Tag Archives: Risk

Clarity of Purpose

Whenever I think about the truly exceptional people I’ve worked with, there’s only one quality they all shared; clarity of purpose. Now it seems like fulfilling the job description that Human Resources typed onto your offer letter would succinctly define your purpose, sadly that’s not always the case.

Timely and tidy

I’ve worked for people who had well-defined expectations for their estimator, however they didn’t consider the estimators purpose in their organization. Delivering tidy proposals before the deadline is an absolute job requirement but that’s documentation (process), not procuring work (product). I’ve never seen an estimating job offer that stipulated how much work you’ve got to win, but I know plenty of people who “used to work in estimating”. The pervasive mindset of most firms is that executing a proscribed process known as best practices will lead to an acceptable number of awarded contracts. Anyone who isn’t successful must not be working hard enough. Estimating is viewed as a machine, and they’re hiring you to crank out wins. The problem with this perspective is that it only works when winning profitable work is easy.

Clarity of Purpose

Competition is different in a booming market

Too much and too little

Meanwhile, there are lots of estimators struggling with the estimators paradox: You lose because you included something extra, and you win because of something you left out. Knowing what to include in your bid can be a strenuous exercise in judgment. Balancing the gaps in information against the surpluses of available minutia can easily consume all the estimators time. Time is lost right at the start as some estimators struggle to get the invitations to bid (ITB) out to their subcontractors (subs). The struggle is compounded when questions arise and the estimator has to write Requests For Information (RFI’s). All this information management work is in addition to actually estimating anything. The problem is compounded by the standard practice of having several estimates in process.

What do you think you do here?

It’s a simple question, what’s your purpose in this business? The answer is emphatically not “estimate the cost of projects” because that’s the process not the product. Your purpose is to win profitable work. Working from that position, it’s obvious that there are immediate hazards surrounding the winning number. If you’re a little too low, the work won’t be profitable. If you’re a little too high, you won’t win. These hazards get more severe the further your number is from the correct answer. Way too low may irreparably harm your company, and jeopardize the project. Way too high, and you may harm your firms reputation, leading to exclusion from future opportunities.

How to get where you’re going

Effectively dealing with these hazards can be summarily described as controlling risk. Let’s take a moment to visualize uncertainty in the example below.

Guessing——————————————————————————————Actual built price

Greatest uncertainty                                                                                                     Least uncertainty

 

The left side represents the least amount of work, and the greatest amount of risk. There’s a chance that you could guess perfectly, but it’s very small. This approach is better known as gambling. The right side represents the most amount of work and the least amount of risk. Companies obviously can’t afford to build models of every project to negate risk. They can, however compile past project information to help price similar work.

Clarity of Purpose

Above: Design driven risk

Estimators conduct Quantity Take Off’s (QTO’s) of the Construction Documents (CD’s) to quantify and value the project scope. The relative merit of their efforts will place their bid proportionately on the scale above. This is the reason estimators control rather than remove risk. If there was no risk, the bid would be done by a cashier.

Multi-level thinking

So if estimators are supposed to win profitable work by controlling risk, and risk is controlled by QTO’s, how are contractors wrong for overemphasizing timely and tidy bids? The problem here is that not all risks are driven by project scope uncertainty.

If we recognize that not all clients are fully funded, we’re forced to admit that not all opportunities are equal. “Winning” a bid with a client who can’t/won’t award a contract is a risk that has nothing to do with how accurate your QTO’s are. Picking only opportunities that you’re likely to profitably win is a fruitless exercise if there’s no contract award.

Very successful estimators pick opportunities that they’ve got an excellent chance of landing a profitable contract award. Remember the estimators purpose is to win profitable work. No contract means no work. From this perspective, estimating could just as accurately be called “Contract targeting”.

Clarity of Purpose

Sheep’s dog, isn’t the same as sheep dog.

What defines an estimators chances of landing a profitable contract? Competition for one, efficiencies of scale for another. General Contractors (GC’s) by definition, contract portions of the project scope to subcontractors. The VAST majority of the actual work is completed by subs. GC estimators are competing on the basis of their relationships with subs. The GC with the most market leading subs has the best chance of winning. Success here, is all about building market leading subcontractor loyalty.

What defines if the work will be as profitable as it should be? In-house, the leadership and administrative abilities of the Project Manager and the on-site staff. Chasing work that’s aligned with their skills, abilities, and past successes is the best way to ensure profitability. On the other side of the contract sits the client and their representatives. Ethical clients with solid design teams are rare gems that attract fierce GC competition for their projects. Incomplete plans and short deadlines is the signature play of the troublesome client.

Clarity of Purpose

“Well our design isn’t complete but we’ve got cloud based computing to share the misery equally”

There’s never time to do it right the first time, but there will be time to do the work again. Unresolved issues handed from estimating to project management tend to harden in the arteries of a project, choking off progress until you’re lucky to simply escape. The estimators purpose is to win profitable work. If it’s not going to be possible to profitably complete the work, there’s no reason to pursue it. Estimators need to keep track of clients and design teams who’ve run contracts into the ground. Very often the client or their design team is the contractors greatest risk on a project.

Deductive reasoning and streamlining your process

Deductive reasoning is a process where you begin with premises that you must assume to be true. Then you try to determine what else would have to be true if the premises were true. Applying this to our situation, we have two premises; Estimators must win profitable work, and estimators work by controlling risk. Earlier I applied deductive reasoning to explain why we do QTO’s, or why it’s important to pick the best opportunities. My intention was to reveal the wider scope of what it really takes to be a successful estimator. If you’re already struggling with the stress and boredom of grinding out bids, this probably looks like I’ve dropped a whole lot more on you. Take heart, that’s not really the case. First off, MOST estimators are losing more than they’re winning. If you’re winning profitable work all the time, I implore you to start a blog! For the rest of us, this means that the majority of your daily work isn’t achieving your purpose.

A critical concept of successful estimating is that in order to win more, you’ll have to bid less. Winning comes from bidding only good opportunities that strategically align with both the GC AND their subs. It takes a lot more focused effort to bring all of that together on an individual bid. Losing bids diminishes the GC’s reputation with the market leading subs. Not only are you wasting your company’s time, you’re damaging your “pull” with subs. More bids means less focus which means higher risk which inevitably translates to lower profitability. Simple things offer no shortcuts.

Most estimating managers won’t consider reducing your workload until you’ve won more work than the company can handle. This circular pattern is why very few people want to become estimators. It’s a ton of work that’s rarely successful because the focus is on single-minded process rather than multi-faceted product.

Elevating the situation requires multi-level thinking. Being able to accurately identify your odds of success is a basic necessity. For more, read up on estimate tracking here. Once you’re clear on the odds, you should be tailoring your efforts to get things rolling quickly. Keeping momentum is how we keep the stress and boredom at bay but that’s not enough to really solve your problem. It stands to reason that you’re tasked with bidding something that’s an obviously poor fit.

Clarity of Purpose

“I can see this client has made some risky decisions…”

Treating every opportunity like it’s equally valid may sound like a best practice but it’s profoundly counter to your purpose. If you’re certain to lose the job, you’re not helping yourself by compromising better opportunities.

Many managers are amenable to courtesy bidding the turkey job to free up resources to land the great opportunity. Gaining a little leg room, then delivering the victory builds faith in your judgment. Backing your judgment with facts and figures, is how you prove your expertise. Trust is built through honesty, transparency, and accountability.

Overworked estimators often hear: “You can’t win if you don’t bid”. The unsaid counterpoint is:”It’s not the job you lost that puts you under, it’s the job you won”.

Clarity of purpose is a simple concept with powerful implications. Give yourself time to consider what you’re doing and ask how it achieves your purpose. We get a lot of encouragement to maintain disciplined process like a regiment on the march, but very little for picking the right direction. It’s only after you’ve arrived at the destination that people realize you knew what you were doing.

 

For more articles like this click here

© Anton Takken 2016 all rights reserved


Reliable Estimating Part 2 Building momentum!

The plans are on the street, now what?

