Curing the at 'any price' syndrome
If you ignore the myriad hidden costs in job estimation, you may get the contract, but you could be headed for a financial disaster down the road.
How many would-be profitable contractors have we seen go bust due to the compulsive drive to win a job at any price? Year after year, we witness still more contractors committing economic suicide by driving the dollar down. Here's how to avoid the problem.
1. Don't skimp on labor costs.
The Achilles heel of this industry is the contractor's defense of, "If I allowed for all items of direct job expenses, I would never win a job." No matter what the job, material will be used, and any tradesman worth his salt should be able to count and measure the required quantity.
There is no secret formula or magic gesture that will gather these quantities, other than physically counting every item of material and measuring each lineal length of conduit, cable, ducts, bus bar, etc. The skill is to apportion a realistic labor allocation to all material items. Remember, there is no material in existence that installs itself.
2. Ask the hard questions sooner rather than later.
Many factors contribute to omissions that lead to underestimation, the most common being contractor neglect in reviewing the scope and special or technical conditions of the specification, and in reviewing the contract documents generally. Many special conditions have brought contractors undone because they have not understood or have ignored specified standards. Some of these standards have only one or two lines devoted to them in the specification, and yet can be the difference between a profitable job and financial ruin.
It is usually the estimator's responsibility to ascertain the viability of the project and apply the company's guidelines as to whether or not to submit a bid. A well-organized estimator uses a checklist of questions in making the initial assessment. These include:
- Do we want this project?
- Can we finance it?
- Is the location within our scope of travel?
- Do we have the expertise?
- Do we have the tools and/or equipment?
- Can we handle the volume in time?
- Are the terms of the contract acceptable?
- Do we know the client's, builder's, or developer's payment performance?
Too many contractors in the industry have a Superman ego ("I can do anything"), but if they cannot answer this checklist in the affirmative, it could result in financial disaster. Make sure you know your company's limitations.
3. The devil is in the detail.
The next factor leading to underestimation is the reluctance to mark points that need clarification (Who supplies what? What is the extent of 'make good'?), and noting the "big money" items.
Many estimators spend an inordinate amount of time taking off small money items and congratulating themselves that they found the odd power outlet that was partly hidden under the stairs, then giving scant attention to the method of installation of the mains, sub-mains, switchboards and specialized equipment. Special attention should be paid to those tasks requiring specialized skills (high-voltage glove and barrier connections, fiber-optic terminations, etc.), and specialized equipment such as cranes, winches, hydraulic crimping tools, excavation equipment, and testing instruments.
4. Factor in all time costs.
Many contractors also tend to allow insufficient time to get the labor to the work site. For example, walking time is the time taken for workers to move from the site shed to the appropriate floor on a multi-story building, or to the actual work area on a large industrial or commercial site. While it may take the same amount of time to fit off a GPO on the 35th floor as it does at ground level, the lost time in reaching the distant site and returning is considerable.
Security checkpoints are present at many industrial and government buildings, and can be time-consuming to negotiate. These sites often have a check-in to enter the site, as well as one when leaving. Some sites have even further security access to areas within buildings. It has been known for a contractor to rack up two or three hours per day in these non-productive activities.
Travel time is often ignored when outside the "normal" radius from the company's office. Usually, the cost of travel is taken into consideration, but often, the non-productive time spent in-transit is forgotten. Site induction is required on most large building projects today, and it is mandatory that all site personnel attend these sessions, including new personnel arriving on-site during the project.
Supervision is a sizeable and often underestimated time/labor cost. It is naïve to believe that all supervision is covered by the overheads. Depending on the type of project, supervisory time is required not only to organize labor teams and handle personnel issues, but to liaise with other trades, chase as-built drawings, control variations, attend meetings (site and coordination), and commission—all of which can be time-consuming events.
5. More costs to factor in.
Plant and equipment is another cost area where it is easy to omit adequate rates for plant and equipment hire (scaffolding, scissor lifts, site sheds, shortage facilities, cranes, forklifts, etc.)—especially minimum hire, travel, set-up, and dismantling costs. Contractors have made considerable losses when they have not scheduled a plant and equipment usage program, which has resulted in equipment hire rates being paid while the equipment stands idle.
Substantial time can be lost checking material on delivery, storage, and transfer to the workplace. Clean-up and builders' charges are not to be forgotten. Every job has clean-up time to be factored in, and must include an allowance in the estimate for this work. On many projects, the builder or project manager will apportion the cost of the total site clean-up to all subcontractors.
No surprises on the bottom line
Winning a tender is easy, but ignoring the costs to win the job at any cost is a sure recipe for financial disaster. You cannot sell right unless you buy right. Buying right means knowing your costs.
Remember, there is a lot more to address than just the labor and material. All estimates must include all costs, irrespective of the competitive environment. Estimators who choose to ignore these costs in order to "meet the market" are only kidding themselves.
It is up to the contractor/proprietor to establish the selling price based on an estimate derived through sound estimating practice to enable the project to be completed with a positive financial outcome.
Brian Seymour, MBE, has been training estimators in Australia's electrical/cabling contracting industry for more than 30 years. This article first appeared in the August/September 2002 issue of our sister publication, Cabling Installation & Maintenance Australia-New Zealand.