Tag Archives: Solutions

Who pays the price for being wrong?

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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© Anton Takken 2019 all rights reserved

 

 

 

 

 

 


Finding Mistakes

In a lot of businesses, estimating is a bothersome hang-up standing between an opportunity and a contract.  It can be painstaking and detailed work that has little resemblance to whatever the business actually does.  Making a mistake in the bid can have devastating consequences so it’s a pretty big deal to get things right.  The main problem is that there typically won’t be anything you can compare your bid against to spot if something went wrong.  For little stuff, it’s pretty easy to “see” the whole picture as a list of stuff adding to the total.

When things get more complex, the estimate can be several pages of fine print.

The bigger an estimate is, the more opportunities there are to make a mistake.  So how do we spot them?  Well a whole lot of estimators would tell you to just go looking for them.  That sounds good, but unless the mistake is fairly obvious, it won’t stand out as one entry in a list of hundreds (or thousands).  So now you’re combing through the spreadsheet looking for small deviations.  Maybe you’ll catch a few, maybe you’ll miss a few.  This is where estimators will tell you to do another review, in hopes the second dragnet will catch whatever you overlooked.  So, you start again with the fine-toothed comb, going over every entry.

By this point, you’ve probably seen everything in that estimate several times.  Anything you really analyzed has become familiar to the point where you’re memorizing figures. When people play a matching game, things only “look right” when the relationship they remember stays the same.  It’s happened to me, and I’ve basically gone “blind” to mistakes I was actually looking at.

Artistic rendering of an estimate under review.

 

If we checked in with estimators again, they’d probably tell you that they factor in a contingency to pay for mistakes they couldn’t find.  How much?  Well that really depends on how badly you intend to screw up doesn’t it?  With all that said, it’s probably not too surprising that there’s a lot of turnover in the estimating profession.

However, all is not lost.  For starters, I think it’s important to point out that wherever (mostly) normal people are working, emotions will factor into their behavior.  On the surface, estimating seems to be a strictly facts and figures profession.  People take the job and eventually the facts don’t meet the figures.  Then the estimator succumbs to the stress and seeks alternate employment.  That approach has some obvious problems.  Instead, what if we emotionally connect with the risks and the rewards?  See making a mistake is a risk, catching it is a reward.  That emotional and mental balance promotes agility, creativity, and confidence.

So how does that apply to finding a screw-up on page 6?

Well for starters, you have to connect with all the little things you’ve caught along the way.  Most of the time a little mistake gets swept aside as quickly as possible.  Maybe it seemed embarrassing, or trifling.  Take a second to consider what would have happened if you hadn’t caught it.  Chances are good that some of them would have been pretty serious.  The key here is to take this as a rallying point.

You just caught a costly mistake.  Maybe it was a decimal point, or a typo, or some other subtle detail that would have had big consequences.

Now you’re connecting an emotional reward with spotting subtle details.

Enjoy the moment.

You’re also learning to spot patterns in your work.  Consistently making a mistake you can correct is the long way around.  There’s no point in “rough drafts” that include pointless errors, so you’ll stop making most of them.  By being emotionally connected to your process, you’ll start looking where these errors are likely to hide.

Circling back to finding that mistake on page 6, we must understand that we’re not the sum of our mistakes.  Going looking for every mistake you’ve ever caught is going to doom you by experience.  I’ve been doing this for ten years.  I’ve caught thousands of mistakes in my estimates.  I once had a boss who wanted me to compose a binder listing every single mistake I’d ever found which was to be used as a “checklist” against all future work.  If every job was consistent enough that an item specific checklist was worthwhile, there would be no “estimating” involved.

Instead, I go through the estimate and I allow myself to reminisce about the processes that put each figure on that spreadsheet.  That keeps things familiar without mindlessly memorizing everything I see.  If you’ve ever reminisced about an experience, you’ve doubtlessly recalled thoughts and emotions.  Sometimes you’ll remember a thought, or a feeling that you hadn’t had in years.  As often as not, you’ll remember something tangential to the topic, like the scent of your favorite food when you reminisce about your childhood home.

