Tag Archives: Perspective

December 22, 2016

Seven new estimating ideas to try

By Anton Takken

We’re all looking for an edge to win a bid or make a project more profitable.  Estimating is a profession with deep roots going back through history.  It stands to reason that many of our current problems were familiar to our ancestors.  As with all human endeavors, we’re trying to improve on old problems, and sometimes a “new” idea is really just a rediscovery of a forgotten gem.  With that in mind, I hope the following seven ideas are at least new to most contemporary estimators.

#1 Provide constructability review for fee instead of conceptual competition for free

Conceptual estimating provides financial feedback on incomplete designs.  Since the complete design-development process can take months or even years, it’s important for clients to have a way to maintain alignment between their design and their budget.  There are many situations where a conceptual estimate can help the client to make an informed design decision.  General Contractors (GC’s) have traditionally extended this professional courtesy to assist and encourage upcoming projects.

Some GC’s believe they can make themselves indispensable to a project by providing extensive conceptual estimating.   They hope to secure a contract award before the design is completed.  This is commonly known as “client capture” and it’s the reason some firms will spend a considerable amount of time on conceptual bidding.

Seven new estimating ideas to try

“Scott does a lot of conceptual estimating and it’s starting to show.”

Since neither the Architect nor the Client pays for these conceptual estimates, they are naturally enthusiastic about soliciting bids from GC’s.  In some markets, it has become common to solicit competitive conceptual estimates from several GC’s without any intention or obligation to work with the “winning” GC on the final project.  The request for proposal (RFP) on such projects  encourage GC’s to provide design solutions, while studiously avoiding any reference to contract award.

GC’s with more optimism than caution end up as unpaid design consultants.  Some truly callous Clients will  “refine by bid” which is where all the estimators best ideas from one round of bidding are incorporated into the plans before they’re put back out to bid with their competitors.  This process is repeated until the client is satisfied that they’ve got the cheapest contractors building the best ideas.    I encourage estimators to find less frustrating ways to help their competition!

Clients may be unwilling (or unable) to award a contract to a GC on the basis of the conceptual estimate.  Nevertheless, these clients need budgetary feedback on their designs.  An unspoken detail of complimentary budgeting services, is that you can’t hold anyone responsible for bad information.  Clients who solicit several bidders are hoping to work around this problem by putting their trust in a budgetary consensus.  This encourages bidders to game the uncertainty to their advantage.  The bidders goal shifts from providing insightful conceptual estimates worthy of contract award, to landing an invitation to the final round of bidding.

Since Architects act as gatekeepers to new project opportunities, the GC’s will favor the Architects interests wherever they can.  This means that GC’s aren’t as interested in finding budget-blowing design choices as they are in delivering a plausible-sounding number.  GC’s who mostly chase conceptual work won’t attract market-leading subcontractors (subs) who have real opportunities to pursue.  Firms that cannot attract market-leading subs must often cut corners to be competitive.   All of these conflicting motivations serve to move the outcome of a conceptual estimate further from its purpose.   Many clients end up blind-sided by a budget blowout on their final bid as a result.

Estimates are not free.  Competitive bidders submit their estimates in a good faith exchange for either contract award, or bid results which help them to win their next bid.  Competitive conceptual bidding with no obligation to award or even select a contractor is a terrible practice that’s harmful to all parties excepting the Architect.

GC’s should offer clients an alternative.  A constructability review would furnish the client with not only the conceptual estimate, but a comprehensive report on the constructability of the plans.  Furnishing the client with a list of outstanding budgetary issues provides a way to track changes and guide progress.   The fee for these services should be commensurate with the labor involved in meeting the client’s needs, including recompense to any subcontractor consultants involved.

#2 Include sample subcontracts with every invitation to bid

It’s impressive that with the incredible amount of information that’s being effortlessly transmitted via email, and bid-letting software that one crucial document is virtually never shared before the bid deadline; the subcontract.   Many GC’s provide the sample contract under Division 1: General Conditions in the project specifications.  However that sample contract is only between the Client and the GC.  Most GC’s include subcontract terms that are much more stringent than those in the General Contract.  The most common are the “pay when paid” provisions which allow a GC to deny or delay payment to a sub because the client hasn’t paid them.  Some GC’s restrict the allowable percentages of overhead and profit on change orders on subcontractor’s change orders as well.  Other GC’s require every subcontractor to provide several hours of daily cleanup.  These are just a few of the many contractual requirements that Subs are expected to agree to after they’ve bid the job.  GC’s factor the general contract terms into their estimates as part of the project risk.  Providing a sample subcontract with every invitation to bid (ITB) shows the subs what the GC is expecting of them.  This avoids unnecessary arguments and negotiations for the Project Manager trying to get the project started.

Seven new estimating ideas to try

“Here we see a project manager fixing problems with the estimate… “

#3 Provide bidder responsibility matrix to delegate trade overlaps and identify sole-sourced vendors

Building on the concept of telling Bidders what you want from them, it’s a good idea to provide a bidder responsibility matrix.  There are tons of situations where several trades will overlap, yet nobody knows which trade the GC expects to do the work.  Rather than leaving these things to chance, it’s far better to actually provide direction so there won’t be any bid-day surprises.

