Construction estimating important missed costs

The estimating department plays a vital role in the construction industry. 

It is responsible for accurately assessing and calculating project costs. Understanding these costs, especially the less obvious ones known as indirect costs, is crucial for successful project management and overall company financial health.

While direct costs like labor and materials are more obvious, indirect costs involve expenses such as permits, insurance, overhead, additional nonproductive equipment, and labor. Neglecting to fully understand and account for these indirect costs can have significant consequences. Leading to financial difficulties, project delays, and even failure. Therefore, it is essential to recognize the importance of the estimating department's role in thoroughly understanding all costs associated with a construction project.

Over the past 20 years, I’ve talked with many contractors who self-perform work. One of their top complaints and questions is why profits run away from them as they approach the back end of their projects. Aside from project management flaws, this article will discuss construction estimating important missed costs that result in reduced project profits

First and foremost, every contractor should be using estimating software. By using bidding software, you’ll have increased efficiency, more accurate estimates, improved collaboration. In addition, multiple estimators can work on the same bid at the same time, enhanced reporting to cross-check your numbers, and better integration with other estimating software. Running reports is a powerful tool and will be explained further below.

Fully understand your overhead costs.

 If you’re a contractor who self-performs your work then you’ll need to determine what trades, equipment, and necessary project costs will need to be carried out for the life of the project. For example, if you’re running a 12-month project which has both self-perform and subcontract work, you know you’ll need certain trades and equipment for the FULL duration of the 12-month project. For example, a labor foreman who will be productive on some days but babysitting subs on others.  An equipment operator with a piece of equipment who’ll be productive some days, but on others will offload deliveries and/or support subs and not be productive all day.  By running a report you’ll determine and differentiate how many of the above examples are already worked into your items then add or even subtract (if too many hours) from your bid.  I’ve won many bids because I had too much labor and was able to take some cost out but on the flip side, I’ve had to add tens of thousands because I was too short on hours for trades and equipment.

Assigning budgets for labor loss time, holidays, and punch lists.  These are costs that every single project will have. However, I’m amazed at how few contractors account for this in their bids. Bad weather, labor-paid holidays, vacation, and the inevitable punch list are all costs that should have a budget too and if not, they will eat up your cash flow and profits. This will first require thought and possibly getting your CPA involved. It’s not an exact science but assign a few cents per bid dollar to labor lost time and then punch list.  These costs will add up to tens of thousands of dollars on a multi-million dollar bid and are critical construction estimating missed costs

Equipment forecasting.

This is especially important for contractors who self-perform work and have higher equipment needs. Differentiate which equipment should be bought, leased, or rented. With the changing tax laws, purchasing may not be the best option so do your homework. Stay on top of your equipment and monitor frequently. You don’t want to find out you have an expensive piece of rented equipment sitting in your yard collecting dust for 6 months!

Using historical data for construction estimating is a powerful tool because it provides valuable insights into past projects, allowing contractors to make more accurate cost estimations.  However, relying solely on historical data can be destructive to profits if it is not properly analyzed and adjusted for current market conditions. Construction costs, material prices, and labor rates can fluctuate over time, and failing to consider these changes can result in underestimating or overestimating costs. Additionally, if historical data is based on projects that had significant cost overruns or unforeseen challenges, using it without appropriate adjustments can lead to repeating the same mistakes, ultimately impacting profitability. I’ve seen many project management staff fudge numbers so they looked better for the office to review and then these incorrect numbers were used for bids, resulting in the loss of profits.

Now I know what you are saying, if I keep adding more costs I’ll never win work. I know today’s market is more competitive than ever. However would you rather get less work that’s more profitable and allows you to run a tighter operation with more cash flow or a company with less cash flow and inconsistent profitability on projects?

With the influx of infrastructure spending now is an excellent opportunity to enhance operational inefficiencies and increase project success rates for sustainable results. Using the traditional 10% overhead without additional thought can and will burn your profits. By addressing these issues at an early stage, you can set yourself up for success in the long run