New year’s reprieve
2019 is here, so what are you doing to ensure you are more successful this year than last? Brian Seymour outlines the process every estimator needs to undertake today to ensure your company is around tomorrow.
It is at this time of the year that your estimating department (whether it is one person or a large team) really should be reviewing your company’s past year’s projects to determine the direction you should take into the future.
A decision also needs to be made as to which projects your company will bid for or decline as well as which projects are achievable, based on the tendering period, the resources required or the potential risks involved.
This review should carefully analyse your previous year of estimating and the following questions should be considered:
- How many jobs did you estimate? Did you pick up everything you could lay your hands on or were you selective in picking only the jobs that would suit your company and expertise?
- What type of jobs did you estimate? Were you selective in the type of jobs for which you have the people, the expertise and the plant and equipment to successfully complete it on time?
- What size were the successful jobs? What are your limitations on the size regarding your financial circumstances, number of employees, plant and equipment, and location?
- Did you do a risk assessment? Have you evaluated potential problems ahead of time to develop strategies to limit them (see more below) and set weighting criteria?
- How many successes did you have? Are you winning an exceptionally high number of tenders because you are pricing below the industry average or are you one of the few experts in this type of work and have limited opposition?
- How many were lost? Is there an industry downturn and all your competitors are lodging cutthroat tenders or are you are you competing in a sector in which you do not have the resources or the knowhow?
- Is your estimating system up-to-date? Do you need to make changes or update your estimating system whether it is a manual or computer-based system? Is it coping with your current estimating requirements?
- What changes will you make for the next year? Based on the above questions, what will you do to improve your prospects of achieving a more profitable outcome?
Developing the volume of your business is expected and it’s rewarded; however, it takes planning, cash and expertise to keep revenue growth from destroying an otherwise successful electrical contracting business. In fact, getting too big too quickly is one of the primary reasons businesses fail. Stable sales and increased profit outweigh being ‘the biggest contractor in town’ if the higher turnover is producing minimum profit and higher risk.
You must recognise that sales growth is not directly related to overhead levels. Overheads will at some point grow out of proportion to sales and investment in overheads becomes very expensive —additional non-productive staff, additional vehicles or a new computer system. Once overheads grow it’s hard to reduce, and revenue levels are not guaranteed.
You should analyse your customer relationships on a regular basis otherwise it will be a case of ‘no customer – no revenue’. It costs less to provide the service to retain customers than it does to recruit new ones. You also need to analyse all new business opportunities before you spend resources to tender for the work. Do you have the cash reserves to be the ‘banker’ on a new project? Many large projects have a longer period between progress payments than the cash expenditure required to maintain the work schedule.
A most important step in your review is giving thought about the trends of profitable projects versus the losers. What are the commonalities? Is there a specific type or size of project that makes you money and are there others that have never been profitable? Your review should include a risk assessment to be applied to future estimates.
Even after you have completed your estimated count and measure, priced the materials, included the subbies’ costs and your company’s overheads and profit, the job is still not complete. The question needs to be asked: “What do we need to consider to reduce the possibility of a financial loss?”
Prior to starting the take-off, it is important to study the plans and specification of the project, to determine whether this job fits your company’s requirements and having a risk assessment plan will considerably reduce the possibility of a loss.
This assessment should be done to verify that the cost estimate follows standard estimating guidelines for the department. This would include a review to verify that the company’s standard estimating procedures were followed regarding estimate format, costing, presentation and documentation. This would include items such as the following.
- Verify that the estimating methods used match the plans and specification.
- Using the correct techniques to overcome possible variances in the engineering documents.
- Ensuring the values on the summary sheet matches the detail pages.
- Confirming that all information on the estimate detail pages be tracked to the source documents.
- Making sure that all allowances, fees and factors are appropriate and consistent with comparable past projects.
- Confirming all nominated sums (e.g. prime cost, provisional and contingency) are included.
Determining the suitability and practicality of submitting a tender for a new project needs several issues to be addressed. Will this project fit within your current scheduling? Do you have the manpower and resources to complete within the time frame? Do you have staff trained in this type of work? Is there a substantial portion of the job that must be sub-contracted out? Is it in an acceptable location? Will weather have a delaying effect? Are there any unacceptable conditions either in the documents or on site?
Prioritise each of these issues. Some companies have ‘tolerance levels’ for these risks. Risk tolerance tells you how sensitive your company or people are to risks. High tolerance means you are willing to take a high risk, and low tolerance means you are not willing to take many risks. A company’s risk tolerance varies according to its financial stability and project diversification. The generally accepted definition of risk in project management is time, cost, performance and other project factors that impact on these. The above issues influence the evaluation of the risk factor and is important to quantify matters.
There are quite a few construction risk probability software programs available on the market that offer suggested percentages as to the chances a particular event that may occur under certain circumstances. These programs offer a chart of the probability a risk will occur and the impact on the job.
However, whether you are using a computer-based program or a manually determined assessment, the cost of the risk needs to be calculated. Whether it is lost time, lost money, lost quality or a combination of all, it will have an impact on the final selling price.
Once the review has been completed and all parties signed off, it should not be tossed into the cupboard to look at ‘when we get around to it’. It needs action and those matters that need improvement should be instigated now, or the same results will occur again next year… if you are still in business.