It works the same way in estimating.  All those little successes in catching an error will suggest themselves as you’re reminiscing your way through today’s spreadsheet.

Bonus points if you look cool doing it!

Bystanders might see what I’ve done and attribute it to experience or painstaking diligence.  I can tell you that I’ve worked with some seriously intense people who had more experience than I do.  They work awfully hard to catch stuff that just pops out for me.

There are some downsides to my approach.  Perhaps the worst of which is that my approach requires sincerity.  You must genuinely feel a reward for finding a mistake.   People in general, and your employer in specific may tend to focus on mistakes as the source of all problems.  Tell your boss that you caught a huge mistake, and they’re likely to only hear that you’re a danger to the business.  It’s difficult to keep your chin up in these situations so you often must keep your own council.  That’s a whole lot harder than it sounds, especially when you’re working with/for insincere people.

Another downside is that it’s easy to get infatuated with your own inventions.  If any part of your process is faulty, no amount of massaging will offset that fact.  I’ve sunk lots of time into constructing elaborate error catching shortcuts that overlooked something critical.  Sometimes these shortcuts would work, other times they wouldn’t.  It was like an ambulance with a dodgy starter.

Every little thought that pops up as your reminiscing won’t be relevant.  People are capable of spotting patterns that don’t really exist.  Unless you’ve arrived at the cause of your mistake, you can’t celebrate catching it.  Playing it fast and loose with what you actually know is guessing, which is worse than being wrong because it’s irresponsible.  Again, everything here depends on sincerity.

It occurs to me that I know a lot of people I know might have read to this point and come up with an equivalency without realizing it.  See it’s super-common for people to think in terms of the proverbial carrot and stick.  Whatever incentive is proposed may be equally substituted with a sufficient punishment without affecting the desired outcome.  This may explain why so many employers cling to the notion that all estimating mistakes are perfectly obvious oversights.  To this way of thinking, an estimator should be motivated by fear of missing stuff.  There’s a huge, gaping hole in this logic.  They’re basing this assessment on omissions found in winning bids.   It’s anywhere from possible to probable that the entire reason you won the job was because of an “omission”.  Nobody (but the estimator) cares about the absolutely perfect estimate that lost the job.  This point of view encourages big contingency funds (sandbagging) which won’t win work in a tight market.

Finally, my approach has a fatal flaw for anyone who started out in a boom.  When it’s easy to win work, there’s less risk in being wrong so standards slip.  Everyone has to start somewhere, so if you’re starting in a boom, seek out an estimator who was successful during a down market.  If they’ll review your work, acknowledge each mistake as a discovery.  Challenge yourself to find them on your own and give yourself credit for improving when you find them.

Hopefully this approach will be as helpful to you as it has been for me.

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© Anton Takken 2018 all rights reserved


Are pricing revisions costing you work?

Sometimes the estimators job isn’t done at the bid deadline.  Clients, Architects, or the Owners Representatives may have questions for the bidders as they review the bids they’ve received.  In some cases, the estimator will need to make revisions to suit the client’s needs, or to facilitate direct comparison against a competitor.  So far, so good.

Estimators are under pressure to respond quickly because the client is planning to award the contract as soon as they are satisfied with the winners bid.   Clients can be very difficult to reach following a bid so it behooves an estimator to make sure their attention doesn’t drift to a competitors bid.  Most contractors pack the calendar with bids so there is always another deadline looming.  This means that every post-deadline revision is taking time away from the next bid.  Leisurely clients with lots of questions rarely understand the estimators need to hustle.

Are pricing revisions costing you work?

“Sam had a terrible feeling that the client wasn’t going to let the meeting end.”

