How To Estimate Construction Jobs To Protect Profits
busybusy team | March 27, 2018
The modern construction industry offers contractors many opportunities and many challenges. These are often presented as two sides of the same coin. For example, improved building materials evolve with advances in science, fabrication methods, and assembly techniques. However, in order to take advantage of these improvements, a business may have to invest in re-training, re-tooling and, possibly, new equipment.
Most new opportunities carry some up-front cost challenges that must be overcome. Contractors have to constantly navigate this evolutionary process and try to stay near the top of the food chain. It helps to have a simple business model that offers an easy-to-use set of benchmarks to measure progress toward financial targets. One such model is the “Construction Project Cycle”, what we call the Construction Triangle.
The Construction Triangle:
Tracking the construction project cycle
The Construction Triangle breaks down the complexity of construction projects into 3 main phases of profitable production: estimate, execute, and evaluate. These phases form a continuous loop where each phase relies on the accuracy of the data supplied by the previous phase. Because of the effectiveness of the Construction Triangle model in projecting and tracking profit and loss, it’s worthwhile to examine the estimate side of the triangle in greater detail.
Accurate estimates drive predictable profits
In this first step, we can break down the process of taking control of information about cost and revenue variables. Control of these variables generates more consistent profits, by improving the quality and reliability of the estimates that make up bids and quotes.
There is a ton of literature on the subject of winning construction bids. Some of it contains good advice for owners and operators, and some not so much. Our focus here is on identifying useful ways to approach the estimating and bidding process so you don’t waste time or money preparing for bids that don’t really have a chance to convert, or that won’t really generate a profit.
Start with a basic business plan
Think of the estimate as a basic business plan. The more focused you can be in this planning, the more convincing you can be in coming up with solutions that meet a particular market need. For example, at least when starting out, you’ll be more in control of a business that specializes in only framing new homes, or just doing renovations and additions, or building decks, sheds, and fencing.
Out of each specialization, a different set of data will drive the costs and revenues. In terms of equipment, materials, and technical training needed to produce fast, consistent quality results, each sub trade or specialty will show major variations. Knowledge and control of the actual values of those results will be made profitable, or not, by the data that gets used in estimating the required revenue.
Translate price into promise
This specialized data gives a stronger bargaining position when bid presentation and negotiation comes into play. You look more like an expert when you know a lot about your “one big thing.” When focusing on one area of strength, there will be a specific combination and sequence of activities that remains fairly consistent from job to job.
A familiar range of variables from job to job will be much easier to price accurately, and to present confidently as a solid promise to the customer. Agreements that protect profits - change work orders, tracking and evaluating subs on site, clarity of customer obligations, clear communications - fit naturally into a value presentation that covers all bases thoroughly.
It’s the kind of quality that most customers expect and appreciate, and are willing to pay for. Those who buy on price alone are the ones you usually want to avoid anyway, to help protect your profits as well as the quality of your work, and your reputation.
Identify the key profit pivots
The time of the people on the job, the necessary equipment, fuel, and operators, these are all factors in evaluating the time variable. Make sure profits don’t slip through cracks on the jobsite, due to customer requests, change orders, or other unscheduled work. The same with unplanned work stoppages that idle equipment and personnel. These will alter the time valuations laid out in the estimates.
Employees need to manage and document all such activities so the data automatically updates the project file. Invoicing needs to account for any off-plan work that gets done, and future estimates need to discount the value of the same extra work.
Adopt available technology solutions
Obviously, trying to manage the necessary data using paper logs and time cards is no longer a practical option. Not only does paper cost more in time, errors, and labor duplications just to keep track of payroll hours, it is unsuited to the collection and analysis of information in real time.
The timing of specific activities, and their associated costs and target revenues, are the building blocks for project updates as well as for the next estimate on a similar job. Good planning requires good time keeping. Fortunately, there’s a simple solution to meet that need.
The busybusy mobile app offers full integration with business intelligence analytics. So simple for recording a full slate of time clock, GPS, and activity-based data, it allows for instant implementation and intuitive click-through operations. And yet it’s powerful enough to provide immediate results in reducing costs for invoicing and accounting, improved cash flows, and remote project management capability.
Activity based costing provides a steady stream of updates to the information and plan details spelled out in the estimate. All the actual data becomes part of the project record, available for detailed analysis during and after the project, as needed. This includes photos, notes, receipts, digital signatures, location mapping, and much more.
An estimate is a commitment to profit
The building plans and drawings will be detailed and specific, with a quantity or a value for every variable. A contractor’s ability to control these variables defines the margin for profit. Control of variables is achieved through a combination of:
- high-performance supervision.
- consistent material and supply management.
- crew experience, training, and techniques.
- machinery, tools, and equipment.
These allow a contractor to set competitive prices, execute optimized work flows, and extract operating margins that include a healthy profit.
Every business owner likely has their bottom-line numbers in mind all the time. The trouble is, those are not the numbers that matter. It’s the many small steps leading to those end results that make all the difference.
The small steps are the variables that can be managed to control how the bottom-line numbers turn out. The solution is to have detailed business intelligence produced by tracking the value of those small steps. Having the data for analysis makes the accuracy of estimates and project plans more reliable. That leads to better project management using the Construction Triangle method, and better financial results in the end.
Data-driven defense of profits
By following these data-driven steps to accurate estimating and project planning, your contracting business will be able to stay at the leading edge of the construction industry, no matter how fast and far things change. You’ll be able to turn a consistent profit, deliver a quality product, and maintain a healthy growth profile, in any market conditions.