Author Archives: Anton Takken

About Anton Takken

I chose to focus on estimating for a few reasons. Chief among them was that it's a position that's hard to fill in most companies. Job security and advancement is easier as a result. Unique to this job is a higher vantage point over the company and its place in the market. Bids are generally over in a few weeks which keeps things from getting boring. The reasons few of my colleagues pursue estimating comes down to a few misconceptions. The first is that it's the builders version of accounting - perceived as a lonely and quiet life among the charts and plans. The second is that it's not engaged in the construction process. Lots of the appeal of the construction industry is the sense that individual effort brought a plan into reality. The teamwork and camaraderie present among tradesman seems conspicuously absent at the estimators desk. Finally, I think the last reason is that it's daunting to be responsible for setting the price of something that's never been done. The good news for folks in estimating is that it's much more social than advertised. An estimator's phone is constantly ringing. Taking the opportunity to build relationships with the bidders creates a positive atmosphere and encourages everyone to do their best. It can be too much of a good thing which is why it's common to arrive at their voicemail when you're calling with a question. A strong rapport with the bidders can be invaluable. Subcontractors have much more exposure to what's going on in the market and they're often eager to share their knowledge. Learning from these experts is a priceless opportunity that's often overlooked. More on this in a bit. I decided to start this blog because I noticed that estimating has applications in many arenas. Over the last few years I've helped estimate in fields ranging from software development to blacksmithing! The more I thought about it, the more I realized that it's not about knowing what everything costs, it's about knowing how to figure that out. I believe the very first step to knowledge is to seek it, the second is to retain it, and the third is to pass it on. I hope to share some insights into how estimating is done and hopefully have some fun doing it. My experience is mostly commercial construction, but I'll try to make everything as generally applicable as I can. There are many aspects of business that all markets share yet it's remarkable that one of the most consistent is the failure to recognize that estimating is the very first step to a successful project. So if you're frustrated that work isn't profitable, or exasperated that there's never enough time to get the job done, this blog will be worth your time. Feel free to email me at: estimatorsplaybook@gmail.com

October 12, 2015

Where do estimators get their prices?

By Anton Takken

This simple question is complicated because the answer depends on the application. Just as fruit comes from plants, it also comes from soil, water, and sunlight. The more specific the answer, the more it will involve larger, and more complex factors.

Pick any two; Fast, Complete, Cheap,

The way an estimator proceeds will be balance their client’s needs against their firms risk.

If a client wants a fast answer with no margin for error (complete), an estimator will reduce their risk by raising their prices, and padding their bids with contingencies. The bid-day price is high, but the client is relatively safe in assuming it won’t cost more than that amount.

If a client looking for fast and cheap pricing, should expect lots of exclusions on the proposals. Expensive and necessary items may not be included so client takes a risk in relying on this information.

Complete and cheap pricing only comes from a dedicated effort to find only what’s needed, and get the best pricing possible for it.

Balancing act

Estimators must weigh the likelihood of being awarded a profitable contract against the effort to price the work.

Artistic rendering of a conceptual bid

Conceptual or budgetary exercises are often done as courtesies to clients and architects. Historical pricing of past projects is the most useful resource for this work. Comparing the proposed project against past projects gives the estimator a project-level price comparison.

By taking each projects cost and dividing its square footage, an estimator can compare square foot costs across differently sized projects. Experienced estimators exercise great caution here because some costs are not proportional to the area.

For example, restrooms and kitchens are very cost intensive because they require the work of so many trades. A large and a small office might have the same number of restrooms and kitchens. The contributing cost of these rooms is spread over a higher square footage in the larger office. This leads to a lower square foot cost than would be reasonable if the exact same finishes were used in a smaller office.

Estimators lacking historical data may refer to annual publications of cost data such as the RS Means books. There are reference books ranging from building use cost data, to trade-specific unit pricing. Every book includes adjustment tables meant to factor for regional cost variations, project size differences, and so forth. The important thing to understand about these resources, is that they’re national averages driven by audits of last year’s work. It’s very precise for comparison, but not very accurate for bidding.

Accuracy versus precision

Accuracy and precision are not interchangeable terms. Accuracy is an approximation of how close a measurement system is to the subjects actual value. Precision is an approximation of a measurement systems repeatability.

It turns out that Baxter is a precision instrument…

So to apply this to estimating, the contract is awarded to the lowest bidder. Any significant difference between low and second low benefits the client by driving down the project cost. Therefore estimators seek to just barely beat their competitors to maintain profitability. The degree to which an estimator is able to hit that mark is their accuracy. Winning a job with a 5% spread is substantially less accurate than a 2% spread.

Mistakes in the bid can easily make winning the project, a fate worse than losing. The estimators ability to reliably deliver an error-free bid is their precision. Successful estimators must be accurate and precise.

Think of it this way, you could theoretically win a profitable project by guessing on every bid until you were successful. The win was not repeatable so the methodology is rarely accurate because it not precise.

Now if you come in within 3% of the low number on every bid, you know with 97% accuracy that your methodology is precise. Figure out how to cut 3% on the next bid and you’ll probably win.

Relevant detail in the big picture

Earlier I referred to the cost data books as precise for comparison but inaccurate for bidding. The market price for work is constantly changing according to prevailing economic forces. While each participant is a rule unto itself, as a collective, the market will follow fairly predictable trends.

Downward trends are easy to spot…

General Contractors (GCs) typically subcontract (sub) portions of the project scope. The GC writes a subcontract laying the responsibility to furnish and install whatever is stipulated for that scope on the sub in exchange for the subs proposal amount. The GC isn’t concerned with tracking the changing price of a wing-nut because they aren’t responsible for buying them, the sub is. GC estimators focus on quantifying scope items that will help define what to expect of their bidders. They use these expectations to scope the subcontractors proposals on bid day.

Professional subs in the skilled trades will conduct detailed estimates down to the literal counts of nuts and bolts. The advancement of computerized Quantity Take Off (QTO) systems has made it possible for subs to estimate with greater speed, precision, and accuracy than ever before.

It’s important to take a moment to point out that granularity does not correlate to accuracy or precision. Square foot cost’s can be just as accurate and precise as a detailed estimate. What changes is the uncertainty. Detailed estimates allow minute changes to address uncertainty related to the smaller issue. In larger firms, estimators have their work checked by the department head who doesn’t have time to conduct their own detailed estimate to check the work. Instead, the totals for meaningful scope areas are compared on a square foot basis. Detailed estimates require great focus and attention to compose properly. Many estimators end up reviewing their work many times before it’s completed. By then the numbers become familiar and it becomes harder to see when something is wrong. Estimators who don’t have anyone to check their work are well advised to review old bids to improve their ability to identify square foot costs. Being able to switch perspective from micro to macro without losing accuracy or precision is a critical estimator skill.

Detailed estimates are used to reduce uncertainty within the bid. However the bid is only accurate and precise through the crucible of competition. Market value is typically provided by only the base bid amount. This crude metric must be interpolated to define how things added up to that number. The only things not subject to opinion, are the Construction documents, bid amount, and the square footage.

But…

Market leaders set market prices. The only accurate estimate is the profitable win. Estimators who spend all their time looking for stuff to include aren’t considering what the market leaders are doing. Their common excuse is that the low bidders are giving the work away. This excuse is rooted in the notion that market leaders get the same sub prices as everyone else. In fact, market leading subs may decide to only bid to the best GCs. GC estimators with stagnant bid-lists may go their entire career without ever seeing a market-leading subcontractor proposal.

Estimating is about controlling risk. Counting stuff and ringing up the tally is a cashier’s job. Estimating demands much more than tidy spreadsheets and vigorous accounting. Controlling risk requires judgment, strategy, communication, and relationships with market leaders. There are estimators who fall short on these factors and they lose a lot of bids.

