The Art of Realistic and Accurate Estimating
As a small business owner, I struggle with quoting prices and scheduling. I end up over promising to the customer, stressing out my people and hurting the bottom line. I underestimate the work involved. That puts pressure on my employees to deliver within an unrealistic time frame. The cost to produce is higher than expected while I under price the job. How do I stop this from happening? I need to get a handle on more accurate estimating.
Thoughts of the Day: Get a handle on the size, frequency and type of cost overruns. Develop a process for estimating that includes operations sign offs. Whenever there’s a discrepancy between what the customer was promised and what really happened hold plus delta meetings to document what went wrong. Recognize that owners can often be people pleasers and that customers can work that lever to their advantage.
Identify any root causes that are causing your estimating errors.
Look for root causes to your problems.
- Are there errors in estimating due to price changes, incorrect inputs, things being left out?
- How about discrepancies between what was quoted and customer expectations for quality or quantity?
- What happens when jobs are rushed?
Some commodities and vended out services can change rapidly in price. Publish a list of price sensitive materials and subcontractors. Tell customers that prices for these items will be adjusted or confirmed once the order is placed.
Get organized for each job and make sure you’re communicating throughout.
Make a detailed material list, work plan and budget for each job. Review with operations before committing to the customer. Ask employees to challenge you if there’s a possibility of cost overruns or delayed delivery. Before proceeding notify the customer and negotiate a solution.
When communicating with customers:
- Put everything in writing.
- Specify quality, quantity and due dates.
- Get operations in agreement before sending anything to customers.
- Make sure customers review and approve everything in writing.
Have a process map from sale to production to deliver, but keep enough flexibility for last minute changes.
Make room for rush work. Ask production to under-schedule, so they can insert rush requests without disturbing other orders. Negotiate schedule changes with production staff before making delivery commitments to clients. Create process maps for everything. Document materials, time and workforce required to produce. Turn those into standard estimating forms, which can be used to create realistic budgets.
As soon as the contract or PO is signed, purchase all price sensitive items. If there are a lot of price sensitive items, ask customers for upfront payment to hold prices. This way you can order materials immediately without dipping into cash flow.
Plus/Delta meetings can help debrief with the team.
Use “plus/delta” review meetings to discuss what happened with all jobs deemed “out of bounds”.
- Carefully debrief jobs that are less profitable or take longer than promised.
- Make notes on what went right (the “plus”) and what went wrong (the “delta”).
- Incorporate the delta notes into selling and production improvements to reduce or eliminate the chance they’ll occur again.
Sometimes mistakes happen, be sure to figure out why and how to adjust moving forward.
If you do run into problems while in production, ask employees to notify you immediately. Know who at the customer to contact and call immediately to work out specifics of what will happen next. Be honest and be prepared to negotiate a solution that will work for both you and the customer.
Sometimes production makes an error. They misunderstood what was expected, or didn’t follow instructions. Your company should deal with the problem, don’t push that back to the customer.
Balance building relationships with clients and protecting your company and team.
Recognize that clients with last minute requests may be very persuasive. Saying, “yes”, without being able to meet their demands will only serve to wreck the relationship when it comes time to deliver and you’re behind schedule or over budget. If the owner is a soft touch who gives away too much, put someone else in the middle between company and client. Pick a designated “tough guy” to hammer out contract details, prices and delivery schedules.
Looking for a good book? Predicting the Unpredictable: Pragmatic Approaches to Estimating Cost or Schedule, by Johanna Rothman.