 

Making the right moves

In times of stress and pressure, it’s helpful to prioritize your tasks.  A client requesting a revision to your bid presents a significant reward for the additional work invested.  Compared to an oncoming deadline for a competitive bid, the client’s request will often take priority because it’s more likely to result in a contract award.  However it’s possible that the Client is calling about a small job with limited profitability compared to the upcoming bid.  The estimators purpose is to secure profitable work for their company by controlling risk.  When everything demands speed, accuracy and competitive pricing, the estimator will see the truth in an old adage.

“Fast, Accurate, or Cheap, you can only pick two.”

With time always in short supply, the estimator must constantly decide between delivering a cheap or an accurate revision.  It’s worth pointing out that the estimators’ wages are generally funded out of overhead.  For many firms, estimating is the only advertising or marketing for the firm.  Time sunk into answering endless questions for a client who awards the contract to a competitor is a costly proposition.  While estimators must make decisions considering uncertainty, their bosses see the outcomes as though there was never any doubt.  Post-bid work is rarely noticed unless it leads to, (or costs you) a contract award.  Many estimators have gotten into trouble this way.

Often smaller General Contractors (GC’s) and subcontractors (subs) aren’t qualified to pursue larger projects for established clients.  Smaller projects are more likely to be for “one-off” projects for sole proprietors who’ve never built anything before.  Inexperienced clients and small budgets are constant companions, which brings us to cost-effective design teams.  Here again, the above adage comes into play.  Incomplete, erroneous, and misleading construction documents (CD’s) are common with clients who have neither the time nor the money for a professional design.  Estimators may expect the number of post-bid revisions to be inversely proportional to the professionalism of the CD’s.

Building a pyramid is an iterative process

Not all client questions are  focused on arriving at a defined outcome.  For example, let’s say a client is trying to reduce cost or waste in their project.  They might ask a question intended to generate a data-point which drives their next question.  With each “layer” of inquiry, they believe they’re cutting away the unnecessary, so that each iteration is better value.  We might imagine this process to look like a pyramid where each layer is successively smaller than the preceding one.

Are bid revisions costing you work?

Above: “An elegant process leading to a difficult position”

The pleasing aesthetics of this process are based on several assumptions that seldom hold true in real life.  For starters, estimators who are competitively bidding have market pressure encouraging them to reduce cost and waste from the project.  It takes great individual knowledge and skill to win competitive bids.  Unless the scope of work, or the risk involved in the work has changed, the client is asking the contractor for information to be used against them.  Estimators know this, so the information provided takes this into account.

Providing information that would reduce profitability, or increase risk is obviously detrimental to the contractor.  As much as possible, the contractor will seek to provide answers to the client in terms of reduced scope, or reduced risk.  Clients are quick to notice that anything that can be cheaply omitted, might be cheaply expanded.  This means that every price the contractor provides has the potential to work against them. Once a price for something has been provided, it becomes a “fact”  separated from the conditions that define it.  Clients will consistently remember the cheapest price they heard for something, and woe betide any estimator who tries to change their mind later on.

In situations where the client requests revisions to revisions, the estimator and the client are poring over the same information repeatedly.  Since the earlier revisions are “fact”, there’s a built-in incentive to assume the earlier work was correct.

Are bid revisions costing you work?

“Good news! We’ve defeated the camouflage but now we’re seeing double”

Between the pressure, the drudgery and the desire to move things along, the estimator may be making quick-but-wrong revisions just to get the client to contract.   Clients obsessively focused on culling waste may talk themselves into cutting out critical project scope.  Estimators foolish enough to price their demands will be rewarded with an angry client, who feels cheated when the critical scope must be restored.

Like most things, it’s pretty clear to see where things went wrong in hindsight.  Clients may have several motivations for their actions, and it behooves the estimator to quickly identify what can be done to bring them to a decision in as few iterations as possible.  It’s my considered opinion that there are three client motivations that should inspire patience and diligence in the estimator.

