The estimating process for a construction contractor is considered to be the most important and also the most challenging.
An inaccurate cost estimate can be detrimental to a business and even marginal errors can be costly. Such inaccuracies often result in nasty cost overruns and your projects stalling.
Most importantly, poor construction estimating will likely lead to an unhappy client which could damage your reputation in the long run.
For small construction businesses or sole traders, the process of cost estimating can be daunting. In fact, a research study showed that 40% of construction companies surveyed were not confident in their estimates and subsequently earned less profits. What’s more is that one in four respondents said just two or three inaccurate estimates could tank their business.
Learning How to Construction Estimate from the outset is critical.
To help you plan more effectively, here are some of the most common cost-estimating pitfalls that put businesses at risk, and what you can do to avoid them.
This is something we see time and time again with small to medium sized construction companies. Overheads are not limited to large scale construction companies.
They apply to businesses big and small and should always be factored into your cost estimate.
Failure to account for overheads will hurt your profit margins. We advise working with an accountant who specialises in this area.
They will be able to give you an accurate reading as to what your mean overheads are. As your business scales over time, your overhead costs should be reviewed accordingly.
Often ranked as the most expensive project cost, labor costs can be the hardest part to estimate. 35% of respondents to the Quickbooks research study stated that they were reliant on making educated guesses when estimating labor costs rather than proven data points.
So why is it so difficult? Well, there can be a lot of ambiguity when it comes to workers’ skill sets and ability which makes it harder to predict who can do what and within what time frame.
Next you have to consider whether or not subcontractors will be needed and if so, at what rate. On top of that, you need to think about overtime and potential travel costs.
You need to be as detailed as possible when costing labour, factor in overtime and if possible source data from similar past projects to improve your estimating accuracy.
It may seem obvious, but you’d be surprised at how often this problem arises. This typically happens for one the following reasons:
So, we can see this usually boils down to one of two things: poor time management and cutting corners.
Site visits are important and should not be overlooked or left to the last minute. It’s crucial as an estimator that you see the physical site so that you can understand the nuances of the area and surrounding infrastructure, therefore, setting you up to make informed and accurate assessments.
If your client or stakeholder is pushing for a quick turnaround, stand your ground and always insist that a site visit be carried out. It will pay you back in spades in the long term.
A risk assessment should always be carried out, no matter the size of the project. Again, this is an area often overlooked by smaller construction companies in a bid to cut costs or save time.
Risk assessments are necessary for the following reasons:
The bigger the risk, the more detailed the assessment should be.
When there is so much information widely available online, historical databases and cost estimating software, it’s crazy to think that some in the trade continue to operate off making educated guesses.
It’s an unnecessary risk for your business to take and is a bad habit to get into. It’s a surefire way to increase the likelihood of cost overruns which your business will have to incur.
We see it happening in instances where a team is under pressure to turn around the bidding process quickly and as a result, start cutting corners.
As a rule of thumb all costs should be based on the most current data available.
Developing a cost estimate is a long and intense process and the thought of reviewing all the documents at the end can feel like a punish. We have all been there.
While it can be tempting to assume from experience that what you have pulled together is accurate, your estimates should always be reviewed, either by yourself, a colleague or third party.
Everyone makes mistakes. Even the most experienced of estimators. Small margins of error compounded over time can lead to nasty financial burden that will likely have to come out of your own pocket.
We can’t emphasize enough how important this is. Check, check, and check again.
We know that the market is increasingly competitive, particularly here in Australia. While it’s great to be ambitious, bidding for business outside of your scope and capabilities can be risky.
Remember you don’t have to put your business forward for every job going. Sometimes winning jobs that your team isn’t able for can end up being more costly than not doing any work at all.
It’s important to consider that projects with a higher degree of complexity will inevitably require more work, more equipment and more subcontractors, thus eating into your profits.
We aren’t saying to only bid on projects that perfectly match your expertise and skill set but rather to be strategic in your approach.
Though it will take more time, gradually scaling will benefit your business more in the long run and also will avoid putting both yourself and your team under too much pressure.
If you’re in the middle of a bidding process and you realise that you cannot adequately handle the scope and requirements of the project, the smartest move is to pull out and protect your business.
Cost estimates are a high risk and challenging task. Profits are typically won or lost based on how accurate your estimates are and if they match your final project costs.
We can see a clear pattern that the leading causes of inaccurate estimations are poor time management and cutting corners.
Such habits should be avoided by all and are particularly relevant for small and medium sized businesses where even just one big project gone awry can have serious financial implications.
Thankfully, with the help of advancements in digital software, the risk of human error and mathematical mistakes can be greatly reduced. Cost estimating software is also becoming increasingly more affordable with a wide variety of options on the market.
Software solutions such as ConX Measure can empower estimators to make the bidding process faster and more efficient with a higher degree of accuracy. It’s a win-win situation for both your business, your team and your client.