It’s probably a let-down for some people to learn that there isn’t a set price for anything. Even if you’re self-performing the work and you know with great certainty exactly how much it should cost. The going rate may be more or less than the amount calculated due to the economic forces of the local market. The best we may do is to stay current on pricing to maintain an informed opinion.

It’s much easier said than done

Summing up, Estimators get their prices from their from a combination of QTO’s, estimate templates, subcontractor proposals, proprietary software systems, historical data, direct vendor quotes, market conditions, and brute-force accounting of what their company needs. All of which are constantly re-evaluated and adjusted to reflect market insights and field conditions. Every price is subject to change, so be wary of trusting any resource that promises otherwise.

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1 Comment | tags: market pricing, Perspective, Pricing, QTO, RS Means, Uncertainty | posted in Uncategorized

October 2, 2015

What to include in your bid

By Anton Takken

It doesn’t take long for an estimator to encounter the estimators paradox: You worry you lost bids because of something you included, and you worry you won jobs because of something you missed. Estimators therefore, spend a great deal of their time worrying about what to include in their estimates.

Estimating may be based on inference, but contracts are driven by bids.

All of the uncertainty, qualifications, and hedging that makes an estimator different from say, a cashier, is often ignored at the contract award. The bids distill all the complexity, uncertainty, skill and risk into two basic numbers; cost, and duration. Obviously this facilitates the Client’s comparison shopping since they can use competitive bidding as a means to prove market value for their project. Very rarely do clients consider that the variances in bid amounts are often driven by different interpretations of the project scope.

For some reason, Bidder #2 just wasn’t competitive…

“Bid per plans and specifications” is the catch-all requirement obliging the bidder to the architects Construction Documents (CD’s). This is only useful direction to the extent that the CD’s are complete, clear, and comprehensive. Perhaps the most self-defeating aspect of construction estimating is the widespread practice of accepting contractual responsibility for incomplete, unclear, or contradictory CD’s. Most General Contractors (GCs) are so eager to chase every opportunity, that they’ll voluntarily fill in gaps that can cost them dearly. As a result, Architects face less pressure than ever to deliver complete CDs to the bidders.

Design Intent

Estimators working with incomplete drawings are forced to make a lot of decisions. From the Architect’s perspective, as long as their design intent was captured in the CD’s, it’s the GC’s responsibility to make reasonable allowances for whatever is necessary. The Architect’s design intent could be suggested by; symmetry, aesthetic/material consistency, repeated patterns, or space usage considerations. Architects expect you to “see” the reasons behind their design, even when they’re not provided. For example, if an architectural detail looks like it will be heavy, it falls on the GC to ensure that supporting materials are up to the task. Architects can’t be expected to define the length of every fastener necessary to build their vision. The GCs responsibility to know how stuff comes together is referred to as: means and methods.

Deadline driven decision-making

Often the Architect serves as the owners representative. This gives them the contractual authority to refuse change orders for project scope they felt was clearly captured in the design intent.

It’s important to understand that Architects will generally address any inconsistencies, missing information, or clarifications brought to their attention before the bid. GC’s should get their questions in Request For Information (RFI) format and formally submitted as quickly as possible. The RFI log can be used to prove due diligence to the client who didn’t know their plans were incomplete at bid time.

A properly answered RFI will tell you what to include in your bid, sometimes you’ll be given an allowance amount when specifics aren’t available.

Read every note and RFI every trap

Estimators are strongly cautioned to read every single note on every single page of the plans. Architects believe that a solitary note buried where nobody would look for it, is sufficient to contractually bind GC’s to whatever is written there. This practice has trapped many estimators in a paradox. If you include the easily missed but terrifically expensive requirement in that note, you’ll lose to someone who missed it. Conversely, if you win the job, the Architect might successfully argue that it’s your responsibility to pay for it, since it’s in the plans. The solution is to write an RFI about the note, thereby forcing the Architect to acknowledge its existence and their intention to enforce it on the winning GC. This levels the competition and springs the trap before bid-day.

No time to ask directions

RFI’s aren’t always answered before bid-day. Estimating is about controlling risk which is done through informed decision-making. Losing a bid is a significant risk, so competitive estimators cannot afford to include the worst-case (most expensive) scenario for every problem. Generally speaking the categories of scope indecision can be described as follows;

Professional standards: A design which will obviously fall short of professional standards constitutes a liability for a legitimate contractor to build. It would be better to lose the job, than to build a public hazard.
Means and methods: General Contractors are expected to furnish and install everything necessary to render a complete project. This includes rental equipment, permits, shop drawings, false-work, temporary structures, taxes, licenses, required wage rates, etc.
Defensible: Decisions you could defend on logical grounds
Debatable: Decisions driven by who benefits the most, or the least.
Damage-control: Decisions about pricing requests that work against you.

Do the right thing

Professional estimators working for legitimate GCs understand that there is no room for compromise on professional standards or means and methods. These scope inclusions define the very essence of “why you’re there”. If the Architect or Client won’t tell you the tax rate for their job, it’s your responsibility to figure it out and bid accordingly. There will be absolutely no lenience shown to any GC who doesn’t include these obviously necessary items. If your competitor beats you by skipping these basics, they won’t make the same mistake again.

A life spent learning the hard way has a distinct look…

Look for logic

Defensible decisions should be driven by logical arguments based on the CDs. For example: if there’s a specification for landscaping, but the project is for an interior remodel, it’s reasonable to exclude landscaping from your proposal on the grounds that the specification section was mistakenly included. The same logic may apply towards an obviously wrong requirement. Any defensible decisions should be laid out in the proposal narrative with the item in question listed in either the inclusions, exclusions, or clarifications. Be careful to explain why it’s a logical decision. Simply listing some scope item as excluded without explanation suggests a bidder was trying to be sneaky.

Validate value

Debatable decisions should be driven by the clients best interest. Does including XYZ add value to the client? If so, it’s reasonable that they will expect it to be included in their bids. However, if the cost of the debatable item is too high, the client’s budget may be exceeded. The one-note-trap items that didn’t get an RFI response fall into debatable decisions. Architects may have emotional attachment to some unique (and expensive) item. Simply cutting it out of your bid to appear low on bid day isn’t respecting the design intent and will put you at odds with the Architect. Of course trapping GCs into paying for items that would blow the clients budget is already at odds with a successful project outcome.

Estimators are seeking to land profitable work by controlling risk. Unprofessional design teams are a very serious risk to a GC, especially when the Architect is also the owners representative. Estimators facing a costly and potentially unwarranted inclusion should understand their options. If an inclusion is debatable, estimators could opt to provide that costly item as an alternate which is not included in their base bid amount. If the item in question is too poorly defined to accurately price, provide an alternate allowance to address the issue while leaving yourself room to amend the price when the details are provided. Obliging your client to do a bit of math on bid-day is hardly the same thing as disregarding their instructions. By exposing the issue and it’s cost, the client has a chance to assess the value and its impact on your bid. Suddenly it becomes clear to the client which of your competitors did, or did not include that item in their bids.

Don’t hurt yourself

Damage-control decisions are most commonly driven by breakout, unit price, and alternate requests. Breakout pricing is the attributable cost of some portion of a complete project. The most common breakout requests are for projects where the landlord and the Tenant will pay for their portions individually. There are however, breakout requests that are poorly conceived and pose tremendous risk to the estimators trying to provide these answers. “How much to add one more office?” seems like it’d be a simple matter. An office added to a row you’re already building would likely cost less than an office isolated somewhere else in the space. The intent of their request is to limit change-order pricing.

Change orders are expensive because they require re-work and additional resources without any additional duration. Adding one office before construction starts would cost less than adding the same office a few days from completion. The client may expect that they can add an office anywhere in the project for the alternate amount, at any time. If the estimator prices this office as a “worst-case” situation, they risk the client awarding the contract based on some combination of all the prices delivered on bid day. It’s possible to submit a proposal where you’re low on everything but one alternate, but the client’s selection makes your “final” number higher than a competitor’s!