Once the Invitation to bid (ITB) is drafted, and sent to every subcontractor on your bid list, you’re free to pursue the other work that piled up. The more your internal systems are built to output an accurate ITB and an optimal bid-list, the more these tasks will depend on a thorough review of the Construction Documents (CD’s). By having an ITB template that requires answers to the most common bidder questions, you’ll be able to focus your review of the Request For Proposal (RFP) and Construction Documents (CDs). Be advised that defining which trades you need to invite isn’t necessarily a quick process.

Reliable Estimating Part 2 Building momentum!

“Sure you’re doing six things at once, but could you go a bit faster?”

A specialty trade or a really small scope of work may be required via a single note in the drawings. It may be a better choice to get the ITB out to the obvious trades, than to hold everything until you’ve scoured the plans for a buried specialty vendor.

An absolutely pivotal concept of reliable estimating is knowing that time is more valuable earlier than later.

You get more out of the early minute than the final hour.

Learning you need to fix a “hole” in your estimate one hour to deadline means you’ve got 60 minutes to get a viable bid together. Until that problem is solved, the idea of winning takes a back seat to the risk of submitting an incomplete bid!   In comparison, an estimator who found just 20 minutes three weeks earlier could have addressed all the issues completely.

I’ve been in the war room in the final hour when we discovered that nobody had invited an entire trade of subcontractors! Until we found a sub with a complete bid, we had only our historical pricing to go on. If we bid and won using our historical pricing, we took a risk that subcontractor proposals would be substantially higher than what we carried. Given the great value of that scope of work, our exposure threatened the success of entire job.   We were in such a hurry with the bid letting software that a single trade was left out.

Reliable Estimating Part 2 Building momentum!

Even with the satellite, Dave couldn’t make the connection…

Nobody found time to verify the invite list in the intervening weeks. Don’t let it happen to you.

Series of sweeps

It’s really simplistic to assume that estimating is a function of counting, pricing, and totaling. The efforts that make the difference between winning and losing are rarely attributed to punctilious spreadsheets. Broadly speaking, a GC estimator needs to conduct a series of sequential sweeps through the CD’s looking for four basic criteria.

Sub sweep

Getting the ITB on the street required the first sweep of the CD’s to determine who needs to be invited, and what information they’ll need to get started.

Scope sweep

This is where the estimator gets a handle on what’s supposed to happen in the project. Estimators must pay particular attention to where scopes of work overlap between design consultants. Architects are famous for not telling their engineering consultants about an alternate request, and engineering consultants are famous for not sharing requirements that should be included in another consultants documents. For example, an electrically operated smoke damper which is shown on the mechanical plans, but not on the electrical. Estimators must review plans looking for where trades will overlap on scope. If the plans aren’t clear on who does what, it’s the estimators job to provide direction to all concerned. Leaving this to chance on bid-day ends up with double-ups or holes. The scope sweep should enable the estimator to roughly define how much work there is for each trade. Any trade with an especially small scope of work should be noted for a mandatory follow-up with a trusted sub. The same goes for sub-tier subs like Fire Alarm, Pavement striping, HVAC Controls, Coring/Drilling, Imaging, etc. I call these “ghost trades” because they’re never clearly visible, but they’ll haunt your bid if you ignore them!

Error Sweep

After two sweeps of the plans, the odds are good that you’ve already come up with some questions for the design team. The goal isn’t to pick the plans apart, so much as it is to resolve issues that are likely to impact the bid. CD’s often fall short of defining vital project information like site logistics, alternates and phasing. Getting these questions into Request For Information (RFI) format early in the process gives the design team more time to answer which may in turn allow you more time to communicate the answer to your bidders.

Strategy Sweep

There are lots of GC estimators out there whose entire strategy is to simply rely on subcontractor bids to deliver their victories. This flawed approach hinges on two fallacies. The first fallacy is that there’s something magical about their company that makes subs want to give them better prices.

Reliable Estimating Part 2 Building momentum!

You can howl, but then you’re singing along!

The second fallacy is that all subs are bidding all jobs at all times. By inviting everyone, they feel sure that the market leaders will send them a bid. This “strategy” is successful only when there’s no real competition.

Estimating is about controlling risk. If it were possible to simply add everything up and arrive at an accurate price the industry would use cashiers instead of estimators. Risk and how it’s controlled is how a plan becomes an opportunity. A lot of estimators get hung up on risk as a one-sided concept. I hear a lot of GC estimators looking to press project risk onto their subcontractors. Poorly defined scope, misleading diagrams, or counter-intuitive specifications are all treated like it’s the subcontractors problem. These GC’s fail to understand that the uncontrolled risk raises subcontractor prices, making the GC noncompetitive. It’s of pivotal importance for a GC estimator to understand that winning bids is a function of reducing risk for everyone.

Taking responsibility for sorting this out is how a GC estimator can set themselves apart from the field and thereby attract the market leaders. It’s pivotally important to understand that this is a proactive measure administered fairly to all involved parties. Bid directives are an effective means to mass-communicate a plan of action but they can be easily shared with your competitors. I recommend using bid directives to provide clear and accountable leadership that your competitors would shirk. Strategies should be treated as confidential information, and communicated accordingly.

Very few jobs will present an opportunity for a single overarching strategy to secure a victory. That being said, if you can’t find any advantage, you won’t likely land a job. Very often the greatest advantage a GC will have is due to an existing relationship with market leading subs. In that case, picking work that’s best suited to the top performers becomes the GC’s strategy for success.

Measuring time!

Finally, we’ve reached the point where most folks believe the real estimating begins; the quantity take off (QTO). I’ve written about software technology for estimating before. There have been notable advancements in how estimators tasks are completed, like computerized QTO. For example, it’s now possible to measure, count, and color the plans without the printed plans, scale, paper, calculators and pencils. While that’s a huge advancement, most of these proprietary programs lack the logical “polish” of standard business programs. These programs offer an exponential increase in the speed of QTO’s provided the estimators learn their idiosyncrasies.

Whether you’re using a digital system or manual takeoffs, there are some aspects of reliable estimating that never change.

“One pass” takeoff

After all the effort to define which Construction Specifications Institute (CSI) Masterformat divisions pertain to your project, it’s tempting to conduct the QTO in “CSI order”. Lots of estimators will begin their takeoffs with Division 2 Sitework and skim through the plans looking for anything that pertains to that division. Unfortunately there are often solitary notes pertaining to a small scope of work that’s unique from everything else shown on the page. This means that the estimator skimming for a specific CSI division will ignore that solitary note figuring that they’ll get it when they sweep for that division. When the note is on a particularly unlikely sheet, it’s often forgotten. Later, when their Project Manager comes down the hall complaining about how they missed something, that note will be very familiar.

I advocate what I call the “one pass” takeoff. I make sure that absolutely everything depicted, noted, or specified on the page be taken off before I go to the next page. If you’re doing manual takeoffs, this means you’ll have to start a CSI division sheet for each division as they present themselves. It’s a lot of shuffling to record your measurements, and the sheets tend to look less tidy from the many edits. This is still worth the effort since it not only catches the one-note traps, I’ve found it’s actually faster than repeated skimming.

Knowing where to stop is as important as knowing when to stop

Unless the job is fairly small, chances are good that your QTO’s will be interrupted or at least spread across several days. Estimators should understand that co-workers have no comprehension of how much focus it takes to complete some takeoffs.

Reliable Estimating Part 2 Building momentum!

I’m…gonna need a moment here…

Something as simple as the height of a concrete stem-wall may require calculations based on information scattered across several sheets. It’s therefore good practice to write (or type) notes on the plans providing the necessary information where it would actually do you some good. General items like area and perimeter measurements for each room can prove incredibly helpful since a myriad of takeoffs are based on these two pieces of information. By leaving a record of basic measurements, you’re able to pick up where you left off with minimal wind-up.

I would also recommend that your day’s work be paused at a meaningful and reliable point. Stopping mid-way through a sheet is sure to keep you up worrying about what you missed. Choose to either stop early or work late in order to leave yourself a clear conscience.

