In Part I, we discussed how the estimating process begins with a comprehensive understanding of your project's scope of work and knowledgeable and well-trained estimators following solid processes and procedures that must be implemented in your Estimating Department.
In this segment, we will cover how to gather your costs, properly mark up your estimate, and develop a trustworthy review process.
Every item in your estimate must contain an associated cost. That's a lot of cost pricing to get together. It is advantageous to identify them one at a time. There are many sources for you to obtain reliable costs.
Historical Data from Your Previous Projects and Estimates
One of the best sources to look for cost data is your last job, provided the estimate for your previous project was accurate. Historical cost data should be used cautiously. Changes in prices and labor production efficiency may have substantial impacts on project costs.
A good practice is to obtain a quote from two or more vendor sources. You will achieve a better understanding of the overall going market rate for items in your estimate. You do not want to lose your advantage if you use only one supplier quote and lose a job because your competition had better pricing from supplier "B."
Subcontractors' quotes for specialized work on your project that you don't perform in-house is a great way to lock down costs for that scope of work. Whenever possible, obtain your quotes from a subcontractor you have worked with previously and have a mutually beneficial relationship with.
Published Cost Data
Although I am not a fan of randomly using cost data from third-party sources, they do have their use in estimating. Cost databases are well researched and maintained by professional cost engineers experienced in the industry. If you are unable to obtain a qualified subcontractor or supplier quote, you can rely on these sources for average itemized costs when needed.
Organizing Your Data
During this stage of the estimate, you have a large amount of data, and all that information must be assembled, organized, and analyzed. That's a lot of information to get one's arms around. You need to put a system in place to handle it all efficiently. Remember, the goal is to transfer everything from the takeoff to your cost summary once, without reworking.
Once you completed the pricing of direct costs and reviewed your pricing on the cost analysis or consolidated estimate document, you are ready to transfer total costs for each section of your estimate to the Estimate Summary, where you add your markups. During this process, be sure to double-check your steps, for the reason that errors are easy to make.
It is a good practice to create a standard Estimate Summary document that lists items repeatedly estimated to save time. Your column headings or categories for your Estimate
You are now at the point of the process where you apply the appropriate markups to the total dollar values. In general, different percentages are added to the sum of each column to account for indirect costs, including:
Stage 4 - Establish an Estimating Review Process
The primary purpose of an estimate review process is to present information about the estimate and the project in such a way that it allows the reviewer to evaluate the quality of the estimate to verify it sufficiently meets its intended purpose. The review process should comprise of a series of estimate reviews, starting with internal estimating department reviews, and project manager reviews, with final reviews by management or ownership depending on the structure of your organization.
Estimating Team/Estimating Department Review
The first review of the estimate should be conducted by the estimator that prepared the cost estimate. This is essential screening to ensure that the math is correct and that the estimate is documented correctly and adheres to estimating department guidelines. In the next stage of the review, it is checked by the lead or head estimator for accuracy and compliance.
Project Manager Review
Once the estimating team has reviewed the estimate closely, it is ready for review by the project manager. The objective now is to gain the project manager's support of the estimate. This is also the first point where the estimate needs to pass an overall validation test, as well as a quality review.
The project manager should also review the risk basis of the estimate and agree with the analysis of cost risk associated with the project and should agree with the risk assessment provided by the estimating team. The project manager and estimator must be able to defend it in subsequent review to upper or corporate management.
Lastly, the project manager should reconcile the current estimate to previous successful estimates of similar projects. This is an important aspect of the overall estimate review process but is often overlooked.
The company management or ownership conducts the last series of reviews. These reviews are conducted at a very high level of analysis and usually do not involve the details of the estimate. Management will be interested in the cost risk assessment. The estimator should be able to clearly and concisely explain how the contingency amount was developed, and what the levels of risk are. It is the responsibility of management to accept the level of risk indicated or change the amount of contingency and accept more or less risk for the project. When reviewing the risk analysis, it is always important to discuss the areas of high risk and how to mitigate those risks.
The goal of an estimate is to predict the cost of a project accurately. The purpose of an estimate review is to determine that an accurate and high-quality estimate has been prepared. The review process should ensure that the proper estimating methods, procedures, techniques, data, and guidelines have been engaged in the preparation of the estimate. By using a structured estimate review process and review techniques, you are ensuring that quality estimates are consistently prepared, which effectively supports the decision-making process by management.
Part III, we will discover how to calculate gross profit and develop a winning selling strategy.