The clients doing this rarely stipulate which alternates are their highest priority because these clients are looking to spend their entire budget. Municipal clients, committees, and developers are the three most likely to request a menu of prices. Their selections will depend on how much of their budget is left over after the base-bid amount.

Estimators facing this challenge must understand that damage-control is achieved through limited risk. Any unclear/unfair request is subject to your limitations, qualifications, and exclusions. Any price you provide can be used against you, so make sure the descriptions are clear and that there’s an expiration date on every number. There’s absolutely no reason that menu or alternate prices should be valid in perpetuity. In some cases it’s reasonable to identify these prices as a courtesy, to be used for final scope adjustments made before the notice to proceed. Clients may not have considered the risk of an open-ended request. Furnishing them with decision-making information is reasonable, equipping them to damage your profitability is not.

Open ended alternates: You lock the wheels, they take the bike.

Open questions and closed answers

By all means stipulate the cheapest, and least disruptive interpretation of an open-ended pricing request. If clients were taking these potential alternates seriously, you’d have well-defined plans for each of the alternates.

While we’re on the topic of poorly defined alternates, there’s a variation of the one-note trap wherein a single note obliges the GC to provide alternate pricing. These buried alternate requests are the sneaky obligations that surprise you on bid-day. I’ve attended bid-openings where the client rejected a GC’s proposal entirely because an obscure alternate request wasn’t priced. GC estimators should be very cautious about demanding a last-minute alternate price of their Subcontractors (subs). The odds of an accurate price fall in direct proportion to the available time. If you’re caught flat-footed on bid day, it may be better to provide an alternate allowance and spend the remaining time working on getting your base bid down.

If the Architect comments about the allowance rather than a fixed price you might kindly point out that it appeared to be an informal alternate request. If necessary, you might explain that real alternate requests typically appear on the Request For Proposal (RFP), Division 1 of the Specifications (General Conditions), and the cover of the plans. Estimators should never guess on fixed pricing. If the request isn’t reasonable, you can give an allowance and direct complaints towards the incomplete/unprofessional plans.

Nuclear Option

Sometimes even an allowance amount would be too risky. I’ve encountered RFP’s with an alternate request to build the same project in a different state, several years in the future. A GC simply may not have the licensing, connections, skills, or resources to build in a different state. Any effort to price this alternate would be guessing for that GC. Even if they guessed correctly, the GC still can’t actually do the work. Estimators should understand how a wrong guess could seriously damage their firms reputation and client relationships.

The only answer to such a request is to refuse to price it at all. To Be Determined (T.B.D.) is professional shorthand for “I’m not answering now”. It’s better to lose a bid than to damage a client relationship by guessing.

Just because the client of their design team put it on the CD’s doesn’t mean you have to act against your best interest. Market value is achieved by reaching a balancing point between competition and profitability. Client demands are equally balanced by their risk and reward. If clients want more value from their contractors, it won’t be achieved through high-risk requests.

It’s worth mentioning that a project with a small scope of work and long list of alternates is a sign of a low-budget client who won’t make decisions. Helping these clients is rarely profitable because any savings you can find for them will be squandered by delayed decision-making. Lots of diligent estimators think they’ll face less competition because the alternates are too much work. In fact, their competition moved on because their experience tells them that the job won’t be profitable.

Define, decide, direct and deliver

To apply all of this to a practical problem, the estimator needs to understand that while every competitor could make a different decision, the really good estimators will be incredibly consistent with one another. This is because consistent methods, yield consistent results.

Time spent vacillating on an issue for lack of definition is wasted. Define the issue, what is the cost, what is the risk? Low cost, and low-risk issues should be included because they won’t affect your odds of winning, and you might gain a little profitability if it turns out to be unnecessary.

Any exclusion that’s makes the project unsafe, unprofessional, or obviously incomplete is estimating malpractice. There is no decision to make here, estimators are representatives of their firms, and should never act irresponsibly or unethically.

Come to your decision based on the facts, and direct your resources accordingly. Publish a bid-directive for subs outlining the approach you intend to take up to, and including the wording of your clarifications. If you’re protecting your firm from risk, show your subs you’re protecting them as well.

Deliver your proposal with clear and comprehensive exclusions, inclusions, clarifications, alternates, and allowances. Explain why decisions were made, and identify the limitations of your answers to their problems. Clients should be guided through a concise narrative of your proposal which alerts them to issues within their project. Making your proposal easy to understand for the client, builds their trust in you. Clients who understand the issues are better able to solve the problems and award contracts fairly.

Estimating revolves around competition which leads to thinking about how you might outmaneuver a peer. Keep in mind that the client isn’t watching a game, the outcome of the bid is a crucial step in a successful project. The client will see how decisions you’ve made, reveal your intentions. Make decisions you’d be equally proud to explain to your client and your boss.

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September 28, 2015

Request For Information

By Anton Takken

We estimate the cost to build a design because neither the design, nor the construction are perfectly controlled. Most buildings end up with notable differences from the bid-day plans. Since the bid-day amount is the basis of contractual award, these differences take the form of change orders. The only thing clients dislike more than change orders, are delays. As estimators, we have the ability to set a project on the right course by calling the design-teams attention to likely problems.

Before we get too far into that process, it’s important to understand the perspectives of all the key players. Effective communication comes down to how you ask a question, rather than what you’re asking about.

“While it may have been a good question, the response left the stronger impression”

The Client thinks you know the cost of everything all the time

Since estimates are “free”, clients tend to think of estimating as an auction where each bidder knows the projects’ value from the beginning. Clients may assume that a few days with the plans and maybe an hour walking the site is all a contractor would ever need to build a job perfectly. General Contractors (GCs) are guilty of creating this impression when they’re trying to get on the clients bid list. Like any sales job, there must be a balance between what’s promised and what can be delivered.

The Architect believes their intent is obvious, and it’s your responsibility to know what to do.

By the time a set of plans has been put out to bid, the Architect has spent a tremendous amount of time developing the design. The minute differences in paint shades may have more emotional value to the Architect than the way something’s bolted together. While Architects may spend months or years developing a set of plans, the majority of their time may have been sunk in helping their client to pick between different schemes. This means that the nuts and bolts of the final design are put together in a compressed timeline. Clients can and do make substantive changes at the last moment, causing predictable grief for the Architect. Nobody’s going to say this before the bid, but the Architect relies on the GCs estimators to make reasonable assumptions about missing information. If your Project Manager (PM) tries to submit a change order for something the Architect feels is obviously necessary to fulfill their design intent, they’ll claim that means and methods are the GC’s responsibility. For example, it’s not ordinarily the Architects job to define the length of screw necessary to attach a substrate to a structural element.

Once the answer is known, everyone will think the solution was obvious from the beginning

Estimators face a completely different set of challenges. Bids must be competitive, thorough, defensible, and profitable. A proposal distills all of the scope of work to a few variables like cost, and duration. This has the effect of making every proposal appear uniform, while concealing the impact of unanswered questions. Many estimators have won a bid by incorrectly interpreting the Architect’s intent.

Architect: “No, no, I wanted all three like the middle one!”

Be advised that many Architects include a General Conditions specification that stipulates that whenever the contractor is faced with multiple requirements, they should always defer to the most costly option. This gotcha specification works in obvious conflict with competitive market pricing. After the bid, it’s always obvious that they wanted something expensive. Before the bid, they don’t have time to answer your question.

Fast answers to easy problems

Estimators may have a few days with the plans before the Request For Information (RFI) deadline. Architects have RFI deadlines to provide themselves with sufficient time to properly respond to bidder questions before the bid deadline. On many commercial projects, it’s very common for the RFI deadline to be a week ahead of the bid deadline. Be advised that most Architects see absolutely no problem in answering all the RFI questions the day before or the day of the bid deadline. GC estimators won’t have time to generate easy to read directives for their subs. It’s a race to make last-minute changes before the deadline.