Before you begin an intense take-off, consider your schedule and the day’s obligations. It’s unwise to get a half-baked start on something complicated right before a meeting. One of the advantages of the one-pass takeoff method is that you don’t have to do the sheets in order. If you’ve got a limited amount of time before an appointment, pick a sheet you can complete. Estimators must accurately track and predict how long each element of a QTO will take. The fastest QTO’s are the ones that aren’t interrupted, however estimating is about more than take offs. Getting interrupted at an inopportune time is part of the job.

Three round review

Checking for errors is the best way to catch them but how you go about it can greatly increase your reliability. Huge data sets and tiny differences can stymie even the most dedicated review. The key to catching errors is to structure your workflow around meaningful review points. The simplest problems are most easily caught earlier in the process. Breaking the QTO down, this begins at the page level. Before moving to the next page in the plans, the estimator should review everything they took off on that sheet. The minute detail is fresh in your memory, and transposition errors are more easily spotted. The vast majority of errors are caught at this level.

The next round of review is when tallying a division as a GC, or a major component as a sub. The errors found at this level tend to be more dramatic because you’re moving the contributions of several plan sheets. A flooring subcontractor might take a moment after tallying the carpet and the tile measurements to see if the relative difference they’re seeing aligns with what they’d expect. These order of magnitude comparisons can tell you if you’re missing an individual room or an entire floor.

The third round of review is after the QTO’s have been entered into the estimate. Does the estimated cost outcome align with the division level review? By using the earlier reviews as benchmarks to compare against, the subsequent reviews become more reliable.

Reliable Estimating Part 2 Building momentum!

You could say the process leaves a mark on you…

I would strongly caution an estimator against more frequent reviews of their work because reviews without benchmarks are little more than skimming plans looking for stuff to add. After a person has looked at the same information a few hundred times, their ability to recognize new information diminishes. You have to be able to trust your work by testing it at intervals that allow you to know if you’re right or wrong.

Taking notes

An awful lot of estimating comes down to judgment when dealing with uncertainty. It’s not fair, but an estimators judgment is often criticized after the uncertainty is removed. People don’t care that you had a good reason for your decision, they only care about the outcome of your decision. It’s therefore absolutely critical to develop the habit of clarifying, stipulating, and excluding anything that requires judgment on the proposal. Effective proposals define with minute clarity what is driving the uncertainty. For that, you’ll need to take notes of where you found the problem. Keep in mind that as an estimator, your work is laying the foundation for the Project Manager’s efforts. Everyone needs to know where the tricky bits are located. Plus if you’re expected to present your estimates for review at your company, it’s good to be able to provide references for all the hard decisions you made.

Schedule slip

As mentioned earlier, interruptions at inopportune times are part of the job. I’ve had multi-million dollar estimates interrupted at the last moment over questions on a $50.00 change order! Estimating is about controlling risk even within the estimating process. Plainly speaking, an estimator must not only predict how long a QTO will take on a piecemeal basis, they must also be capable of plotting a path to recovery when they’ve been derailed. It’s at this point that many, many, “old-school” estimators just plan on spending the night. I believe that most estimators could substantially improve their quality of life by committing themselves to solving schedule problems with overtime as a means of last-resort.

Schedule recovery may involve many approaches ranging from additional workers, to less detailed takeoffs. Estimators should consider the value and the risk associated with each scope of work they’re taking off. A perfect paint takeoff can take a considerable amount of time, yet the paint scope is relatively inexpensive when compared to plumbing. Since the paint scope is relatively inexpensive, the relative risk of an imperfect takeoff is quite low unless you can’t attract more than one painting bid. Estimators should always prioritize on high value, and high risk scopes of work. As a GC estimator, knowing which direction to go between similar bids on bid-day is why you’re doing the takeoff. Continuing with the paint example, a pressed-for-time estimator might shift to a square foot cost for the paint scope followed by a list of scope inclusions that painters might miss. Providing sufficient information to scope sub bids is FAR more important than knowing the precise square footage of Paint color 1.

Lots of GC’s have a team of people working on an estimate. If you’re heading up the effort you will need to think on your feet when people call in sick, show up late, or otherwise drop the ball. Project Engineers are frequently “loaned out” to help in estimating, however they are rarely relieved of their normal responsibilities. Many will prioritize their ongoing projects at the cost of your time-sensitive estimate simply because they don’t work for the estimator. Lead estimators must provide and enforce deadlines for every task. Never give a helper sufficient time to squander your recovery. It’s better to check on them too much, than to find they’ve dug you a deeper hole.

Estimators who are working with interns, Project Engineers, etc. should make a special effort to simplify and compartmentalize the tasks they are delegating. Estimators are used to thinking in terms of length, area, and volume measurements, however these terms can quickly overwhelm someone who’s facing their first takeoff. Estimators should understand that “standard” units for takeoffs are arbitrary to a newcomer. For example carpet is measured by the square yard, yet ceramic tile is measure by the square foot. Taking the time to explain that there are nine square feet per square yard can make the difference between a useful takeoff and a mess that nobody understands.

And for goodness sake, if you’re having people do this work without a digitizer, or on-screen takeoff system, then at least give them a courtesy lesson on how to measure areas that aren’t squares or rectangles! While we’re at it, teach them to use decimal feet in lieu of inches! For some reason, this rather obvious point is overlooked in most construction education.

Addenda of mass distraction

Many architects will respond to bidder questions via an addendum before the deadline. Projects and professionalism will vary which means that GC estimators will have anywhere from over a week to only a few hours to incorporate changes made via the addendum. This practice is easily the single most stressful aspect of professional construction estimating because unclear, misleading, and outright contradictory information is often presented without sufficient time to get clarification. Estimators should note that shoddy plans, municipal or “public work” clients, and last-minute addenda are constant companions.

Reliable Estimating Part 2 Building momentum!

The architect finds last minute changes to be the most fashionable…

The absolute #1 priority is to get that information disseminated to the bidders as soon as possible. The second priority is to provide the necessary leadership and communication to ensure your bid-team isn’t derailed by the Addendum.

As a start, every Addendum should be scoured for changes to the deadline, proposal format, etc. Everything that goes to the bid-team should have the most current deadline printed where it’s easily seen. Wherever possible, notify bidders when an Addendum has little or no impact on their scope. If the Addendum ONLY affects the GC’s, don’t bother the subs with needless panic-inducing addenda.

If your Request For Information (RFI) was answered in the Addendum, you might reference whether the Architect response is consistent with your earlier bid-directives. The better your direction, the lower the risk your subs will face. Lower risk leads to lower prices, this is where the truly professional estimator earns their keep. If you do your best to get in front of issues, you may be rewarded with an addendum that confirms all of your bid-directives which means your subs are the only ones who don’t have last-minute changes.

Preparing for the blitz

Bid day is a real test of your skills, knowledge, tools, endurance, and patience. The better part of victory is preparation. Heading into bid-day you’ll need several critical elements in place. First and foremost, you’ll need your estimate “built” which is to say that your QTO has been imported or entered into your template form and prepared to accept subcontractor proposals. You should have a reasonable estimate of every trades worth, and a decent idea of what the final cost will be. Second, you’ll need your bid packet, which is all the completed forms identified in the Request For Proposal (RFP). Generally, this is the proposal itself, a CSI breakdown, a construction schedule, bond, etc. Everything should be as ready as possible for the bid-runner to deliver.

Third, you’ll need the “bid tab” or “scope sheets”. These are the scope of work as broken down in the estimate in anticipation of how the subs will bid. The scope of work is generally listed in rows, and a series of columns are made for subcontractor comparison. As the subcontractor proposal is compared against each row, the item is either checked as included, marked for follow-up, or an allowance is inserted. Once all the columns are filled for a given sub, their tally is calculated at the bottom and the subs are ranked by price lowest to highest for entry into the estimate.

I should mention that every Alternate that affects the given scope of work should be built into the scope sheet. Poorly defined Alternates can wreak havoc on bid-day. It’s important to know what to expect.

Estimators with plenty of time often export their bid-tab as a checklist which they have their subs fill out, endorse and return. This helps to prevent the “gotcha” nonsense that comes with indecipherable inclusions, exclusions, and clarifications on subcontractor forms.

