My partner is bogged down with estimates. Sometimes we spend too much time estimating and the payoff is low; but without a detailed estimate, we don’t really know the job cost and what to quote to a customer so we can make a profit. We need to focus on getting more sales, and my partner usually plays a big role in generating leads. I’m worried that the quoting effort will bog us down as we pursue more sales.
Thoughts of the Day: Having a rigorous, efficient way to estimate the cost of doing business is an essential business function. Form a team to work on estimating. Consider alternatives to a laborious upfront approach to estimating.
Build the foundation
for a pricing model by reading up on when and why different approaches to estimating get used. Figure out what makes the most sense for your business.
Knowing how accurate an estimate is, as compared to the actual outcome, will help with appropriately pricing future client proposals. Reduce risk by looking at similar completed projects.
Base assumptions on history by tracking the material and labor needed to perform specific tasks.
Add up all direct costs, including subcontractor fees if applicable, tied to a specific type of project. Figure out the amount of downtime / hour of uptime – how much time off / hour worked for each labor group – and build a formula to add that in. Assign specific labor groups and related costs to specific types of work. Create standard calculations for the amount of material that gets wasted per task or per project, keeping in mind that some projects may have greater amounts of waste, and some less. Come up with a formula for allocating overhead expenses to projects.
Create a formula to calculate the desired amount of profit and a slush fund for contingencies. Price in extra dollars in case something goes wrong based on history. If there is no history, price in extra dollars for the learning curve.
For new proposals, use the selling process to gather information needed to build an accurate estimate.
Make information easier to share by asking your sales team to document each prospect’s needs, concerns, approach to budget, etc. using a standard form. In addition to the time needed to put together an estimate, plan in time for the estimator to review the sales notes, ask questions, gather additional information, and test assumptions with the prospect.
Build a new estimating model and then test it by using it to price similar types of completed jobs. Focus on jobs where your company has successfully and profitably performed similar work, with a similar client, under similar conditions.
Teach other people to use the new estimating system. Use the notes from sales, marked up labor and material costs and formula for profit and contingency funds as inputs to build new estimates.
The goal of estimating is to, as much as possible, reduce uncertainty, while recognizing that some degree of uncertainty is inherent. Know when good enough is just that, good enough, and use that approach to simplify the estimating process. Move the owner from estimator to reviewer of others’ estimates. Convert the owner’s freed-up time to helping get and close more sales.
Especially when the project implementation goes on for more than a day or two, one estimate may not be the right approach. Consider simpler estimates to start, re-viewing and re-pricing at regular intervals as the project unfolds. Bring together people from the shop floor, inventory management, and sales to debate the best approach to staying within budget. Use change orders to document additions to the original estimate based on handling subsequent client requests.
Use your evolving estimating system to debate different types of clients and work. Always be willing to ask, should we take on that work, that client? Is there enough margin to cover our risk and allow us to make a profit?