This leads to the first imperative of RFI writing; getting fast answers. It’s pretty tough to improve on a “yes or no” response in terms of rapid communication. By extension, this means that RFI’s should be written to elicit a yes or no response. The key here, is to understand that multi-step or multifaceted questions lead to confusion and delays.

Let’s say that the finish floor plan shows a room that’s missing any call-outs for wall finishes, trim, or flooring. With rare exception, specific paint colors won’t affect the price for bidding purposes. Asking if the walls should be painted may elicit a simple “yes”. In contrast, a request for the desired finishes of all the walls in room XYZ could lead to a situation where they don’t answer because the Architect is still debating between paint colors. Bid day passes and you never got to know if the room will be painted or not.

Addressing one issue per RFI allows the Architect to answer the easy questions right away. If they’re still debating about paint but not carpet, they won’t answer an RFI asking for both the paint and carpet. From an estimating standpoint, getting half the missing information might be worth its weight in gold.

Every design is a work-in-process

It seems painfully obvious that estimators questions are going to be focused on getting the job priced. If two options cost the same, we don’t need to know which one in order to bid the job. Design teams know that their published decisions are fulcrums for accountability. Estimators must keep in mind that design teams and clients may have little knowledge of how their aesthetic decisions affect the budget. An open-ended requirement in the plans is seen as a “placeholder” for a future decision. The problem for GC’s is that it’s a contractually binding requirement to an unknown. From the client and design teams perspective, the missing information is “no big deal” because they presume the estimator knows what everything costs all the time.

They get cranky when you point out the holes in their design”

Applying this insight, estimators are well-advised to do a little research on what’s at stake before they draft their RFIs. If a fixture specification failed to define the finish, the estimator should inquire as to what impact the available choices will have on pricing. If there are prices for the “good, better, and best” options, draft the RFI with those options listed. It’s possible that the design team is debating between colors at the same price point. Getting the design team to define the price point, solves the estimators problem. Questions that won’t affect your bid should be noted for future hand-off to the Project Manager since it’s not worth the administrative effort until you’re under contract.

Get a complex problem on one page, and a proposed solution on another

It can be particularly difficult to get a yes or no answer to a complex problem pertaining to spatial relations. Architects use a variety of perspectives to depict the project scope. It may require constant flipping between a plan view, a cross-section, and an elevation drawing to visualize the problem you’re trying to address. The RFI needs to be less work for the Architect and for everyone who must understand their response. One very low-tech way to address this problem is to literally photocopy the plan areas in question. Re-size and cut out the copies until they fit on a single 8.5″x11″ sheet. White-out every note, callout, or icon that doesn’t pertain to the question. Make a copy of this sheet. Use one for the question, and the other for a proposed solution. Label them accordingly. Bubble the areas in question to call attention to only what you’re asking about.

The RFI should simplify the problem and refer the reader to the first sheet, before suggesting a solution referred to on the second sheet. Simply asking “Is the proposed solution acceptable?” This leaves you with an RFI that could get a quick “yes” while providing your subs with a simplified two-page diagram of the issue and it’s resolution. Be advised, creating a simple diagram of a complex solution can be a very arduous task. Try it yourself and you’ll have newfound respect for Architects.

Many architects will follow-up later with an addendum or an ASI which incorporates their RFI direction into the plans.

Respect the designers intent.

Architects spend a great deal of time refining their aesthetic vision of the project. While competitive estimators are motivated to find cheaper options to land the job, Architects fulfill their duty to protect the design’s integrity. This often places them at odds with budget conscious clients and their contractors. It’s therefore good form to treat their designs intent with respect. In the simplest of cases, an RFI might open with an explanation of the issue, followed by “we believe the design intent is: (your suggestion)…” wrapped up with “Is that correct?”

The tone of the question implies that you’re on their side and that you see their solution but you want to check with them first. Estimators should studiously avoid phrasing that communicates: “hey these plans are wrong, here’s a cheap shortcut.”

“Good information, but… wrong application”

Some thoughts on suggestions

RFIs are the only way that a GC Estimator can communicate on the record with the design team. On the surface, it seems like an RFI could only be used to ask questions. In fact, the majority of the time, the GC will have a distinct preference for how any given problem is solved. Including a suggestion in your RFI is how you can try to steer the solution to your benefit. If there are multiple potential solutions, you should never assume that the Architect or the client will know which suggestion is the most cost-effective one.

I’ve encountered situations where moving a wall 3″ in a single direction saved thousands of dollars compared to any other option. Including that information in my RFI proved instrumental in getting a prompt reply. Architects who aren’t sure which choice will be the most cost-effective may request alternate prices on the bid. Alternates exponentially increase the estimators workload without offering much potential for reward. RFI’s that lead to more questions than answers are bad for business so share what you know to facilitate solid decision-making.

GC estimators are looking for better, cheaper, and faster solutions. The natural opposite of all of these things are sole-sourced specialty products and their vendors. Sole-sourced items tend to have long lead times and high prices compared to similar products. Architects have very little concern for lead times or difficulty in managing prima-donna vendors. That’s the GC’s problem. As surely as night follows day, specialty products tend to create unusual problems for the build team. Bringing this back to RFI’s, the estimator will often find it necessary to resolve issues pertaining to, or caused by, specialty products.

Defensive designers will delay decisions

Architects tend to believe that high prices come with high quality (except for change orders), so design teams tend to be quick to shoot-down any efforts to replace over-priced products with substitutes. If you’re competitively bidding a project, the cost of an expensive assembly is only a problem when there’s a reasonable chance your competition will miss it. Estimators who ask for solutions geared towards retaining the annoying, expensive, and long-lead product will get quicker replies from the Architect than those which oblige the Architect to defend their design decisions.

The one-note trap

The more expensive, hard to get, or outright difficult the product is to work with, the more likely it is that the Architect will require it with a solitary note located where absolutely nobody would look for it. Estimators who catch the note risk losing the bid by including the high-priced item that their competitors will overlook. Architects spend lots of time picking out something that’s dear to their design, so it’s very suspicious that they’d take chances on its inclusion through minimalist notation. This may be a trap intended to make the GC pay for signature design touches that the client can’t afford.

Daylight is the best disinfectant

Whenever these traps are encountered, estimators should draft RFI’s identifying precisely where the note appears, why it appears to be an error (i.e. because it looks like it doesn’t belong) and asking the design team to confirm that the sole-sourced thing has no allowable alternates. When it’s appropriate, ask the design team to list the approved vendors of the specialty product, because chances are excellent that they worked with one of them directly.

Architects can’t afford to ignore that RFI, and by answering it publicly, the bidders are all on equal footing to compete. By all means keep that feature’s price handy because once the budget is blown, it should be item #1 on your list of Value Engineering ideas.

Some notes on notation

Construction Documents (CD’s) are the composite of a set of drawings (plans), Scope letters, Request for Proposals (RFP), specifications, soils reports, directives, Addenda, and RFI responses. Mid-sized projects may have literally thousands of pages in their specification manuals, and hundreds of sheets in their plans. After all the work in putting them together, design teams are often imperious about questions that are answered in the CD’s.

RFI’s should pointedly reference the applicable sheets, details, and specifications down to the individual sub-heading. If you don’t tell the design team where to find what you’re looking at, they won’t have much reason to believe there’s a problem.

Whenever necessary a screen shot, or photocopy of the relevant information with bubbling around the area in question should be attached to the RFI. The motivation is to guide the reader through your natural confusion. For example:

Note A on Detail 5/A5.1 calls for “5/8″ thick ceramic tile”, which corresponds with the dimensioned layout of the room shown on the Floor Plan Sheet A6.1 (see attached). In contrast, specification 9300-122,A,5 calls for 24″ thick ceramic tile (see attached). We believe the intent is to install 5/8″ thick ceramic tile.

Is that correct?

If not, please provide the desired tile thickness for the area in question.