Projects with special requirements for Minority Business Enterprise (MBE) participation should be tracked in real-time in the estimate. Allowing for “what-if” strategy is a crucial tool to making timely decisions. Very rarely will MBE companies be the lowest bidders, so it becomes a balancing act to meet participation goals, without undue cost.

As you head into the final hour, all of your hard work preceding the bid will be paying off. Be sure to “close the loop” with everything you’ve learned on this estimate by tying your estimate tracking to your bid results. An awful lot of an estimators daily struggle comes down to reconciling the big picture against today’s efforts.

Reliable Estimating Part 2 Building momentum!

Winning profitable work is the estimators constant goal.  Very little has more influence on your ability to win than choosing the right opportunities. Everything is an opportunity to people lacking perspective. Estimators must take it upon themselves to provide not only estimates for projects they’ve bid, but perspective on the market in which they compete. It’s vitally important to show your work in much the same way as an estimate validates the proposal amount.

Reliable estimating practices not only improve bidding, they enable decision-making.

 

For more articles like this click here

© Anton Takken 2015 all rights reserved

 


Stuff nobody will tell you about estimating

I suspect every profession has a few hidden qualities you wouldn’t discover until you’d been at the job a while. Estimating has some interesting features that can really make or break your chances of success, provided there’s somebody to point them out to you.

Speed is your friend

On the surface, estimating seems to be about careful measurements, considered accounting, and an overwhelming obsession with minute detail. In practice, successful estimating is about time management. General Contractor (GC) estimators are responsible for getting the information out to their subcontractors (subs) as well as getting the subs questions answered by the design team. Every problem needs time to resolve so it’s really important to maintain rapid communications during the bid.

Stuff nobody will tell you about estimating

Mobile office solutions, speeding you on your way to the next crash…

It’s really tempting to silence your phone and ignore your email for a few hours to get something done. Which leads to the next item…

Leadership is more important than takeoffs

If your estimate relies on sub or vendor quotes, your first priority should always be to providing direction, insight, and encouragement to those bidders. Specifically, your efforts should be directed towards finding a unique and advantageous approach to the project. Ineffective estimators tend to assume that there’s something special about their company that will ensure that bidders will give them their best efforts. In a vacuum of leadership, subs will hedge towards protecting their own interests which never means low prices.

Perspective, then persistence

Hard work and persistence are admirable qualities that absolutely will not lead to success on their own. Lots of estimators assume that bidding and winning have a cause and effect relationship. It’s true that you can’t win if you don’t bid. However the reverse is not always true because there are insincere/unfunded clients with projects bidding that have no chance of being awarded. Sadly these clients consume the lion’s share of the slow market. While they can occur at any level of the market, these clients tend towards the bottom strata wherever they appear. They can be identified by their incomplete plans, short deadlines, multiple alternates, and resistance to answering questions. Everything is supposed to start right away despite the lack of permits, or even plans that would pass building department review. These clients range from uninformed neophytes, to jaded negotiators. What they have in common is the general belief that they don’t owe the low bidders a contract award in exchange for the free bids.

In the worst cases, the client will use the proposals to inform their negotiations for bid shopping. “Helping” an unethical client to award your competitor is a destructive use of your time. Morally flexible estimators might think it’s great to be the person such a client calls to “negotiate” with. Clients who bid shop are cheating all the companies who bid in good faith.   These negotiations open with two assumptions; the client is never fair to their contractor, and they think you aren’t smart enough to see that.

Any estimate that will not lead to contract is a waste of time. Better estimators don’t make better clients. Until such time as estimators can seek recompense for time wasted on feckless clients, we must protect our companies interests by declining to bid. In hard times, the estimator must be prepared to accept that this means precious few real opportunities will exist. This reality escapes those consumed with hope that behind every half-baked set of plans lies a great opportunity. The fact remains, when the good clients exit, the market declines. Down markets always have lots of terrible clients wasting everyone’s time with profitless jobs that rarely happen. It’s the only time they can attract bidders.

Stuff nobody will tell you about estimating

“Attention everyone, ship Desperation is now boarding..”

There is no market for bad news

Estimators looking to trade publications, and mass-media for relevant information on their market are bound to discover that there are precious few articles that will admit when things are bad in the present. Unless the article is written to influence an election, you can count on the article to refer to bad markets in the past tense framed in the perspective of steady improvement since then.

Periods of intense bidding with low backlog should indicate that contractors are starving for work and are chasing whatever is out to bid. Often, these times are couched in phrases like “Bidding picked up in the 4th quarter signaling potential growth this spring”.

Once spring rolls around and the summer rush work comes out to bid, these articles will say “Despite holiday season slow-downs, construction steadily climbs”.

This optimistic world-view is on display whenever you talk to other estimators. Go to a job walk and eventually you’ll hear someone ask; “You guy’s staying busy?”. With rare exception, the response is merely a list of the most impressive sounding projects that estimator won within the last nine months or so. Nobody likes a downer but it’s important to understand that what you’re hearing is not the entire truth. Estimators must learn to look beyond what’s said, and listen for what is missing.

If you’re struggling to land work, consider what you’re hearing from others. If the projects listed at a job walk are all finishing up, that’s a strong indicator that new victories aren’t newsworthy which may suggest that your problems are shared. Subs bidding to GCs should pursue bid results aggressively. GC’s are often more candid about the client, and the market after they’ve lost a bid. Estimators who speak truthfully and share what they see often benefit from information shared in kind. GC estimators are often listening intently to the nuance of what their subs are telling them. Don’t get too involved in trying to appear strong when you’re trying to find work.  Posturing sends the wrong message.

Decisions define us

Estimators exist because it’s not possible to simply “add everything up” like a cashier. Simply put, estimators must make decisions about what to do when things aren’t perfectly clear. The lack of information is a risk, making a decision on how to handle that risk means you’re accepting responsibility for the outcome of that decision. It’s easy to see that decisions based on the worst case scenario is the most likely to add money and time to your estimate. GCs who habitually sandbag their estimates are communicating their priorities. Competitive sub bids will go where they won’t be squandered.

While on the topic of unclear plans, it’s worth commenting on motivations. Missing, incomplete, or contradictory requirements may be a symptom of design team motivations. Estimators who’ve reviewed plans from a design-build project may notice that the plans have far fewer notes, and shorter specifications than projects developed for hard-bidding. Design professionals working on hard-bid projects are primarily concerned with their liability.

Design teams know that budget blowouts are a frequent outcome of bidding. Costly items are often sparsely mentioned on plans in the hopes they’ll be overlooked by the contractors. These buried notes are an owner-placating feature that the designer is trying to buy with the contractors money.

Stuff nobody will tell you about estimating

It’s rare to see such a perfect application for existing technology

Their decision to be predatory speaks volumes on their character. Exposing these traps through Request For Information (RFI’s) is how you can control risk without losing the job.

The advantage of ethics

Dishonesty is rampant in the construction industry. Incomplete plans labeled “100%”, or unrealistic schedules, are simple examples but this issue runs deeper. Information is withheld simply because it’s less risky to remain silent.

Bid results are traditionally provided upon request.  In practice, this typically means the GC estimator plays “keep away” with the information until it’s all but assured that the sub will never profit from it. Some GC’s are so focused on their own interests that it borders on cruelty. Providing bid results is seen as additional work that only benefits subs.

The deal offered to subs is to either award them a contract or furnish them with bid results in exchange for a free bid. GCs should promptly and publicly furnish this information to recompense subs for their bids. Better informed subs deliver better bids.

Acting ethically can present huge advantages beyond good-will. Trustworthy estimators benefit from stronger relationships with their vendors and subs. There’s less risk in working with honest people, lower risk means lower prices, which means you’re harder to beat and more profitable than your competitors.

It won’t do much good to pursue the bottom of the market with high-minded principles. However an established reputation for fair-dealing has a way of opening doors to quieter opportunities. The very best clients choose to work with honest contractors. There may be fewer opportunities compared to the hardscrabble market. However the work you’ll land is more successful, and reliably profitable than the high volume of profitless work out for public bidding.

