bidder.

For simple additions or subtractions, the alternate needs its own mini-estimate to address what’s going on. When the changes become more convoluted, the Alternate essentially replaces the original bid. Estimating programs may feature user-defined breakout tags which allow the estimator to sort, group, and compile the different breakouts into different schemes that reflect the alternate. Unfortunately, many estimating programs with breakout functionality are unable to compile multiple breakdowns into a cohesive estimate. This is very common for trade-specific estimating programs.

For example, let’s say there is an alternate which substantially changes the vinyl flooring scope. Some areas grew, other areas got smaller. As there are several alternates pertaining to the vinyl flooring, the estimator would have breakouts defined by the rooms involved.

Rather than a single line item for all the vinyl tile in that alternate, the program would output each room’s vinyl flooring separately. As silly as it sounds, some estimating programs will not compile the breakdown information into a cohesive estimate the way it does for an ordinary bid.

“With our new mirror technology you can double your horsepower!”

When GC estimators call the subcontractor wanting to make changes to the Alternates, the Subcontractor ends up going into intense “manual override” to answer relatively simple questions. The sub is usually under incredible pressure to answer quickly because the deadline is rapidly approaching. It’s much worse when the GC calls the sub whenever they are away from their desk, and unable to wrangle a simple answer from an obstinate program. I know of at least one competitor who guessed at a breakout price on bid-day that dramatically under-bid one portion of a project. That mistake was the first of many cascading events that ended in bankruptcy. Learn from their mistake, professional estimators do not guess! It’s much better to replace a lost opportunity than it is to “win” a project that imperils your company’s survival.

Bigger blocks, fewer breakdowns

One successful strategy to counteract an estimating programs clunky breakdown system is to use the definable breakdowns for complete alternates. Picking up on the earlier tile example, the estimator would conduct separate breakdown-level QTO’s for each alternate separately.

Let’s say there were four rooms pertaining to the base bid and two alternates.

In the base bid, rooms one, two, and four get vinyl flooring.

In Alternate #1, rooms two, three, and four get vinyl flooring

In Alternate #2 rooms one, three, and four get vinyl flooring.

This means that one definable breakdown would be named “base bid” and the estimator would conduct their QTO for the rooms as normal. Then the estimator would name a definable breakdown “Alternate #1” and would do a QTO for rooms one, three, and four. Note that this repeats the QTO of room four. Finally, the estimator would name a definable breakdown “Alternate #2” and would do a QTO for rooms one, three, and four. At this point, every room has been measured twice, and the vinyl flooring has arguably been estimated three times.

However, the estimator can now output their reports by the individual breakdown with all the pertinent information correlated normally. This means that the Alternates will display the total vinyl flooring as a single line item, tremendously simplifying the information you’re reading at Mach 6 when the GC calls. Only in estimating do we have situations where taking the long way around gets us to our destination faster than a direct path.

Quoth the vendor: “It costs more”

Quoted goods pertain to items with requirements that influence the price such as custom-built equipment. Some quoted goods are unique materials represented by an agent or a firm that promotes the material to design professionals to secure exclusive sales rights. Wherever competition and transparency are discouraged, artificial pricing hikes are sure to follow. As a result, the quoted goods can constitute an out sized proportion of the total estimate.

Quoted goods can be material exclusively, or they can be materials plus some labor or service. “Parts and Smarts” is industry parlance for a proprietary system of components that the contractor must install themselves, according to the design and programming requirements of the quoting firm. This is most common in fire-alarm and HVAC controls systems. “Turnkey” proposals are generally understood to be standalone quotes to deliver a completely built system. At the trade-level estimators desk, it’s critical to correctly attribute labor hours to the quotes you expect to receive.

Trade-level estimating program defaults can be very complex. For example, a fire alarm vendor supplying a “parts and smarts” quote will provide the fire alarm devices which the electrical contractor must install on a dedicated system. The electrical contractor is expected to furnish the junction boxes, conduit, and wire, for a fire alarm system that has not been designed yet. Estimating programs might have a “helpful” default for fire alarm takeoffs however they will only quantify the quoted goods. This means the estimator must carefully supplement the “fire alarm” takeoffs with all the parts and pieces that the fire alarm vendor omitted. Unless the whole system is attributed to a dedicated breakout, the quoted aspects of the fire alarm will be separated from the costs to furnish and install all the stuff needed to make the vendor’s quote work.