Be forewarned, irrelevant details always attract attention and causes confusion. Screenshots are really easy but it’s virtually impossible to cut out all notes, dimensions, and icons that will distract your reader from the real question.

Formal for a reason

RFI’s are a formal and contractually binding process between the GC and the Architect/ owners representative. The questions and their answers become part of the defined project scope of the contract. This means that unless otherwise noted, the questions you asked the Architect during the job walk are off the record. They can absolutely disavow any direction, instruction, hint, or help they gave you.

You should not directly ask any questions of the Architects’ consultants (engineers, interior designers, landscape designers, etc.) because the consultant’s response would effectively bypass the Architects’ control over the design. Architects extend the same courtesy to the GC by not communicating directly with their subcontractors. Most GC’s instruct their bidders to direct questions only to the GC’s estimator and emphatically warn bidders that contacting the design team or client will result in exclusion from the bid.

Life in the slow lane

The price paid for binding answers is time. RFI’s involving multiple design disciplines take the longest since there is more coordination required to answer. If the design team is answering multiple GC’s questions, they might compile and collate the RFI’s looking to avoid redundancies on their next bid-directive. This leaves even the easy to answer RFI’s waiting for a last moment response.

RFI’s are frequently misunderstood, or mishandled leading to situations where after weeks of waiting, the response fails to solve your problem before the bid. Architects who don’t understand your situation aren’t inclined to extend the bid, or revisit a “closed” issue.

Estimators need to understand the stakes of writing RFI’s properly. Many botched RFI’s lead to Architect responses that add additional layers of confusion, risk and frustration. Perhaps worst of all, your competitors poorly written RFI might oblige you to sort out a problem they created.

Informal guidance

Occasionally there will come a problem that leaves your estimate stuck until you’ve got the Architect’s answer. In these cases, Estimators should reach out to the Architect informally and ask for advice on how to phrase the problem so it will be easily resolved. Some Architects will appreciate the courtesy and may even tell you how they’ll answer your RFI. Not only is the RFI answered, but the estimator gains time to share the information with their subs before the bid.

Subcontractor driven questions

Skilled trade subcontractors can come up with some very technical questions. A GC Estimator may lack the trade-specific knowledge to properly articulate the question to the design team. Many GC’s simply copy and paste a subcontractors RFI onto their template and submit it as though it was their question. These RFI’s may be poorly written, or asking for information already provided in the CD’s. Since skilled trades generally correlate to engineering consultants, the RFI responses may be full of incomprehensible engineering legalese. This is most prominently displayed when a soils engineer answers an excavators poorly written RFI.

“Rick knows what he’s doing but his writing is atrocious.”

GC estimators should take the time to learn what the sub is asking about. If this issue affects one bidder, it likely affects others. Getting to understand the problem and it’s likely solutions, is critical to asking only what you need to know. There are lots of sub estimators who were pressed into estimating, or are expected to estimate in addition to a host of other duties. RFIs before the bid should be decidedly geared towards answering estimating questions. You need to know enough to price the job, not to perfectly build it on bid-day.

Preparing for the bid

Sometimes the most dearly needed RFI’s go unanswered before the bid deadline. Estimators need to prepare contingency plans for every significant RFI. Generally speaking, the suggested solution in your RFI should be your bid-day default condition. If that RFI goes unanswered, then your proposal clarifications will need verbiage informing the client that you’ve included your specific solution to an issue raised in RFI (#) submitted to the Architect on (Date). Most clients aren’t paying attention to their Architects RFI log. A submitted bid implies that you had everything you needed to accurately bid the job. Architects who ran out of time answering RFI’s should have every sympathy with your situation. If the issue is serious enough that you can’t risk such a move on the project, it’s time to reconsider the opportunity. Sometimes missing information is intentional. Weak design teams and unreasonable clients won’t improve after the contract is written.

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1 Comment | tags: Bidding, Questions, Request For Information, RFI | posted in Uncategorized

September 3, 2015

Excuses and Uncertainty

By Anton Takken

I recently encountered an estimator lodging a familiar complaint. “My competitors are bidding at a loss.” Sure, on the surface it’s entirely possible that the low bidder stands to lose money at the amount they proposed for the work. People make mistakes all the time.

However there’s a tendency for some folks to assume that being low-bidder implies low quality. The time-worn comment attending every perceived failure is “What else can you expect of the lowest bidder?”

To be fair, the losing bidders are a bit biased …

Somehow it escapes notice that it takes a lot of investment to produce something cheaply. Consider how affordable cars are made possible through huge factories, infrastructure, and training. The total investment to make a luxury hand-made vehicle is minuscule in comparison. Sure we may appreciate the craftsmanship of a luxury car, but few can afford it. Unattainable quality has no practical value beyond inspiration.

Low bidder could be compared to the winning golfer who faced the same conditions as every competitor, yet took fewer strokes to achieve the same end. Market leading General Contractors (GCs) attract market leading subcontractors (subs). The very best sub prices go to the very best GCs which means those GCs can build the same project for less money than their competition. In some cases the advantages for the market leading GCs can be so profound that not only are they unbeatable, but they are making higher profit than the high-bidder stood to gain if they’d won.

These relationships don’t happen overnight, and they certainly don’t happen from random chance. There is absolutely no substitute for knowing your market.

At the subcontractor level there can be enormous disparities in material costs depending on the scale of the firms revenue. A subcontractor who buys their material by the train-load enjoys prices unattainable to a competitor who buys a fraction of that amount. Efficiencies of scale play decisive roles in determining who will be market-leader. However it’s here, we encounter another tiresome excuse.

“The big guys can afford to call the shots and push everyone aside. There’s just no beating them.”

It’s foolish for estimators to pretend that every company is excellent at all things. Chasing opportunities that are too big, or too small sets you up to fail. Bidding work you know you’ll overprice or underperform is disrespectful of the opportunity and a waste of time. Perhaps the biggest mistake that estimators make is failing to prove the relationship between being able to pick a good target, and hitting your mark.

That being said, smaller firms offer more direct access to stakeholders than their larger counterparts. It’s often possible for a hard-working but small firm to build a relationship with a bigger client than they could otherwise attract. Not every project hinges upon the purchasing power of a small-fry company. Clients find occasions where the agility and dedication of a smaller firm is worth paying a premium for. Estimators at small firms must look to leverage their size against lumbering bureaucratic competitors.

It takes a lot of patience and even more follow-through but this is how little firms compete with big ones. It bears mentioning that for every company with a huge sign on a huge project, there are hundreds of smaller ones quietly building everything else.

Only they that lost, knew what they were doing.

At the heart of these excuses is an effort to claim that the estimator who lost is the only one who knew what they were doing. If this were true even half of the time, we’d see near-constant business failure across the construction industry. Many of the estimators making these excuses haven’t collected enough information to say what happened with much certainty. Knowing you lost by $X amount or Y% only illuminates a very small portion of what goes into a bid.

Right off the top, it should be obvious that so long as there are differences between the competitors, there aren’t equal odds of success. With observation and experience, it becomes obvious what firm constitutes the long shot in every bid letting. If that firm is yours, you’re probably chasing the wrong opportunities, or your company hasn’t adapted to the available work.

Starving Artists and poorly informed bidders

Competitive bidding proves market value over time. Under-bid work is a self-correcting condition. GC’s who can’t accurately define market value often struggle to be competitive. A lot of companies like to believe that they are delivering a higher level of quality than going rate will pay. As estimators, we cannot allow our firms to become “starving artists”. If you’re selling up-market services, then by all means pursue work higher in the market. If these options are scant, then it’s time to diversify goods and services to meet actual market needs. Every business must meet its customers’ needs at a sustainable profit level. Even non-profit entities need surplus funds to allow for growth, and the occasional set-back.

Winning perspective vs. losing percentage.