Good estimators have pull

With all the information going back and forth, it’s easy to overlook a vital aspect of an estimators craft. GC estimators rely on subcontractor proposals to help define, describe, and value the scope of work. Attracting market attention is a function of a good opportunity, minimized risk, and profitability. Market leaders will avoid unprofitable, risky, or difficult projects. As an estimator it’s easy to think that the project’s intrinsic qualities aren’t under your control. To be sure, there are definite challenges in bidding ugly work.

The estimator must understand why they’re pursuing a project. Simply grinding out bids because a Request For Proposal (RFP) landed on your desk is what I call bid-milling. Bid-milling is the practice of chasing everything in the hopes that higher volume of bidding will create profitable wins.

Stuff nobody will tell you about estimating

It’s not a good look

This never works because each firm will be a market leader for specific opportunities. A contractor with a high volume of losses communicates that they’re not a real contender. The market-leading subs won’t waste a bid on GC’s who aren’t sincere about winning.

A GC estimator needs to understand that a mediocre project with a good client can be made into a profitable and low-risk opportunity through their leadership. GC’s who habitually work for good clients naturally attract market leaders. Contractors with a history of well-managed and reliably profitable projects are able to reduce the risk of less professional clients and their design teams. All of this starts with the estimators commitment to controlling risk.

Estimators who pursue good opportunities with accountable leadership, ethical dealing, and meaningful feedback are more successful than their competitors because they are the professionals, that everyone wants to work with.

I encourage you to consider those actions carefully. These simple actions are profoundly rare in professional estimating because most folks think their situation is different, therefore some aspect doesn’t apply to them.

Success in this craft requires clarity and intent above all else. There are no shortcuts with something this simple.

For more articles like this click here

© Anton Takken 2015 all rights reserved

 

 

 

 

 

 


Controlling Risk

If estimating was simply calculating the price of things that work perfectly, we wouldn’t be estimating, we’d be cashiers. Since estimating involves calculating risk, it’s worth some investigation into what is involved. Risk is the uncertainty of a return and/or the potential for a financial loss. The construction estimator must understand that sometimes things go very wrong which can cost substantially more to fix than the job was originally worth. Taken to its fullest extreme, the sky’s the limit for liability.

Like absolutely everything in Estimating, we start by bounding the problem. Companies purchase insurance policies for a reason, there must be a means to backstop the risk of the worst case situation. This allows us to avoid factoring unlikely risks like acts of nature into everything we do. As a rough starting point, we need to consider how the project, or doing what’s necessary to build the project will present risks to people, property, or contractual agreements.

Contractual risks

Most estimators will hone in on contractual penalties like liquidated damages as their main risk. It’s understandable that an easy-to-read penalty would garner attention, but this ignores a very fundamental aspect of risk appraisal. If you can control or manage the contributing aspects of a risk condition, the resulting risk is reduced.

balance

Skeet diversified his portfolio with a “retirement vehicle”.

Taking liquidated damages as an example, the penalty for being late is less of a concern when the contract blocks the client, owners rep, and design team from impacting the production, or schedule. Some contracts require the bidders to submit their own Critical Path Method (CPM) schedule. This allows the General Contractor (GC) to define their duration, milestones, and completion dates. More control means less risk.

Screwing up is always going to hurt you

It’s worth mentioning that there are legal precedents which allow clients to pursue damages against a GC who’s late project delivery led to client losses. Contracts which include the phrase “Time is of the essence”, may not include stipulated liquidated damages however the client can recover damages against the GC for being late. Clients opening retail, resort, gambling, entertainment, retirement, etc, facilities can stand to lose incredible sums in lost revenue for every day they’re prevented from operating. Liquidated damages can actually be the least of your liability problems with high-revenue clients.

Diving deeper into contract law is beyond the scope of this article. I heartily encourage consultation with a contract administrator or attorney as needed. As estimators, we need to understand that penalties for failure aren’t the real drivers of risk. What drives the risk, is what drives the failure.

Flip the problem around. If absolutely everything goes perfectly on a construction project, you have a very simple trade of goods and services for payment. Contracts predominately exist to lay the groundwork for legal action for when things don’t go well.

Production + client delay = your risk

Contracts can, and often do, present conditions that work counter to the project’s success. These are the real drivers of risk. For example, a contract may stipulate the project deadline while also providing clauses whereby the client or their representative can stall production without corresponding schedule extension.

a-funny-looking-rooster-chicken

“We spent the last three weeks making changes, now we just don’t have time to give you a two-day extension”

Owners representatives are virtually never contractually at-risk for the outcome of their actions. Everything from submittal review delays to unanswered requests for information (RFI), can prevent the GC from getting their job done as valuable time passes. Contracts are generally written as though the plans and specifications, known as construction documents (CDs) are perfect. While there are certainly provisions for getting questions answered, and submitting change orders, the final arbiter deciding your fate is normally an unaccountable owner, or owners rep.

Good clients are lower risk but they are harder to find.

Project risk is certainly not strictly bound to the contract terms. Just as hiring good employees reduces the chances of problems, so too, does working for good clients with professional design teams. There are good and bad examples at every level of every market. Estimators must learn to size up their clients to get a sense of how things are likely to go. At present, Architects are often the “gatekeepers” of project opportunities for the GC. GCs looking for leads, should be careful to solicit the attention of Architects who attract good clients. The better the clients, the more discrete the opportunities tend to be.

Low barrier to entry work speaks as much of the client as the project. As Edmund Burke so artfully wrote: “Only fools rush in where angels fear to tread.” Better opportunities are out there, but you’ve got to do good work to see them.

Mitigation by bid scoping

GC’s mitigate risk by contracting out portions of the project scope to subcontractors (subs), and vendors. The subcontract provides a layer of risk-management in terms of stipulations, remedial actions, and so forth. By diversifying the risk among many subcontractors, the potential for a catastrophic problem is reduced. GC estimators spend a good amount of their time scoping subcontractor bids. Inclusions, exclusions, clarifications, and allowances frame the essence of what you’re getting for the proposed amount. GC estimators must be very careful when comparing subcontractor proposals because sub proposals are an integral part of how the subcontractor mitigates their risk on the project.

Specialty scope and the risk of the sub-tier sub

From the GC’s perspective, it might seem as though subs “miss” a lot of important scope, or that they’re lazy about including items that seem like they should be part of the deal. In practice, most subs are perfectly aware that the GC would prefer that they take on additional risk for work that’s not really their specialty. Inexplicably, GC’s will tolerate hiring upwards of half a dozen companies for the concrete work, but they have little to no patience for splitting scope in Mechanical, Electrical, or Plumbing (MEP) trades. If it’s pipe, it’s the plumbers job. If it’s wire, it’s the electrician. Perhaps it’s because concrete work is easier for GC’s to understand than the skilled trades.

Specialty vendors like Fire sprinkler, Photovoltaic (solar), Geothermal heating systems, and Fire Alarm are stand-alone companies that switch between subcontracting, and sub-tier subcontracting. Most subcontractors are ill-equipped to manage a sub-tier contract which adds to the subcontractors risk.

subtiersubtiersub

Artistic rendering of how the sub-tier-sub contract arrangement breaks down

GC’s pressing for these arrangements like the notion that they have only one contractor for “all the wire”. Lacking the willpower to learn about these “ghost trades” the GC’s are choosing convenience over control. Higher risk means higher prices, GC convenience adds up to squandered opportunities.

Risk in bidder spread

Bid scoping can portray risk in very stark terms. For example an estimator comparing three proposals obviously has a high, middle, and low bidder. It’s incredibly unlikely that the middle number will be perfectly between the high and the low. If the low bid is further away from the median amount, it’s an outlier. “Scary” low bids sometimes happen because people make mistakes.

