Capable builders do not roughly estimate/guesstimate the costs of building projects they submit to clients. They calculate the costs. They figure the charges. They nail down those numbers and get them right.
You will hear all kinds of rationalizations for sloppy estimating and bidding. Costs can be accurately projected in advance. By developing systematic procedures, capable builders are able to turn out estimates and bids that come within a few percentage points of the work shown in the plans and specifications.
Estimating and bidding is not the same thing. Estimating involves calculating the direct costs of building a project. Bidding Involves figuring markups for overhead and for-profit and then adding markups to direct costs to get a bid price. In other words, bidding includes estimating, but estimating does not include bidding.
Estimating and bidding require a different mind-set. Estimating should be based on hard numbers – on quotes from subs and suppliers and on cost records from past jobs. To as great an extent as practicable, intuition and judgment should be kept out of the process of cost estimating. Bidding, on the other hand, inevitably involved judgment calls about the amount of company overhead costs you need to recover on the job and what amount of profit to shoot for.
To estimate and bid a job successfully, use a four-step process that separates calculation of direct costs from figuring overhead and figuring profit:
1. Gather Information – Set up a binder for the job, inspect the job site, and walk your subs through it. Study the plans and figure the quantities of each item of work to be done by your crews. Get quotes from the subs. Get material prices from suppliers.
2. Calculate Direct Costs – Figure material costs. Use your labor productivity records to determine costs for all work to be done by your crew. Enter and total all material, labor, and sub costs on your estimating sheets.
3. Figure Overhead – Determine how much overhead to charge to the job. Overhead is usually figured as a percentage markup of total direct costs. The percentage can vary widely from job to job. Typically, it is higher for the smaller jobs.
4. Figure Profit – Based on your assessment of the project, figure out how much profit to charge. Judgment will play a large role. What do you feel is fair? What will the market allow? How high do you need to go to make it worth your while to work again with a frustrating client?
With these four steps complete, you can figure your bid – or what is often called selling price – the amount you will charge the owners for the job. A bid is determined by adding together estimated direct costs, the markup for overhead, and markup for profit together. In other words: Estimated Direct Costs + Markup for Overhead + Markup for Profit = Bid (Selling Price)
Portions of this content was sourced and/or published in:
- Barbara J. Jackson, Construction Management Jumpstart