It’s good practice to conduct separate breakout estimates for any quoted goods that involve bidder groups with inconsistent levels of scope delivery. For example, the breakout combined with parts and smarts quotes can be directly compared to turnkey proposals.

Getting more information out of less data

Reading along, it would be easy to conclude that the best approach is “more breakouts”. Being better informed certainly helps when making decisions. To serve its purpose, the estimate must be a condensed explanation of what a project entails. Specifically, the estimate should reveal what is driving the cost, duration, and risk, of the project. I’ve encountered plenty of estimates that were so detailed that they buried the meaningful project attributes. This can be described as the “noise to signal ratio”. If you’ve ever been listening to a radio station when an adjacent station intruded, you can appreciate how difficult it is to understand what’s being said.

The Request For Proposal (RFP) may list alternates the owner requested alongside breakdowns the Architect wants to see. The intention and implication of each may serve different purposes which occasionally makes them difficult to understand.

I’ve seen projects with twenty or more breakout requests on the RFP get whittled down to three alternates in the course of a single exchange with the client at the job walk. Clients and Architects aren’t always considering the quality or the context of the information they’re requesting in the RFP. It’s often easier to generate a long list of things they might want, than it is to consider which things they would actually be willing to combine. There’s also a tendency to be additive rather than reductive when tasked with writing a wish list.

For example, lets imagine a project which is comprised of three connected buildings named A, B, and C. The client asks that all buildings be included in the base bid. They then ask for an alternate to move building B to the other side of building A, and to omit building C altogether.

Their second alternate request is to build only building’s A and B as originally aligned, omitting C altogether.

At this point, we’re up to three prices due on bid day. To bid them separately, all the estimating for buildings A and B would be repeated for all three prices.

In contrast, we could arrive at the same answers by answering two questions. What does building C cost? and “What cost difference is there in moving building B’s alignment with Building A?

That’s one breakout, and one alternate which is never repeated elsewhere in the estimate. More importantly, the estimate for building C generates 100% of the accuracy with 50% of the data compared to estimating A and B together. It’s probably a whole lot easier to review an estimate for building C against the drawings than it is to check a “combo bid” against multiple buildings. If your process is the same for all the buildings, the check on building C will be instructive towards determining if there are issues with your estimate for buildings A and B.

It’s also very significant to note that the building alignment question is pulled out as a line item cost. This allows careful consideration of what the result implies without the “noise” of building A and B’s total factoring in. I really can’t stress this enough because alternates are often sparsely documented by the design team. It’s fairly common for a complex alternate to be completely and exclusively defined in a few sentences on the RFP. What may sound like a simple “add this” or “take away that” alternate request can generate a long list of subtle consequences to the project. The knock-on effect for the client is sticker shock. Estimators who’ve carefully constructed their approach to reveal the subtleties are better equipped to present a solid explanation.

Savvy estimators will have already noticed that this advice could lead to a situation where you win the job and the client selects one of the alternates. Now when you go to hand off the estimate to a Project Manager (PM), you don’t have a single estimate which perfectly reflects the contract scope of work.

Your options will depend heavily on your software. In some cases, an estimator can copy the Building C breakout into the base bid and “multiply” the new version by -1 thereby generating a subtraction amount in all takeoffs. When grouped with the original total, and the relocation alternate, the output would be reconciled to the actual quantities needed.

Without question, this will require additional work, however it’s important to note that most estimators don’t win every bid. Spending a bit of extra time on those you win is an easy trade to make when you’re sinking less time into the losing bids. Negotiated agreement or “sure shot” bids should be done so that the estimates can be handed to a PM without confusion, rework, corrections, or delay.

Estimating is about controlling risk to secure profitable work. We can worry about risk created by the limitations of people and machines, or we can build our operations to accommodate them. I’ve provided a few examples to show how applying the four P’s can lead to opportunities that competitors only saw as obstacles.

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