Cost of replacement

The idea here is to quantify how much it would cost to hire a replacement if the low bidder fails. Be advised that once the project is under-way, the real cost to replace a subcontractor will always be more than the bid-day difference between bidders. Taking over the partially completed work of a competitor is a very different situation than the sub priced on bid-day. I should mention that there are plenty of legal recourse’s for subs who made a mistake on bid day. GC estimators must uphold their duty to investigate and correct bidder mistakes. Scary low bids should signal caution, that’s how a judge will see it in their courtroom. The risk in hiring a low bidder can be considered as the monetary difference between the outlier and the consensus median. I use the term “consensus median” to signify a price that would fall in the middle of the market-value proposals. Estimators should be careful about using the second low bidder as their consensus amount because it’s entirely possible that the low and second-low made the same mistake.

peers

Mark and Jay aren’t picky about what they bid so long as nobody else wants it.

The less the estimator knows about the subcontractors submitting proposals, the less faith they can reasonably have in small data-sets. Estimators who’ve bid highly sought-after projects may find themselves inundated with subcontractor proposals. The proposals will tend to stratify according to contractor ability and interest in the work.

The myth of sub coverage statistics

GCs are always looking for greater “sub coverage” because a bigger data-set implies greater certainty in their calculations. It’s certainly nice if you can get it, but unless you’re a market leading GC with an absolutely irresistible opportunity out to bid, the odds are good that won’t happen. Market leading subs are the only relevant contenders for the project. Without their bids, a GC won’t win the job. So GC’s need to have relationships with those market leaders before the bid. GC’s hounding anyone else for bids “just in case” they come in lower, are wasting the subs time.

It works the same in reverse for subs. The subs can’t reliably win profitable work without a market-leading GC, which makes market leaders lower risk. Lower risk means lower prices, higher hit rates, and better profitability for everyone.

GC’s who stockpile sub bids are wasting most of the subs time. They’re perfectly aware of this which is why these GC’s are among the least likely to provide bid results. Often these are the bid-mill estimators constantly calling an hour from their deadline with jobs that “nobody’s looking at”. This often means one of two things; they’re unacceptably risky for your competitors to work with, or they’re hoping your rushed bid includes a mistake that benefits them. It’s bad business either way.

scale

Ed has a feeling he might have under-bid the job.

Relative risk

We often think of a projects risk in isolation, rather than how the project affects our operation. Losing a critical bid can have dire consequences for a company. Deductive reasoning leads us to add up all the risks and consider the potential reward. Inductive reasoning works in the reverse. Starting with the understanding that we must win profitable work out of the available opportunities, we work within the boundaries of our current market to make the best decisions. It’s very easy to convince yourself that projects are too risky when you look at them in isolation.

Lots of companies become convinced that they’re good at building a specific type of project to the exclusion of everything else. I’ve encountered firms that were utterly convinced that they couldn’t build seemingly identical projects to their regular work, simply because the client was new to them.

As a company, the risk of losing an opportunity to capitalize on your expertise is substantial. Projects that are similar to past successes may indicate that your firms risk-mitigation is particularly effective for that kind of work. Your competitors may not have your expertise, which makes the opportunity less appealing to them. Market leadership is built on the ability to capitalize on opportunities that your competition cannot. You have to see them in order to hit them.

Perspective versus pessimism

Estimating is about controlling risk, not adding money for everything you’re afraid of. The more you know about what’s going on, the less you have to be afraid of. Estimators need to understand that pessimism is a poor proxy for knowledge. There are times you’ll know that a job is a time-bomb of risk. Constant pessimism devalues your council to ownership. There are lots of angry estimators forced into bidding bad work simply because their boss tunes out their complaints. The only thing worse than losing a good job is winning a bad one. In my experience, it takes a considerable effort to lose the truly awful jobs because wise bidders steer clear. Sometimes the only way to lose, is to decline to bid.

hyena

“We thank you for the opportunity…but we’re not currently bidding work in the carrion market.”

Timing

Sometimes the most significant risk in a project is how winning it would affect your ability to succeed in everything else you’ve got going on. Tight labor markets can limit growth which in turn limits the amount of work a company can take on before they can’t meet their obligations to perform. Seasonal rushes can quickly overtake the available resources leading to higher prices. Estimators preparing bids for work that will take place during seasonal rushes must consider how this opportunity compares against the most profitable work of the year.   Careless estimators can find they’re suddenly on a hot streak winning bids during slow seasons, only to discover their summer is booked solid with low-profit work.

There’s risk in losing opportunities

Estimates are not free, so estimators must consider the risk of investing their time and energy into losing clients. Subcontractor may encounter GC’s with high bid volumes and low hit rates. I refer to these firms as bid mills since they grind out bids as quickly as they can. Sadly, short-changing the estimate leads to lots of mistakes. When they’re lucky, the mistakes lead to a lost bid, when they’re not, they land a profitless job. As a sub, your irresponsible GC’s problem eventually becomes your problem.

priorities change

Bid mills compete in the warm glow of their accomplishments.

The very best protection against losses is to avoid doing business with irresponsible firms. The time spent on the lost bids could have gone to better opportunities with other clients. The rare and profitless win, consumes company resources to eke out a minimal loss on the project. Those resources were pulled from profitable employment with responsible clients.

The real risk of working with bid-mills is tremendous. Some subs could improve every aspect of their operation by firing bad clients. It’s often difficult for them to see it because they only see themselves occasionally winning bids. Gamblers go broke thinking along the same lines.

Safely getting from existing to proposed

Construction documents generally depict the existing and proposed conditions without going into much detail on how the construction is done. Architects typically rely on the build team to determine the means and methods necessary to realize their design.

On jobs with limited applicable scope, Architects may elect not to hire an expensive engineering consultant. The assumption is that a “little” engineering problem is an acceptable risk for the build team to assume. For example, adding a new piece of roof top HVAC equipment to an existing structure. Without engineering approval beforehand, any resultant failure will be the build-teams responsibility.

Civil projects can present environmental challenges that are safety concerns. Retaining walls are used to hold back soil that would otherwise slump, slide, or erode. Different soil types require “cut-backs” which relate the soils stability to how steeply it can be piled. Sandy soils are prone to cave-in so excavations must have gently sloped edges for worker safety while the walls are constructed. Restricted sites may not allow sufficient room for safe excavations. Ground-water, flash-flooding, and seismic activity can all generate additional safety hazards for workers. These are not simple problems with easy answers.

Projects dealing with compromised or hazardous structures are especially given to unique engineering challenges. These projects demand an engineered plan for every step to completion. Hazardous materials require a site evaluation, testing, and remediation plan built around worker and environmental safety. Estimators are often presented with a false choice; help the client to save money or take chances on safety. There is no choice, build safely or don’t build at all. Playing dumb, or passing the buck on safety issues won’t protect you when bad things happen. Local traditions and “school of hard-knocks” graduates often underestimate the magnitude of what is at stake because they don’t know the margins of error in what they’ve done. A lifetime of narrowly averting disaster does not, an expert make.

Nuclear option

Estimators can contact engineering firms and request a proposal to solve the problem. Often engineers will provide a roughed-out plan of action along with their fees to develop the design, do the calculations, and so forth. Often we get so hung up on the idea that half-baked design is an unavoidable vocational hazard, that we forget that our business is in contracting labor. Estimators work by controlling risk through whatever channels we can. It bears mentioning that estimators should list out the cost of this safety engineering as a breakout cost. Communicating the real cost of safe work may spur an honest client to get their design team on track. Once it’s made so clear, it’s difficult for clients and design teams to pretend they didn’t know it was an issue. Moreover, it gives the client a sense of your commitment to safely delivering their project.

Summing up

Estimating is about controlling risk, rather than simply summing it up. The savvy estimator is looking for ways to mitigate all of the risks mentioned above. Risk is most effectively mitigated by building an operation around successfully controlling problems common to the work you’re pursuing.

Some really excellent clients have horribly one-sided contracts. Until market forces cause them to reconsider their terms, these clients are a bountiful opportunity to the companies who have “seen past the contract” to know what they’re really like. Honest, cooperative, and communicative clients can mitigate the risk of an ugly contract.

