Shawn McCadden is a leading remodeling industry expert on the topic of Design/Build. He was the owner of his own multi-million-dollar design/build remodeling business; Custom Contracting, Inc., in Arlington, Massachusetts, incorporated in 1991. Accomplishing his original business goals and his written business plan, his business was employee managed by 1996 and he successfully sold his business in May 2004.
In the article below Shawn shares some insight about how design/builders and remodelers can get more out of their estimating system in they think strategically about estimating.
Don’t Underestimate Your Estimating System’s Potential
Knowing what to charge clients for the work you do is often the difference between long term success and eventual failure for the business. Many contractors look at estimating simply as a way to determine the cost of a project. In the traditional design-bid model of project delivery, this simplistic approach may work, assuming your sell price generates enough gross profit to cover your overhead and profit requirements. However, if you’re doing design/build, and your current estimating system is limited to only producing the number you charge clients for a project, you may be missing out on many other possible benefits.
First a few assumptions
By gathering the material, labor, equipment and subcontractor costs of a project, contractors determine the direct cost of a project and then use a markup amount to determine the sell price for a project. For the sake of this discussion we must also assume that the contractor has created a business budget. By knowing or predicting the costs of being in business for a predicted sales volume and adding in a net profit requirement, the contractor can determine burdened labor costs and know the company’s markup requirement over and above direct costs. We must also assume the estimator knows how to estimate and has experience estimating the kind of work the company produces. If you think of Design/Build as a way of doing business, your estimating system must become a tool that facilitates how you do business, not just a way to get to the price.
Ease of use is important
A design/builder’s estimating system should be fast and easy to use. Typically, the yellow pad and calculator method does not apply here. A computerized system should be used that allows the estimator to concentrate on estimating, not adding up numbers over and over again to gain or confirm confidence in the end result. The system should also allow for on the spot “what-if” adjustments. The estimator must be able to quickly estimate the effects of any changes or suggested alternatives to the project during design. By having this ability, the client’s decisions during design are better qualified by simultaneously knowing the financial impacts of those decisions.
Estimating must be accurate and adequately detailed
To increase accuracy, estimating should be done so it is comparable to the company’s job costing system. Information within the estimate, and job costing, should be broken down to a level of detail that allows the insight you need to make future estimating adjustments. For example; it may be beneficial to estimate each component of an addition frame as a separate and comparable item, rather than look at the entire frame as one line item. Estimating in one computer program then job costing in another may become cumbersome, or may not work at all. Accounting programs will often allow job costing, but not estimating. Typically, after a project is sold, a summary of estimating information is entered into the accounting package as a budget for purposes of job cost comparison. This limitation does not allow for fast estimating or what-if adjustments. Also, it may not be easy, secure or wise to allow the estimator access to the company’s accounting information.
Think about output before you do input
The formatting of each individual estimate, as well as the overall estimating system format, may be the most important consideration. How information is entered into the estimate can limit or expand how it can be used or who uses it. Strive for a format that allows the information created by the estimator to be shared throughout the company. If you build your estimate the same way you build the project, step by step, you can create a critical path for how the project will be produced. This can be a huge benefit to your production supervisor and/or the project lead carpenter. A predefined path, showing labor and material breakdowns, allows your team to predict and schedule resources including subs, material lists, material lead times, just on time material deliveries, and overall labor requirements. If done correctly, you can also use individual project information to create one master schedule for all company projects and resources. You will know when you need which employee or sub, depending on skills or abilities, and identify schedule conflicts or shortfalls before they occur. This critical path can also help identify cash flow needs during the project while assisting in generating payment schedules.
Separate costs and quantities
Another formatting consideration is how you break apart the information for each line item inside your estimate. Rather than enter lump sum amounts for materials and or labor, such as total cost of wall studs or total cost of flooring and installation, separate the costs and and the quantities. By formatting your information in this way you can quickly apply what-if options for material substitutions, changes in room size, and or additional labor considerations for any changes. This also facilitates quick pricing updates when a client calls back two years later and wants to go ahead with the project. There's no need to redo the entire estimate because you’re not sure how the lump sums were determined, just check for pricing changes as the quantity will likely still be the same.
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There are some extra benefits for Design/Builders
Estimating in this way does involve more time for the estimator. If you are bidding on projects this extra time can add up. If you are really doing design/build, you are typically only estimating projects that you know you will be building. Having the estimator create this information at the same time he or she determines a sell price eliminates duplication of effort, reduces miscommunication and saves a lot of time for the people who will ultimately use the information.