  • Curiosity
  • Testing the contractors
  • Scope to budget alignment

On the contrary, I believe there are three client motivations which should be cause for concern and reservation.

  • Distrust
  • Dishonesty
  • Incompetence

Answering questions that speak to the client’s curiosity, budget, or desire to vet their contractors will give them what they need to enter a contract that’s beneficial to all concerned.  Conversely, questions driven by incompetence, dishonesty, or distrust are likely to move the project further from an honest and practical effort to award the contract.   “Helping” an incompetent client by pretending every ill-advised question is valid is how a lot of estimators end up with a profitless job and an angry client.  It makes little difference whether the client is distrustful or dishonest when their condition prevents them from awarding a contract in good-faith.   Scoundrels will sometimes feign distrust on the grounds that they don’t know enough to properly protect themselves from greedy contractors.  Demands for post-bid breakout pricing to “prove” that the bidders aren’t overcharging is a common and fundamentally dishonest practice.  The goal here is to make the winning bidder compete against the losers’ breakouts.

Imagine watching a 1600 meter race in the Olympics.  The winner is the one who finishes in the least time.  Should it matter if they were winning at the  400 meter mark?

The client intentionally misled the bidders to believe the contract would be awarded in good faith to the lowest bid submitted before the deadline.   Pretending that it’s “too close to call” is the favorite line of the scoundrel.  Extending the “competition” to continually solicit “run-off” bid revisions for better pricing quickly devolves into outright bid shopping.  It should go without saying that the construction industry’s policy of withholding bid results enables this chicanery.

I’ve awarded half-million dollar contracts that were won by less than $50.00.  I did so cheerfully because my risk of the low bidder having missed something was negligible.  While we’re on the topic, I can only think of three ethical and honest reasons to conduct a “run-off” bid.

#1 The project scope has been significantly changed following a budgetary blowout.  This means that contract award based on the original bid is not possible.   This is notably different from having a “run-off” bid where the two or three lowest bidders are asked to deliver Value Engineering (VE) proposals.  This is dishonest because any VE ideas lifted from contractors who weren’t hired constitutes a theft.  Any estimator who participates in this kind of run-off should seek easier ways of helping their competitors!

#2 A contract was terminated after the project started, but before it reached completion.  The contractors who originally bid the job are in a better position to estimate the cost of taking over the project.  Taking over a failed contract presents a lot of risk which will deter bidders.  Asking only the second and third place bidders from the original bid for a run-off bid reduces their competition which may encourage them to bid.

#3 Two or more bidders sent proposals for the exact same amount.  If this is the case, the client should be careful to disclose the actual bid amount so all the affected parties know the client is conducting an honest bid.

So how do we apply all of this?

Estimators who find themselves with a client whose revisions seem endless should create an opportunity to speak directly to the client. Emails, faxes, and messages won’t do because there is no control over the narrators tone in our reader’s imagination.  A direct conversation provides nuance that is essential to diplomacy.

It’s been my experience that offering gentle resistance by presenting questions or your own, can disrupt the iterative patterns to reveal the clients motivations.

For example, I called one client who was on their fifth iteration of the bid in as many hours.  When I was on the line with the client, I explained that whenever a client requests so many changes, I assume I’m not getting them what they need.  This little disruption shifted our dynamic from call and response, to collaboration.  From there I could help them to define their problem, along with thresholds for acceptable solutions.  Working within that understanding, I was able to bring everything to conclusion with one final revision.

That’s not to suggest that all clients will respond as well.  I had a similar situation where I tried the same approach.  This client was only interested in breakout pricing to see “who was really low”.  Everything was presented as though the decision was just one unanswered question away, yet it’s just “too close to call” the original bid.  More than one such client, added scope of work in each revision over the span of several days, then called (to avoid written record)  to say they’d like to hire me if only I would do all the extra work for my original price.

Are bid revisions costing you work?

“If you show them where to cut, you won’t like it when they do.”