Competitive bidding calls for perspective and judgment. Losing a bid isn’t the end of the world, but don’t kid yourself; there are consequences to losing. Time spent on the losing bid wasn’t invested in other pursuits (opportunity cost). Wasting your subs, or vendors time with fruitless bidding costs political capital by lowering your status as a market leader. Failing to justify your place on the client’s select bidders list may get you cut from future invitations.

Taken in whole, the impact of losing a bid carries its own, very substantial risk. “Throwing a number” at work you don’t want is almost always worse than declining to bid. Some GC’s may be concerned about “appearing weak” for backing out of a bid they’ve invited subs to bid on. Estimators understand that there are opportunities that pose much greater risk than they’re worth. Showing good judgment is far superior to a bluff. Showing respect for the sub‘s time is much appreciated. Often it takes a bit of time after the RFP to get a sense of the client and their design team. No amount of perfect bidding will protect against an unethical client. Starving bad clients of bids is one of the best ways to lower the market risk.

example

 

For more articles like this click here

© Anton Takken 2015 all rights reserved

 


Industry problems we can solve

I’m sure every industry has some practices that are not ideal or could do with improvement. The construction industry is home to some really detrimental practices that are as rooted in ignorance as they are in tradition. Estimators have a unique opportunity to lay the groundwork to move their companies away from some of the worst practices. Like most worthwhile things, it’s going to take extra work, greater perspective, and a commitment to long-term planning. My intention is to list issues that are hurting the construction industry along with possible solutions for the estimator.

Problem: There’s much more risk than reward

General Contractors (GCs) take on the project risk when they are awarded the contract. It’s a critical concept to understand that although they may subcontract (sub) out portions of the work to spread the risk, they are looking at a liability until the work is properly completed. While many entrepreneurs would focus on the profit amount, the estimator must understand that the average construction contract presents FAR more risk than reward.

Industry problems we can solve

“You’ll never taste anything like this again!”

Setting the project-driven risk aside, the average net profit for a GC is quite low compared to other industries. It’s very difficult to win competitive bids with higher profit margins.

Possible Solution: Owners representative at-risk.

Clients naturally want a contract to address all their concerns. The most popular solution is the adversarial relationship between the owners representative and the GC. In most cases, the Architect serves as owners rep. The Architect typically develops the plans, specifications, and contract which are collectively known as construction documents (CD’s). This creates a situation where the party most able to affect the project cost, duration, and risk, is the least responsible for these ramifications to the owner. GC’s are under contract to perform the work regardless of what the Architect throws at them. It’s especially critical to understand that Schools of Architecture do not regularly include curriculum on contracts, scheduling, business, or management. Ostensibly, Architects rose to fill a leadership gap because they understand the project vision better than anyone else.

Industry problems we can solve

“Without expert interpretation, this might seem like a bad idea…”

Their critical role in ensuring that the design integrity is maintained has been waylaid into construction management. There is a great deal of evidence to suggest that Architects are miserable largely because of the management meetings.

Accountable construction management between the design team and the build team is the solution. Accountability is assured by sharing risk and reward. I suggest that the traditional retainage of 10% of contract value be the monetary risk the Construction Manager (CM) and Architect individually face under their contracts. As owners rep, the CM would have contractual authority to direct, approve, or decline changes to both the build team and the design team on the client’s behalf. Naturally the CM would need to be an entirely independent entity. Basic CM services would start before the bid, to provide conceptual pricing assistance, constructability review, and bid list selection. CMs would then conduct the bid, collate the results and present their recommendation to the client.

Industry problems we can solve

“Now yer digging where there’s taters!”

Since some clients stall out after the bid, CM’s should seek an hourly rate for all their pre-contract award work. Estimates are not free, clients need to face financial liability for wasting the markets time.

But what about negotiated agreements and/or GMP contracts?

GCs reading this might naturally claim that they’d do all of this under a negotiated agreement, potentially saving their client the fees of an unnecessary representative. In the best possible case, the GC will act professionally and ethically to deliver the best possible value to their client. In my experience, the average GC will interpret this to mean that the risk created by Architects as Owners rep, is a monetary inclusion into the GC’s  bottom line. Simply put, the GC knows the client won’t pay for additional costs that their architect caused, so the GC pads their bid to guard against losses. These Architects are led to believe they are infallible, as their tab is quietly deducted from a secret fund. As long as the build team must work around unaccountable oversight, the risk will hurt the client and the contractor which ultimately damages the entire market.

Guaranteed Maximum Price contracts are often the outcome of a CM at-risk contract arrangement. The problem with this approach is the inverse of the negotiated agreement in that the owners rep is the GC’s employee first, and the client’s second. The project risk is still carried by the General Contractor, but augmented by their authority to direct the design beforehand. There still isn’t an independent, and accountable owners representative which means the client will not capitalize on controlled risk.

Problem: We must estimate the risk and the job, but the client awards only the low bidder.

Estimators prepare bids which are driven by estimates. The trick is that all the unqualified uncertainty that makes estimating necessary, is contractually ignored!

Consider the paraphrased example of how bids progress into jobs:

Client: Quick, how much to build this design?

GC: We estimate the cost of what we see right now at $X amount.

Client: Here is your contract in the sum of $X amount, get going!

Architect: Here are the revised plans including the building department comments…

GC: That will cost $Y amount extra

Client: Typical contractor, ignore stuff you know we’d need then hit me for change orders!

Now consider this alternate example:

Client: Quick, how much to build this design?

GC: We estimate the cost of what we see and what we think you’ll need at $X + $Y amount.

Client: I’m sorry, your number wasn’t competitive.

Possible solution: Stop providing free construction consultation services.

GC estimators eager to sell their firm, forfeit their leverage to encourage an ethical contract award. Pricing what the design team missed, (or didn’t include) for the client, drives a pattern where design teams use “free” bids to outsource their responsibilities. Clients could contractually bind their design teams to accept responsibility for errors and omissions in their work. Notification of this contractual obligation could be included in the RFP. Alternately, the client could hire a CM as owners rep who would share a portion of the Architect’s accountability for errors and omissions in the CDs. The CM’s accountability should be likewise published in the RFP. Cut the risk and the price of construction will fall.

Industry problems we can solve

Clients must understand that design-side risk should be design-side responsibility. Incomplete plans marked “100% Construction Drawings” would stop happening if the Architect had to pay for later additions. A CM as owners-rep working in concert with the architect would provide a meaningful benchmark by confirming status of the project before the bid. Many clients are unaware of when postponing the bid to finish the design would lead to project success. Far too many Architects are pushed into soliciting bids on their incomplete design by clients eager to “get started”.

Problem: Low barriers to entry, and technology have shifted our priorities

During good market conditions the construction industry sees incredible expansion. I once interviewed with a GC who told me they anticipated their revenues to double every year for the next decade! Seven years later, that firm closed its doors for lack of work. In most markets, it’s not particularly difficult to become a GC or a sub. For many GCs soliciting bids, the subcontractor pool appears to be constantly changing. Rising to meet these dynamic challenges, many software firms offer bid-letting programs which include access to subcontractor databases. The GC estimator can transmit an invitation to bid (ITB) to literally millions of subcontractors simultaneously. Many GC’s cast a wide “net” for their ITB, planning to interview any new subs that come in low on the bid. GCs in these situations tend towards a hedging mindset with these unproven subs. Most GC’s have some kind of Subcontractor Prequalification Process (Pre-qual) which usually involves filling out forms, providing pertinent financial information, references, insurance certificates, license status, Key staff resumes, and so forth. The purpose is clear, to define how risky the sub is.

The GC is facing the sub market like a fishing troller who seeks to get the most fish on deck, then sort whatever needs tossing. GCs bidding this way can’t see the sharks from the minnows till the whole mess is delivered on bid day. They assume they’ll get bids from all interested subs because one net is just as good as another from the fishes perspective.