Again, estimators must actually know the market value and the market demand before suggesting a structural change. Estimators learn their way around by digging into to every win and loss. The monetary difference is a single number outcome of a huge variety of factors. Estimators face a great deal of uncertainty trying to determine what factors played the commanding role to determine victory. Start by roughly defining the differences in each proposal. Then move on to define what’s “behind” each proposal in terms of sub roster, schedule, site logistics, relationships, market segment, and so forth. Breaking down the “winning combination” can be immensely instructive. The goal isn’t to exclusively look for quantitative differences, so much as differences in perspective. These are the insights that mold options into opportunities.

“After a lot of effort, it became clear that Mark doesn’t see a pattern here”

Risk is relative

Estimators are keenly aware of the quantities of all the building components. One area where each estimator is looking at the same job and getting different measurements is risk. Risk is the potential for loss presented in a deal. Estimators must understand that some portion of the risk in a job is quantifiable according to the strengths and weaknesses of the GC.

Estimating is about controlling risk and uncontrolled risk is very expensive. In some bids, it could be said that the lowest bidder was the least afraid of the opportunity. In other situations, the lowest bidder might be the least informed of the risk they’ve undertaken. Estimators work by bounding uncertainty. Every job could potentially suffer catastrophic and costly problems, but we’re in the business of preventing them. The better we are at our business, the less likely the problems are to occur. Better firms have lower risk. Perhaps more accurately, better build teams have lower risk. To this end, estimators should become very curious about which subcontractors were on the winning team. By tracking the results across the GCs and subs, a picture will emerge of who’s the market leader for any given scope of work. Like anything worthwhile, it takes a lot of work to develop this knowledge. Growth doesn’t always mean expansion. As businesses mature, their ability to do more with less grows in proportion to their commitment to excellence.

Nagging, price checks, and why cashiers don’t win bids.

Some GC’s are prone to assuming that broadcasting an invitation to bid (ITB) to every sub in a five state radius guarantees they’ll receive the best bids that the market has to offer. Many subs interpret the “cattle call” ITB to be a waste of their time. As a rule, the very best opportunities tend to be discrete because the leader of the “winning team” begins their campaign by enlisting their best players. If you’re a GC who must constantly resort to nagging subs for bids, you’ve probably wasted their time in the past, or your projects are simply unappealing.

Both cases are a symptom of a GC without any sense of who their subs are and what they’re good at. Estimating this way becomes little more than a cashier demanding a price check over the stores intercom. Lots of waiting, incomplete information, and very little money saved. When such a GC loses by an amount roughly equal to their profit, they assume their competition has bid at a loss. This cashier mindset leads to “checking the receipts” rather than comparing stores.

A roster of the awarded subs could potentially reveal an exclusive GC-sub relationship. It could also reveal that the winning GC carried a sub who wasn’t competitive among the bids you collected. This could imply that sub bid a lower amount to the winning GC. It could also imply that the winning GC found the make it or break it cost difference in a different trade’s proposal. Often, these look too good to be true, so the estimator has to sink a lot of their precious bid-day into deciding if it’s legitimate or not. This can lead to situations where low-value scopes of work are laid on trusted subs even if they’re not the cheapest.

It’s also possible you’ve found an angle to defeat that GC on the next similar project because you’ve got a better sub. Be advised that your precious sub may find their way to the competitors bids if you don’t reliably land work. It’s incredibly frustrating for market leading subs to bid to a GC who keeps a few dullards on the roster to pull the whole bid into a loss.

Protip: The sub who’s never cranky about the losses is the one causing them.

Faster follow-up

GC’s typically have the benefit of timely bid results from their clients, especially those with public readings. However many GCs would benefit from considering all avenues of information, including asking their subs. It’s terrifically common for clients to indulge in post-bid pricing requests with one or two of the bidders. Some clients believe in remaining silent until they feel certain of the decision to award. Many otherwise honest clients fail to reconcile that they transcended from bid scoping several proposals, to negotiating a different deal entirely with a favored bidder.

Subcontractors are often involved in these rapid post-bid pricing requests which in turn often requires that distributors and vendors be consulted. Everyone in the supply chain has personal and financial interests involved which means things won’t stay secret for long. GCs who can’t get their client to answer the phone should reach out to trusted subs to see what’s going on.

Bid shopping is a serious problem that thrives in secrecy and delayed information. I know of many jobs that were successfully won against bid-shoppers through coordinated efforts between the legitimate GC and their subs. Your average estimator would absolutely love to do their part to hurt a cheating competitor. I should point out that GCs who consistently and voluntarily provide accurate, and timely bid-results on everything they do earn the subs best efforts.

Glory follows virtue as if it were its shadow: Marcus Tullius Cicero

GC estimators must understand that there’s no sense in being an ethical bidder if you don’t prove it by acting virtuously. Success lies in being the best, and nothing sets the field of close competitors apart more starkly than the measure of their honesty.

But if it’s the client’s job, don’t they get to change their mind?

It’s absolutely and unequivocally unfair to send a Request For Proposal (RFP) promising contractual award to the lowest complete bidder by the deadline without committing to the low bidder on those terms. Once they’ve fairly awarded the contract, they’re free to negotiate any further changes with that GC at their convenience and according to the terms of the contract. If they want greater range to negotiate with a specific GC, they should dispense with the competitive bidding in the first place.

If an auctioneer accepted an offer after bidding closed, the entire auction is little more than a fraud. GCs need to hold clients to their own terms. The practice of proving market value by competitive bidding is why bids are “free” in the first place. Moving the goal posts to suit the client’s desires after the bid is dishonest and unfair. No good comes of pretending otherwise.

Submitted without comment

It takes a lot of losses to know what you’re doing

Uncertainty is the reason estimators exist. If it were possible to simply tot up everything perfectly, we’d use cashiers instead. Estimators must continually switch between deductive (top to bottom) and inductive (bottom to top) reasoning to balance uncertainty against market value. Inductive reasoning starts with the presumption that profitable work exists at market value. Working “backwards” from that market value, the estimator looks for ways to make that happen. Deductive reasoning is the comfortable and familiar “add everything up” practice of QTO’s bid-scoping, and spreadsheets. Both systems of reasoning involve uncertainty, however there is a cross-canceling effect when the systems are properly applied to one another on the same project. In most cases, you stand to learn more from your losses than your victories because the winner gets no feedback beyond the contract award. Losing a bid is a costly endeavor, so estimators should gain knowledge to improve from every effort.

For example. Let’s say you lost a bid on a simple remodel project. Working deductively, you did a QTO, and made sure that all the obvious scope was attributed to a subcontractor bid, or vendor. In your view, the majority of the risk of the project was driven by unknown/concealed conditions. You may have decided that approximately 15% of the shared wall space would require some measure of re-work in order to facilitate the project. Many estimators will provide a bid-directive to that effect to all bidders. Some subs will interpret this to be an open-ended question intended to prevent change orders. As such, the 15% of re-work might well be priced at change-order rates.

Working inductively, we compare the winners bid against our own. Unless specifically indicated, we must assume that their bid was complete, and that the work stood to be profitable at that amount. Compare the competitor’s operation to your own. If the competitor consistently wins similar projects, they probably have extensive experience mitigating the predictable risk. This doesn’t mean that they bid less than 15% of rework. Repeat business is the goal of most companies. Subs who regularly win work with a GC tailor their proposals to suit that GC’s preference. Subs learn what the GC will and won’t consider a valid change order. If some rework will be expected without a change order, the subs will include that work at their much-reduced bid-rate. Lacking a specified amount, the subs exercise their judgment. The more expert the team, the better the judgment, and the more likely the victory.

Working inductively, you might inquire with trusted subs to see how your competitor addressed the risk with their bidders. This conversation opens up avenues to compare the subs competitors and gain insights thereto. Keep yourself open to multiple premises to explain what happened. The rework was necessary in your opinion based on your perspective. Your competitors past experience in the building, or knowledge of the client might have altered your view of the bid-day situation entirely.