I’ve also had GC’s as clients who blustered officiously about how it’s their “standard procedure” to  answer even the most perilous questions from a client.  They didn’t care that it was potentially ruinous to the trust of all parties involved.  A question was asked, and it’s their duty to answer it.  It would be difficult to imagine another situation where someone could honestly work so hard to  appear incompetent, dishonest, and lazy to their client. As a sub, it’s not “good optics” to let a GC put your name on their mistakes.  Rookies at the GC level are particularly likely to cause this problem, which is why their subs won’t follow instructions.

Good reputations can take a lifetime to earn, but only a moment to lose.

Estimators inclined towards a more charitable view of their incompetent or dishonest clients should consider how costly a failed project can be.  The people involved can either generate, or ameliorate the projects risk.  Estimators should consider their part in the projects risk.   How did the pricing revisions affect the project risk?  How did the outcome of your efforts compare to your intentions?  If pricing revisions are costing you work, look back on your efforts to identify where you might have taken a different approach.  Estimating is more than measurements and spreadsheets.  Thinking beyond the obvious process reveals opportunities to set your work apart from competitors.

 

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© Anton Takken 2017 all rights reserved

 

 

 


Asking the right questions

Incomplete information is an intrinsic part of the estimators craft.  Decisions on how to handle the risk created by this uncertainty can make or break your  chances of winning a job.  Lacking perfect information, we can still make better decisions by improving our understanding of the problem.  I’ve written before about the Request For Information (RFI) process and how to go about getting plan and specification questions answered.  In this article I’m hoping to expand the scope of our inquiry beyond the questions landing on an Architect’s desk.

Asking the right questions

We try not to question what goes on at the Architects desk…

Who does what?

General Contractors (GC’s) solicit subcontractor (sub) proposals for portions of the project scope according to local traditions, and individual company preferences.  Sometimes there are unfamiliar or unusual products that could plausibly align with multiple trades.  These products are often part of an aesthetically significant element of the overall design.  This means that the oddball thing, needs to be installed with care.  As a GC estimator, this situation presents more questions than answers.  If a product could be installed by several different trades, it probably affects those trades as well.  So even if an affected trade doesn’t furnish or install the item in question, they’ll need to accommodate it in some way.  This trade overlap typically creates a lot of bid-day confusion as everyone is free to interpret the work differently.

Find the rep

Conscientious estimators might start phoning all the subs they can think to ask about the oddball item.  After the inevitable delays, phone-tag, and contradictory information, they might arrive at a consensus.  A better approach is to look up the manufacturer of the item and identify any local resources.  Finding a local representative (rep) for the product is a vital lead because they are often involved in the Architects design process to such an extent that they know exactly what you need.  The material rep can tell you who they’ll quote to and what trades they typically install their products.  Some material reps will freely quote to a GC, while others will only quote to trade-specific subcontractors.  In some cases the material rep will provide a list of  recommended installers.  Once you know who the material rep will work with, you can confidently direct your subs accordingly.  Take care to provide the contact information for the reps’ quote department since that’s who they actually need to reach.  Firms that don’t normally deal with competitive bidding can be bureaucratic and slow about preparing quotes.  Protect your deadline by getting the wheels in motion early on.

Be advised that out-of-state design teams will often work with their own local reps.  I’ve encountered such projects where my area didn’t have an assigned sales representative!   Writing an RFI to the design team asking for their sales rep’s contact information may be the only way to sort things out.

Mushrooms

Be advised that items that appear on Architectural sheets but also apply to an engineering consultant’s work like Civil, Structural, Mechanical, Electrical, or Plumbing should be checked to ensure they’re properly defined on the engineered sheets as well.  Some Architects treat their engineering consultants like mushrooms; kept in the dark, and buried in fertilizer!

Incredibly expensive and hard-to-get items that are dear to the Architect’s heart are often carefully notated just once in an obscure place on the plans.  It’s absolutely the GC estimators job to seek out these “one note traps” and see to it that the affected subs are notified of the sneaky scope items.