Solution: There is absolutely no substitute for earning the respect of market leaders in your industry

GC’s need to fundamentally change their perspective of subcontractors in order to understand what motivates failure and success. GC’s do not perform much work as a rule. The typical subcontractor is responsible to provide absolutely everything in their scope of work (SOW) whether they make money or not. Despite the assumptions to the contrary, subcontractor scope of work is as much opinion as anything else. In general, the leading cause of problems between GC’s and Subs is different views on the SOW. The sub defined their SOW via their proposal. Often they omit, exclude, clarify, or stipulate changes to anything they don’t completely accept as their job. This is an understandable inconvenience for a GC who’s looking for a risk-free transfer of responsibility to the sub. That doesn’t change the fact that the sub is an independent entity making their proposal according to their abilities, limitations, and perspective of what is involved. Offering to award a contract is not an ownership stake in the sub’s business.

Industry problems we can solve

“Mike loves riding high on his subs, but he wonders why they’re so hungry.”

Starting with a firm comprehension of what the SOW entails is where GC’s can form an appreciation for what they’re asking. Once they know what they’re asking for, they should consider which subs are best for it. Inviting the same team of subs for every project big or small is inevitably leading to higher prices, lower profitability, and wasted time. This of course means that GC’s need to become curious about what their subcontractors are actually good at. Subs quickly figure out which GC’s are prone to wasting their time, and they bid accordingly. GC’s who pick a team of market-leading subs that are aligned with the project’s needs, inevitably win profitable work. These bids lead to successful projects because everyone involved is at the top of their craft.

Nothing here absolves the GC of a duty to investigate new subcontractors via pre-quals. The focus however, should be on finding market leaders, rather than culling risky subs.

Problem: GCs aren’t independently estimating their bids

GCs’ who simplify estimating to mean bidding typically see no problem in adding up the low subcontractor proposals along with a dose of overhead and profit to arrive at their bid amount. I call this process bid collecting because there is no real method for controlling risk which is the main purpose of estimating. These GCs predominately have their Project Manager (PM) bidding their own work in order to save time and overhead.

Enabled with the technology mentioned above, these GC’s are free to have all their PM’s bidding all the time. The theory being that more bids will lead to more wins. The reality is the overall hit rate declines, as does the profitability for everyone involved. Subs can’t afford to price endless estimates that rarely lead to work. As their focus wanders, they add money to compensate the risk of anything they might have missed. Over time, the GC’s concept of the going rate for work grows further away from market price. While estimating may be cheaper and faster for the GC, this practice has lowered revenue and profitability for everyone. The natural result is clients and subs are seeking better options.

Industry problems we can solve

Its the kind of plan that solves it’s own problems, but not before making a huge mess

Possible solution: Estimator oversight, best practices, and mentoring

There is no way to lose fast enough to save money on bidding. Estimating is about controlling risk. Lots of people think estimating is unnecessary until they lose money on a job. A certain proportion will insist it was simply “bad luck” that made a job unprofitable. A whole lot of them will insist they’ll “make it up on the next one” until they’re filing for bankruptcy. Gamblers ignore risk, which is why the house always wins.

Estimators stand opposed to the fatalistic notion that failure is inevitable and risk is incalculable. Any powerful process stands to do you harm if unattended. Letting your mind wander while using a power saw has serious consequences. Many construction projects encountered a single problem that created other problems, ultimately bringing the GC into court to hear the verdict. Surely that consequence merits greater attention during to the bid. Knowing what the subs should have in their bid, and approximately what it should cost are the most basic guidelines for decision-making. Anyone, whether they are a PM, a secretary, or a dog washer who’s been pressed into estimating should be making informed decisions based on best practices. As professionals we should all demand these basic tools to keep from putting our companies out of business. Estimators should rise to the task and provide mentoring, training and leadership wherever they see estimating going on.

Problem: Bid results are unaccountable, inaccurate, and delayed

If you are a GC who bids only projects with publicly read bid openings, it’s pretty easy to know how your bid compared. For everyone else, it takes some effort to get bid results. Even in the case of a GC who won a bid, it may take the client a considerable amount of time to make their decision public. For anyone who didn’t win a bid, it can become much harder to get a straight answer. Bidders are left in limbo on work they’ve bid, often causing them to forgo other opportunities that would conflict with their potential obligations.

Estimates are not free, the estimators time and effort is worth a great deal. Bidding one project may cause them to lose an opportunity on another. In total market terms, the estimate is worth a veritable fortune and the only recompense to the losers is bid results.

Every process benefits from evaluation and feedback. Timely and accurate bid results can be an invaluable aid to an estimator and it costs the client only a moment of their time. Insincere clients and GC’s are the least likely to provide bid results. Even then, the expectation is that they are only furnished upon request, and with as little context as possible.

Possible solution: Public bid results for the entire solicitation upon award, loss, or withdraw of the project.

There are some good reasons for confidentiality, not least among them is to uphold an ethical bid. Bid shopping, colluding, or bid peddling are all practices that depend on illicit sharing of information. Saying nothing to anyone before contract award is a firm, uniform, and fair means to assure everyone that you’re playing things straight.

Once all legitimate concerns to propriety, confidentiality, and ethics issues have been resolved, it’s time for whoever solicited the bids to provide complete, accurate, and public bid results. Transparency is not only morally superior, it’s better for the industry as well. The team of legitimate subs who brought a GC to victory on bid day should have every right to a contract. GC’s “beating the bushes” for better numbers should be exposed for their duplicitous behavior. The same goes for clients who continually re-bid their projects hoping to snare a lower bid. Every unethical action between bid and award is enabled by the silence of competitors who’ve already lost the job.

Industry problems we can solve

The writing’s on the wall, but who will read it aloud?

Ethical actors have nothing to lose and everything to gain by transparency. It’s particularly important to dispel the noxious idea that “upon request” equates to “transparency”. The selfsame means that the RFP or the ITB was distributed should be used to publish bid results. I used the bid-letting system for my ITB’s to publish my bid results. Not only did my phone stop ringing with endless requests for bid results, I gained the attention of new subs who were attracted by my transparency. If that weren’t enough, several subs saw how I had interpreted their confusing proposal which led to better wording on the next one.

Even when I lost the bid, my subs benefited from knowing how their number compared. Doubtlessly, this public information made it difficult for the winning GC to dabble in any bid shopping. This is an easy way to improve our industry, better our relationships, and win more work.

Conclusions

I believe the problems of the construction industry can be sorted into three basic causes;

  1. Unaccountable owners representation
  2. Contractual risk goes to the party without the authority or ability to control its cause.
  3. Modern contracting lacks transparency, training, and ethics.

Estimators can do more to change the outcome of their projects than anyone else in their firm. We often assume that anything on a form is a contractual certainty, like a concrete barrier to alternate solutions. The fact is, that clients and their design teams want the job to end well, and they want good value. Most clients have no idea of how much their project risk is costing them. If they did, there’s no doubt that design firms would see a dramatic shift in their revenues. Better decisions come from solid information and an honest assessment of what’s going on. Estimators can provide both.

General Contractors can offer CM services to clients based on their estimators input. By cutting down the GC’s risk, the bid day prices are lower, handily offsetting the cost of hiring the CM in the first place. CM’s can track average issue-resolution timelines on the project in comparison to the past projects the firm has on file Everything from RFI response times to change order prices will fall as a function of effective, accountable leadership.

GC’s would face a paradigm shift where transparency is their greatest tool because a competing GC on a bid for one project, may be the owners rep for another.   Overpriced specialty vendors would lose the protection of an unaccountable design team, and be forced to prove their worth against market prices. PM’s and estimators spend their careers mired in the struggle caused by unaccountable leadership, overpriced vendors, and incomplete designs. They have the experience, the skills, and the facts behind them to address these problems.

Industry problems we can solve

A client would be hard-pressed to find a more motivated group to take on this challenge..

Rather than hobbling project managers by making them bid their own work, let’s put their experience and skills to work in CM services. That would diversify the revenue streams by playing to the strengths of your staff. It bears repeating that CM services must face contractual risk and must offer the client a better outcome. Firms with motto’s like “Building relationships, empowering trust”, must put their words into action.

Perhaps the greatest virtue of this approach is that it creates pressure on everyone to do the best job for the client. Systems that reward accountability and transparency of all parties shift the priorities that drive the outcome. When good work is fairly rewarded, the client gets a job well-done.

For more articles like this click here

© Anton Takken 2015 all rights reserved