Be wary of gossip, or mean-spirited conjecture. We’re working by inferences and deductions that are based on corroborated information. Curiosity, positivity, professionalism, and kindness open the doors of opportunity. Everybody wants to win work, and everybody takes a loss from time to time. Begrudging a competitor their victory is a petty move, which is unworthy of a professional. Take the opportunity to share what you know to cultivate future communications. As with anything in estimating, you never get a perfectly certain view of what’s going to happen, but you can get very close. With time and experience, it becomes possible to see the critical dimensions of projects that drive your chances of winning the job profitably. With good information, the only thing you can’t make, are excuses.

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2 Comments | tags: Excuses, Losing, Uncertainty | posted in Uncategorized

August 24, 2015

Controlling Risk

By Anton Takken

If estimating was simply calculating the price of things that work perfectly, we wouldn’t be estimating, we’d be cashiers. Since estimating involves calculating risk, it’s worth some investigation into what is involved. Risk is the uncertainty of a return and/or the potential for a financial loss. The construction estimator must understand that sometimes things go very wrong which can cost substantially more to fix than the job was originally worth. Taken to its fullest extreme, the sky’s the limit for liability.

Like absolutely everything in Estimating, we start by bounding the problem. Companies purchase insurance policies for a reason, there must be a means to backstop the risk of the worst case situation. This allows us to avoid factoring unlikely risks like acts of nature into everything we do. As a rough starting point, we need to consider how the project, or doing what’s necessary to build the project will present risks to people, property, or contractual agreements.

Contractual risks

Most estimators will hone in on contractual penalties like liquidated damages as their main risk. It’s understandable that an easy-to-read penalty would garner attention, but this ignores a very fundamental aspect of risk appraisal. If you can control or manage the contributing aspects of a risk condition, the resulting risk is reduced.

Skeet diversified his portfolio with a “retirement vehicle”.

Taking liquidated damages as an example, the penalty for being late is less of a concern when the contract blocks the client, owners rep, and design team from impacting the production, or schedule. Some contracts require the bidders to submit their own Critical Path Method (CPM) schedule. This allows the General Contractor (GC) to define their duration, milestones, and completion dates. More control means less risk.

Screwing up is always going to hurt you

It’s worth mentioning that there are legal precedents which allow clients to pursue damages against a GC who’s late project delivery led to client losses. Contracts which include the phrase “Time is of the essence”, may not include stipulated liquidated damages however the client can recover damages against the GC for being late. Clients opening retail, resort, gambling, entertainment, retirement, etc, facilities can stand to lose incredible sums in lost revenue for every day they’re prevented from operating. Liquidated damages can actually be the least of your liability problems with high-revenue clients.

Diving deeper into contract law is beyond the scope of this article. I heartily encourage consultation with a contract administrator or attorney as needed. As estimators, we need to understand that penalties for failure aren’t the real drivers of risk. What drives the risk, is what drives the failure.

Flip the problem around. If absolutely everything goes perfectly on a construction project, you have a very simple trade of goods and services for payment. Contracts predominately exist to lay the groundwork for legal action for when things don’t go well.

Production + client delay = your risk

Contracts can, and often do, present conditions that work counter to the project’s success. These are the real drivers of risk. For example, a contract may stipulate the project deadline while also providing clauses whereby the client or their representative can stall production without corresponding schedule extension.

“We spent the last three weeks making changes, now we just don’t have time to give you a two-day extension”

Owners representatives are virtually never contractually at-risk for the outcome of their actions. Everything from submittal review delays to unanswered requests for information (RFI), can prevent the GC from getting their job done as valuable time passes. Contracts are generally written as though the plans and specifications, known as construction documents (CDs) are perfect. While there are certainly provisions for getting questions answered, and submitting change orders, the final arbiter deciding your fate is normally an unaccountable owner, or owners rep.

Good clients are lower risk but they are harder to find.

Project risk is certainly not strictly bound to the contract terms. Just as hiring good employees reduces the chances of problems, so too, does working for good clients with professional design teams. There are good and bad examples at every level of every market. Estimators must learn to size up their clients to get a sense of how things are likely to go. At present, Architects are often the “gatekeepers” of project opportunities for the GC. GCs looking for leads, should be careful to solicit the attention of Architects who attract good clients. The better the clients, the more discrete the opportunities tend to be.

Low barrier to entry work speaks as much of the client as the project. As Edmund Burke so artfully wrote: “Only fools rush in where angels fear to tread.” Better opportunities are out there, but you’ve got to do good work to see them.

Mitigation by bid scoping

GC’s mitigate risk by contracting out portions of the project scope to subcontractors (subs), and vendors. The subcontract provides a layer of risk-management in terms of stipulations, remedial actions, and so forth. By diversifying the risk among many subcontractors, the potential for a catastrophic problem is reduced. GC estimators spend a good amount of their time scoping subcontractor bids. Inclusions, exclusions, clarifications, and allowances frame the essence of what you’re getting for the proposed amount. GC estimators must be very careful when comparing subcontractor proposals because sub proposals are an integral part of how the subcontractor mitigates their risk on the project.

Specialty scope and the risk of the sub-tier sub

From the GC’s perspective, it might seem as though subs “miss” a lot of important scope, or that they’re lazy about including items that seem like they should be part of the deal. In practice, most subs are perfectly aware that the GC would prefer that they take on additional risk for work that’s not really their specialty. Inexplicably, GC’s will tolerate hiring upwards of half a dozen companies for the concrete work, but they have little to no patience for splitting scope in Mechanical, Electrical, or Plumbing (MEP) trades. If it’s pipe, it’s the plumbers job. If it’s wire, it’s the electrician. Perhaps it’s because concrete work is easier for GC’s to understand than the skilled trades.

Specialty vendors like Fire sprinkler, Photovoltaic (solar), Geothermal heating systems, and Fire Alarm are stand-alone companies that switch between subcontracting, and sub-tier subcontracting. Most subcontractors are ill-equipped to manage a sub-tier contract which adds to the subcontractors risk.

Artistic rendering of how the sub-tier-sub contract arrangement breaks down

GC’s pressing for these arrangements like the notion that they have only one contractor for “all the wire”. Lacking the willpower to learn about these “ghost trades” the GC’s are choosing convenience over control. Higher risk means higher prices, GC convenience adds up to squandered opportunities.

Risk in bidder spread

Bid scoping can portray risk in very stark terms. For example an estimator comparing three proposals obviously has a high, middle, and low bidder. It’s incredibly unlikely that the middle number will be perfectly between the high and the low. If the low bid is further away from the median amount, it’s an outlier. “Scary” low bids sometimes happen because people make mistakes.

Cost of replacement

The idea here is to quantify how much it would cost to hire a replacement if the low bidder fails. Be advised that once the project is under-way, the real cost to replace a subcontractor will always be more than the bid-day difference between bidders. Taking over the partially completed work of a competitor is a very different situation than the sub priced on bid-day. I should mention that there are plenty of legal recourse’s for subs who made a mistake on bid day. GC estimators must uphold their duty to investigate and correct bidder mistakes. Scary low bids should signal caution, that’s how a judge will see it in their courtroom. The risk in hiring a low bidder can be considered as the monetary difference between the outlier and the consensus median. I use the term “consensus median” to signify a price that would fall in the middle of the market-value proposals. Estimators should be careful about using the second low bidder as their consensus amount because it’s entirely possible that the low and second-low made the same mistake.

Mark and Jay aren’t picky about what they bid so long as nobody else wants it.

The less the estimator knows about the subcontractors submitting proposals, the less faith they can reasonably have in small data-sets. Estimators who’ve bid highly sought-after projects may find themselves inundated with subcontractor proposals. The proposals will tend to stratify according to contractor ability and interest in the work.