Asking the right questions

Be advised that catching a problem may present it’s own challenges…

When does the project start?

The timing of a project can have a huge influence on the bid-day price.  Seasonal rushes or material shortages can raise prices for work that would have cost much less if it started a few weeks later.  During especially busy times, a project opportunity may fail to attract much competition simply because the timing conflicts with previous obligations.

On the surface, it may seem like this information is provided in the Request For Proposal (RFP).  While it’s true that the RFP will typically include an estimated start date for the project, it’s a rare client that actually starts when they say they will.  Of all the information that’s provided to an estimator, the anticipated start date is invariably the least accurate.  In order to improve on this uncertainty, we need to understand what’s driving it.

Architects are often under great pressure to finalize a set of drawings that have been in development for a long time.  Clients rarely understand the magnitude of work required to translate a design scheme into a workable construction set.

Some clients are under pressure to solidify their financing which can depend heavily on providing evidence of competitive pricing, i.e. bidding.  If their loans fall through with one bank, the client will need to repeat the process with another bank which consumes additional time.

It’s important to understand that even though the client and their Architect are under pressure to get the plans out to bid, both parties understand that they’ll have additional time to correct problems before construction. Neither party is entirely sure how long it will take to correct the problems.

Rafter: A group of turkeys

It’s been my experience that clients tend to pair with like-minded design teams.  If the design team managed their time effectively and delivered complete plans by their deadline, the client that hired them will typically have their financial house in order as well.  Conversely, if there are dozens of Addenda overhauling huge aspects of the plan between the RFP and the deadline, the chances are good that the client won’t have funding to build by their anticipated start date.

Savvy estimators should go to the job walk and listen attentively to the Architect and the client.  These people have sunk a lot of time into the project, and they may be easily persuaded to talk about the various challenges they surmounted in the process.  Conversations that start with inquiry about an aesthetic challenge often ramble into how prior design schemes exceeded the clients budget and what they did to correct it.  Estimators should be listening for indicators of how timelines, budgets, and delivery dates align between client and Architect.   You should be especially concerned about any heroic project overhauls that were completed just before the RFP was issued.  Rushing leads to errors whether it was caused by an indecisive client, or an under-performing design team.

Asking the right questions

Last minute heroics; When substandard work picks up speed.

There’s an underlying lack of sincerity behind any group of professionals who are rushing to get the plans out to bid, rather than delivering plans fit to begin construction.   Shoddy plans for projects that “start immediately” are common among clients who don’t have the money to build.

Incomplete information

Estimators are always looking to find an angle to land the job.  Incomplete plans are part of the challenge, which is why estimators are obliged to write a Request For Information (RFI) to get an on-the-record question and answer from the design team.  It’s imperative to understand that the way you ask the question will influence the answer you receive.   Design teams may perceive questions relating to incomplete plans as an indictment of their work.  Engineering consultants are especially given to avoiding accountability via paragraphs of incomprehensible verbiage.  These answers easily create more problems than solutions.

If the issue is obviously resolved into only a few options, the question should be phrased to communicate that the intent is largely clear, and that you think they want to do X, Y, or Z.  Whenever possible, phrase the question to elicit a clear yes or no response.  Estimators can capitalize on this practice by offering insights into why one choice may be superior to another.  Design teams may be unaware of when one option is substantially more expensive than another.

Why is it so expensive?

Estimators will encounter a lot of opportunities to wonder why something is so expensive.  You might think it’s a simple question that people would be willing to answer, but it often leads to miscommunication.  To understand the complexity of this situation, we  need a bit of context.  First off, estimators know that absolutely every number they provide will be remembered and potentially used against them even if it’s a rough approximation.

Sometimes estimators get focused on efforts to root out the overpriced item(s) to get the costs down without considering whether the remaining work is worthwhile to the bidder.  Small scopes of work are often disproportionately expensive because they still require mobilization, management, and operational overhead.

