Estimating residential construction projects is a combination of art and science.
That is to say, estimating is not just about the numbers on a computer screen, there is a lot more to it than that.
Experience can be the difference between making a double-digit net profit at the end of the job, or losing money and effectively working for free. Which is why good estimators are in such high demand. Because a good estimator will protect a building company's downside.
Your estimates may not win you the job if you find yourself competing on price in a tender process. However, when you sign a contract, you won’t have that instant feeling of dread wondering what you’ve forgotten to include in the contract!
So here are five tips that will help you to estimate your projects more accurately and avoid missing items that will destroy your net profit.
1 - Visit The Site
This is where art really comes into estimating.
Site access can make a big difference to the timeline of a project which impacts the cost.
Challenges and restrictions will not always be apparent when looking at a plan from the comfort of an office, so if the estimator cannot physically visit the site, they will need to be briefed by someone who has, ideally the project manager but definitely not the salesperson!
While you are onsite, take the opportunity to assess the neighbours. A difficult or belligerent neighbour can be a red flag if you are quoting a high-end architecturally designed home that will run for a year or more.
You may not turn down a project because of the neighbours, but you want to factor in the cost of dealing with their inevitable complaints and requests!
2 - Create A Timeline
Again, estimating is not just about the materials and labour that go into a project. It’s also the amount of fixed expenses that need to be allocated to the job.
If your building company is managing six projects at a time and each project runs on average for 24 weeks, then your capacity is twelve jobs a year. Therefore when you divide your fixed costs by twelve and add that amount to a project, that will be your break even point.
So, when you price a larger job that will take 36 weeks rather than 24, you will need to budget a larger figure to cover your fixed expenses.
It sounds obvious but a lot of builders tend to do the opposite. They actually reduce their margin on the bigger jobs because when they see a larger contract value they focus on the dollar value. This is why builders who do not create an estimated timeline when pricing their jobs end up with margin erosion which means their accounts never deliver the amount of profit they were expecting from their jobs.
3 - Use Estimating Software
According to research by Ray Panko, a professor from the University of Hawaii, 88% of spreadsheets contain errors.
So with those kinds of statistics, why would you risk signing a half million dollar contract when there is a good chance you have probably missed something in your costs?
It’s easily done, and we see it all the time. Even so, a survey by the Association of Professional Builders of over 1,000 builders revealed that less than 25% of building companies are using dedicated estimating software.
Take-off software can fast-track the measuring process while estimating software can manage up-to-date supplier pricing which reduces the chances of missing a price increase.
4 - Create A Checklist
Create a process and then follow your process. When you do that there is less chance of missing something. And when you do miss something, which will happen, add it to your checklist so that it never gets forgotten again.
Checklists are the hallmark of systemised businesses, and the fact is, estimating residential projects can be complex. Your first checklist should include your cost centres. A blank cost centre is a warning sign that an item may have been missed.
However, estimating is not all science, it’s sometimes a form of art. So make sure you have cost centres that apply to those components as well. For instance, restricted site access will require additional time to be factored in to receive deliveries. A difficult or belligerent neighbour will require time allocated to deal with their inevitable complaints. A vulnerable site may need a contingency for shrinkage which is a nice way of saying theft.
All of these factors will increase your estimate and could reduce your chances of winning a job... But, would you really want to win those jobs without first protecting your margins?
5 - Create A Feedback Loop
To improve the accuracy of your estimating you need a feedback loop that ensures that lessons learned on your most recent project are factored into all of your future projects. So once a project has been handed over, set up a post-project debrief that involves the estimator and the project manager.
The two things you will be studying are timeline and budget.
In terms of timeline, compare the actual timeline to the project baseline and dig into any deviations. If time was made up with certain trades, can that standard continue? If it can, then by reducing the time allocated for that trade on future jobs your estimate becomes a little more competitive.
If certain trades are exceeding the amount of time allocated then ask yourself, do you need to allocate more time or do you need to be looking for alternative subcontractors?
It’s the same with the budget. Look at which cost centres blew out and which ones came in under budget. And, are those numbers likely to be repeated in the future?
Increasing your accuracy through feedback loops will give you a far greater degree of confidence in your building company's ability to deliver profit year on year. However, you do need to resist the temptation to overestimate or leave high allowances in place for future projects as a bit of insurance.
Because all that will happen when you do this is, you’ll compromise your net margin. And that’s because you think you’ll be able to make it up on the cost centres and then the whole exercise becomes complete guesswork.
Better information leads to better decisions so get your costs as accurate as can be, and factor in your risks such as inflation, difficult sites and difficult clients!
When you do that, you’ll win the jobs that are worth winning and leave the rest for the average builders who are more than happy to compete on price.
If you’d like to discover some more tips for running a residential building company, check out our latest book, Professional Builders Secrets.
Inside you’ll discover how to generate more quality leads and convert more of those leads into sales at higher margins while improving the client experience.
Click on the special link below to receive your free copy.