The myth of sub coverage statistics

GCs are always looking for greater “sub coverage” because a bigger data-set implies greater certainty in their calculations. It’s certainly nice if you can get it, but unless you’re a market leading GC with an absolutely irresistible opportunity out to bid, the odds are good that won’t happen. Market leading subs are the only relevant contenders for the project. Without their bids, a GC won’t win the job. So GC’s need to have relationships with those market leaders before the bid. GC’s hounding anyone else for bids “just in case” they come in lower, are wasting the subs time.

It works the same in reverse for subs. The subs can’t reliably win profitable work without a market-leading GC, which makes market leaders lower risk. Lower risk means lower prices, higher hit rates, and better profitability for everyone.

GC’s who stockpile sub bids are wasting most of the subs time. They’re perfectly aware of this which is why these GC’s are among the least likely to provide bid results. Often these are the bid-mill estimators constantly calling an hour from their deadline with jobs that “nobody’s looking at”. This often means one of two things; they’re unacceptably risky for your competitors to work with, or they’re hoping your rushed bid includes a mistake that benefits them. It’s bad business either way.

Ed has a feeling he might have under-bid the job.

Relative risk

We often think of a projects risk in isolation, rather than how the project affects our operation. Losing a critical bid can have dire consequences for a company. Deductive reasoning leads us to add up all the risks and consider the potential reward. Inductive reasoning works in the reverse. Starting with the understanding that we must win profitable work out of the available opportunities, we work within the boundaries of our current market to make the best decisions. It’s very easy to convince yourself that projects are too risky when you look at them in isolation.

Lots of companies become convinced that they’re good at building a specific type of project to the exclusion of everything else. I’ve encountered firms that were utterly convinced that they couldn’t build seemingly identical projects to their regular work, simply because the client was new to them.

As a company, the risk of losing an opportunity to capitalize on your expertise is substantial. Projects that are similar to past successes may indicate that your firms risk-mitigation is particularly effective for that kind of work. Your competitors may not have your expertise, which makes the opportunity less appealing to them. Market leadership is built on the ability to capitalize on opportunities that your competition cannot. You have to see them in order to hit them.

Perspective versus pessimism

Estimating is about controlling risk, not adding money for everything you’re afraid of. The more you know about what’s going on, the less you have to be afraid of. Estimators need to understand that pessimism is a poor proxy for knowledge. There are times you’ll know that a job is a time-bomb of risk. Constant pessimism devalues your council to ownership. There are lots of angry estimators forced into bidding bad work simply because their boss tunes out their complaints. The only thing worse than losing a good job is winning a bad one. In my experience, it takes a considerable effort to lose the truly awful jobs because wise bidders steer clear. Sometimes the only way to lose, is to decline to bid.

“We thank you for the opportunity…but we’re not currently bidding work in the carrion market.”

Timing

Sometimes the most significant risk in a project is how winning it would affect your ability to succeed in everything else you’ve got going on. Tight labor markets can limit growth which in turn limits the amount of work a company can take on before they can’t meet their obligations to perform. Seasonal rushes can quickly overtake the available resources leading to higher prices. Estimators preparing bids for work that will take place during seasonal rushes must consider how this opportunity compares against the most profitable work of the year. Careless estimators can find they’re suddenly on a hot streak winning bids during slow seasons, only to discover their summer is booked solid with low-profit work.

There’s risk in losing opportunities

Estimates are not free, so estimators must consider the risk of investing their time and energy into losing clients. Subcontractor may encounter GC’s with high bid volumes and low hit rates. I refer to these firms as bid mills since they grind out bids as quickly as they can. Sadly, short-changing the estimate leads to lots of mistakes. When they’re lucky, the mistakes lead to a lost bid, when they’re not, they land a profitless job. As a sub, your irresponsible GC’s problem eventually becomes your problem.

Bid mills compete in the warm glow of their accomplishments.

The very best protection against losses is to avoid doing business with irresponsible firms. The time spent on the lost bids could have gone to better opportunities with other clients. The rare and profitless win, consumes company resources to eke out a minimal loss on the project. Those resources were pulled from profitable employment with responsible clients.

The real risk of working with bid-mills is tremendous. Some subs could improve every aspect of their operation by firing bad clients. It’s often difficult for them to see it because they only see themselves occasionally winning bids. Gamblers go broke thinking along the same lines.

Safely getting from existing to proposed

Construction documents generally depict the existing and proposed conditions without going into much detail on how the construction is done. Architects typically rely on the build team to determine the means and methods necessary to realize their design.

On jobs with limited applicable scope, Architects may elect not to hire an expensive engineering consultant. The assumption is that a “little” engineering problem is an acceptable risk for the build team to assume. For example, adding a new piece of roof top HVAC equipment to an existing structure. Without engineering approval beforehand, any resultant failure will be the build-teams responsibility.

Civil projects can present environmental challenges that are safety concerns. Retaining walls are used to hold back soil that would otherwise slump, slide, or erode. Different soil types require “cut-backs” which relate the soils stability to how steeply it can be piled. Sandy soils are prone to cave-in so excavations must have gently sloped edges for worker safety while the walls are constructed. Restricted sites may not allow sufficient room for safe excavations. Ground-water, flash-flooding, and seismic activity can all generate additional safety hazards for workers. These are not simple problems with easy answers.

Projects dealing with compromised or hazardous structures are especially given to unique engineering challenges. These projects demand an engineered plan for every step to completion. Hazardous materials require a site evaluation, testing, and remediation plan built around worker and environmental safety. Estimators are often presented with a false choice; help the client to save money or take chances on safety. There is no choice, build safely or don’t build at all. Playing dumb, or passing the buck on safety issues won’t protect you when bad things happen. Local traditions and “school of hard-knocks” graduates often underestimate the magnitude of what is at stake because they don’t know the margins of error in what they’ve done. A lifetime of narrowly averting disaster does not, an expert make.

Nuclear option

Estimators can contact engineering firms and request a proposal to solve the problem. Often engineers will provide a roughed-out plan of action along with their fees to develop the design, do the calculations, and so forth. Often we get so hung up on the idea that half-baked design is an unavoidable vocational hazard, that we forget that our business is in contracting labor. Estimators work by controlling risk through whatever channels we can. It bears mentioning that estimators should list out the cost of this safety engineering as a breakout cost. Communicating the real cost of safe work may spur an honest client to get their design team on track. Once it’s made so clear, it’s difficult for clients and design teams to pretend they didn’t know it was an issue. Moreover, it gives the client a sense of your commitment to safely delivering their project.

Summing up

Estimating is about controlling risk, rather than simply summing it up. The savvy estimator is looking for ways to mitigate all of the risks mentioned above. Risk is most effectively mitigated by building an operation around successfully controlling problems common to the work you’re pursuing.

Some really excellent clients have horribly one-sided contracts. Until market forces cause them to reconsider their terms, these clients are a bountiful opportunity to the companies who have “seen past the contract” to know what they’re really like. Honest, cooperative, and communicative clients can mitigate the risk of an ugly contract.

Competitive bidding calls for perspective and judgment. Losing a bid isn’t the end of the world, but don’t kid yourself; there are consequences to losing. Time spent on the losing bid wasn’t invested in other pursuits (opportunity cost). Wasting your subs, or vendors time with fruitless bidding costs political capital by lowering your status as a market leader. Failing to justify your place on the client’s select bidders list may get you cut from future invitations.

Taken in whole, the impact of losing a bid carries its own, very substantial risk. “Throwing a number” at work you don’t want is almost always worse than declining to bid. Some GC’s may be concerned about “appearing weak” for backing out of a bid they’ve invited subs to bid on. Estimators understand that there are opportunities that pose much greater risk than they’re worth. Showing good judgment is far superior to a bluff. Showing respect for the sub‘s time is much appreciated. Often it takes a bit of time after the RFP to get a sense of the client and their design team. No amount of perfect bidding will protect against an unethical client. Starving bad clients of bids is one of the best ways to lower the market risk.

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