Even when the overpriced item is fairly obvious, there can be concealed relationships that simultaneously drive up the price, and block transparency.  Material reps may be working hand in glove with the design team to prevent competition and enhance profitability. Even if a sub wanted to help a GC to offer a less expensive product, they’d risk supply-chain retaliation on their other work.

Asking the right question

“Baxter expected retaliation, but the waiting was the worst part “

Corruption plays a role wherever there’s a lack of competition, transparency, and accountability.  Honest estimators should carefully consider how they sound lest their inquiries be misinterpreted as an invitation to bid shopping.

The key to getting an honest answer is transparent reciprocity.  For example, let’s say all the millwork proposals are much higher than anticipated on bid day.  The bids have been reviewed and you’re confident that all the bidders have included the correct scope of work.  You know who’s low and by what amount.  Now you want to know what’s driving the price increase for all the millwork bidders.

If you called the apparent low bidder and asked “Can you tell me why your bid is $X amount more than expected?”. The sub may assume that you believe they’ve made a mistake that made them high.  They might also  misinterpret the inquiry as a solicitation for bid shopping.

Transparency

In contrast, if you had said “I’ve reviewed your bid and everything looks spot on, but my estimate was quite a bit off.  Did you notice anything unusual that’s driving the cost of your work?”

By telling the bidder that their proposal appears correct, you’re establishing that they’ve provided a valid price for the scope of work.   Transparency builds trust.

By asking what’s driving the cost, you are addressing causes, not symptoms.  This is important because a high price may be driven by project factors beyond a simple list of parts or assemblies.

Continuing with our example, let’s say the sub explains that this project requires almost twice the amount of laminate compared to a typical project.

Reciprocity

Now that you’re aware of what’s driving the cost, you’d naturally want to see what could be done about it.  This is where reciprocity comes in because you’re asking them for help beyond the original agreement.  Estimates are “free” because the invitation to bid (ITB) promises to fairly award a contract to the lowest complete bidder, and to provide bid results to all others.  Bidders provide free bids in exchange for either a contract award, or information on how to win the next time.

Asking for free consultation work isn’t part of the original deal, so you’ve got to propose a new deal.  This is best achieved by promising to keep their solutions confidential and exclusive.

For example: “If you have any ideas on how we could reduce the costs to win the job, we would keep them confidential with the expectation that we would be dealing exclusively with you on this scope of work.”

Confident they can trust you, the sub explains that the reason for the price hike is due a casework dimension that’s a 1/4″ larger than the middle of one full sheet of laminate. By making the casework 1/4″ smaller in one dimension, a single sheet of laminate would cover twice as much casework, reducing the amount required for the job by half.

Now let’s take a moment to consider how different the answers might have been if we’d demanded a breakout of the expensive items.  The millworker might simply provide a line item cost for the offending laminate.  The GC might have misinterpreted the information to mean that this project used especially expensive laminate.  The GC would then request pricing using a cheaper laminate, only to find it didn’t make much difference to the price.

The millwork sub has to be cautious about what they’re saying because they don’t know how the information will be used, and they certainly don’t want the GC to help their competitors by sharing good ideas.   Plus, the GC’s fixation on simple material swapping ignores the greater leadership role necessary to bring good ideas to fruition.  Convincing a design team to reduce a casework dimension by a 1/4″ to save some money on millwork may be an arduous process.  Lots of thought goes into a design, even if it’s not immediately apparent.  It’s only when the challenges are revealed that you really appreciate how difficult it can be.  Expensive millwork might have been the cheapest solution to a complex problem.

Experienced estimators learn that it’s a rare situation where a value engineering (VE) idea is fully implemented by a design team.  This means that the final project savings will be less than whatever you thought on bid day.  Here again, the savvy estimator will share this insight with their sub when discussing how to present the idea most effectively.  It’s often better to under-promise, and over-deliver when it comes to ideas that require design-team involvement.

Asking the right questions

“Design teams are notoriously difficult to impress”

When will a decision be made?

I’ve lost count of how many times I’ve heard a contractor ask the client or architect when they’ll make a final decision on contract award.  It’s a natural question because an unresolved bid leaves you unable to fully commit your resources to other opportunities.   Clients may not fully appreciate how many of your bids are affected as they take weeks to consider the proposals from a handful of bidders.  As mentioned above, an awful lot of clients are finalizing their funding with banking officials who don’t care a whit about the hundreds (if not thousands)  of companies that are waiting for a decision to come down.

Clients may not realize that each GC that bid to them received  subcontractor bids from several  companies for each trade.  A typical commercial construction bid may attract several hundred subcontractor proposals for each GC that’s bidding.  There will be some subs who bid to more than one GC, but it’s entirely possible for a single bid opportunity to involve thousands of firms in a local market.  Even if there was only two GC’s bidding to the client, the vast majority of the subcontractors will walk away empty-handed.  It’s bad enough losing a bid, but passing up other opportunities to honor your commitment to the client can be a costly choice.  The longer the delay, the more opportunities will be lost.

Timetable

Every proposal should have an expiration date to protect the companies interests.  Clients will often stipulate how many days the proposal must be viable in the RFP.  For example, government projects may require an extensive approval process involving boards that only meet on a monthly basis.  This process can be extensive, so oftentimes the client will conduct an “open bid reading”, where the accepted proposals are opened and read aloud to anyone in attendance.  The “apparent low” bidder is noted, and the apparent high bidders are largely free to consider the opportunity lost.

Baring a client’s stipulation, most firms allow a maximum of thirty days before their proposal expires because the vendors, suppliers, distributors, and material representatives will only honor their quotes for thirty days.

Thirty days may not sound like much, but consider that it’s 1/12th or 8.3% of a year.  Many markets have seasonal rushes which define most of the revenue for the entire year.  The bidding for over 90% of a firm’s  annual revenue may occur in the span of 90 days.  This means that dithering clients can create a disastrous situation where they finally tell you that you lost, right after they’ve cost you every opportunity to win replacement work!

Commitment and reciprocity

The key to getting faster response from a client is to ask for a decision based on commitment and reciprocity.  Clients want their project to be successful and they’re particularly concerned about hiring a contractor who is committed to the job.  Explaining to the client that you have committed resources to make their project successful, leads them to understand why they owe you reciprocity in terms of a decision.  If you’re not “in the hunt” (low bidder)  the client can easily let you (and your bidders) get on to other opportunities.  If you’re their low bidder, you may be re-assured of where the process is headed.  Clients may be so hung up on the formality of their contract that they forget that most of the bidders just need to know they lost.

As with almost everything in management, time that’s passed, is opportunity lost.  If you’re not timely and serious about getting answers from a dithering client, there’s little chance of the project becoming successful.  Making the right decision on bid day can determine whether you win or you lose.  The next time you’re looking to answer a common problem, make sure you’re asking the right question.

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© Anton Takken 2016 all rights reserved

 


A Modest Suggestion to Improve Budget Checks

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

A Modest Suggestion to Improve Budget Checks

You’ve got to enjoy those victories

The Architect knows more than they’re letting on

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

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

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

Inflection point

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

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

A Modest Suggestion to Improve Budget Checks

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

Playing dumb is a costly game

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

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

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

A modest solution

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

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

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

A Modest Suggestion to Improve Budget Checks

Efforts to improve engineering transparency are ongoing…

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

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

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

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

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

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

A Modest Suggestion to Improve Budget Checks

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

What would need to change

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

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

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

Likely resistance

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

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

A Modest Suggestion to Improve Budget Checks

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

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

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

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

Likely blow-back

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

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

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

A Modest Suggestion to Improve Budget Checks

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

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

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

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

Final thoughts

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

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

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

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© Anton Takken 2016 all rights reserved