Sole-sourced vendors are companies that must be hired for the project.  Sometimes they sell an exclusive material, other times there are proprietary systems that require specialist training.  The most common sole-sourced vendors will pertain to systems like; Security, Access control, HVAC Control, Fire Alarm, Elevators, Point of Sale (POS) systems, and Telecom.  Many of these vendors are “ghost trades” who only operate in a sub-tier-sub relationship.  If the affected trades don’t know who to call, they’ll just exclude the work entirely.   It’s absolutely incredible how much time gets wasted by all the subs trying to figure out who these sole-sourced vendors are.  GC estimators that provide leadership and information will quickly earn the loyalty of their subs.

#4 Provide “sellable” target budgets for individual trade solicitations on design-build estimates

GC’s who pursue competitive design-build bids rely on subcontractors to fill in a great deal of information.  These projects typically provide a narrative along with a rudimentary sketch of the work.  Lacking a target budget, the subcontractors have no context to interpret the design intent of the project narrative.  As a result, a lot of work is wasted in developing proposals that don’t meet the client’s needs.  Getting the subs dialed in to the GC’s expectations gives the whole team a cohesive plan of action.  Providing leadership and perspective is vital to successful bidding in a competitive market.

It’s worth pointing out that GC’s who have a Project Manager (PM) “bidding their own work” should make sure they adhere to estimating best practices .  Lots of PM’s “estimate” by collecting subcontractor bids and tallying the total of the lowest bids in each trade.  These PM’s have no idea what things should cost because they’re not actually estimating their projects.  GC estimators looking for an edge against their competitors can set themselves apart from the “bid collectors” by proving they are the firm that knows what a winning number should be.

In tight markets, this knowledge can undermine the hack GC bidders by giving the sub market a way to know when a GC hasn’t shared all the project requirements.  Transparency leads to trust and trust leads to cooperation .  The subcontractor market’s frustration with bidding practices that obscure, delay, and misrepresent what’s really going on shouldn’t be underestimated.  Being timely, honest, and forthright with important information will provide a sustained competitive advantage in most markets.

#5 Improve in-house estimating by hosting “lunch and learn” sessions with a market-leading subcontractor

Good leadership is difficult without good information.  Market-leading subcontractors can be a great source of trade-specific information for a GC estimator.  Understanding what drives the costs in complex system can open up options that would be overlooked.  GC estimators should strive to improve their knowledge by inviting a market-leading sub to a lunch hour session where they can present on some specific area of their trade and answer estimators questions.  These meetings can explore new materials, techniques, and technologies that estimators could potentially use for value engineering exercises.  Don’t forget that subs have extensive market knowledge about Architects, clients and competitors.

Reciprocity is a vital component of fair-dealing so GC estimators should share whatever they can that would help the sub to win more work.  Feedback on how proposals are scoped on bid-day can greatly improve a sub’s understanding of how their bids look through the GC’s eyes.  Poorly written proposals may end up on the “war room” floor when time is short, and the prices are close.   GC’s may lose the bid by these small differences so it’s very important for subs to have well-written proposals.

#6 Provide a team strategy that goes beyond simple pursuit.

The very nature of competitive bidding means that the majority of bidders will lose.  Many professionals assume that bidding is like a lottery, where your odds may improve in proportion to the amount you participate.  Their favorite slogan is “you can’t win if you don’t bid“.  If clients merely picked the winning GC out of a hat, this reasoning would have merit.  The reality is that the market-leading price for the proposed work isn’t generated by random chance.  Market leaders will consistently deliver higher value at lower cost than their competitors.  It therefore follows that any GC capable of attracting the best subs on the market will have a profound advantage in quality, pricing and profitability over their competitors.  When these firms pursue an opportunity, it’s incredibly hard to beat them without an excellent plan

Eagles and moths share the gift of flight, but moths squander their gift by banging against windows.

GC estimators should sincerely develop a strategy that plays to not only the GC’s strengths, but to their best subs’ strengths.  Winning  a bid has more to do with targeting the right opportunity than anything else.  Blindly pursuing every opportunity leads to consistent losing.  This tells market-leading subs that the GC is a participant rather than a contender.  GC’s that can’t attract market-leading subs won’t be competitive on dearly needed projects without sacrificing profitability.  Eventually this spirals to the point where every bid is a last-minute, underfunded, and poorly managed effort to keep the doors open.  The ever-present urgency to pursue every project is the most visible indicator that an estimator is adrift.

Seven new estimating ideas to tryEven the best teams get tired of running around

Estimating is a deadline-driven enterprise, and everyone participating knows this.  Invitations to bid that offer nothing but a strategy of pursuit aren’t capitalizing on the opportunity to communicate a viable strategy to win a profitable job.

ITB’s with statements like ;”we’re really going after this job” are presenting  their enthusiasm for the pursuit as a reason for subs to team up with them.  When these ITB’s are followed up with interns or secretaries nagging subs to bid, the tone shifts from enthusiasm to desperation.  Excellent GC’s don’t nag subs for bids.

GC’s who carefully select project opportunities based on their best allies in the subcontractor market aren’t doing themselves any favors by writing an ITB that implies the GC is desperate for company on their mindless pursuit.    If the GC’s best subs are market leaders, nothing is gained by soliciting every company in the book (or the database).  ITB’s can and should indicate when subs are short-listed for a targeted opportunity.  If it’s a great opportunity because the GC’s got a great team of subs, then the GC should clearly commit to their team. 

It’s worth mentioning that scoundrels who think “blind copy” gives them the power to misrepresent their commitments are mistaken.  Dishonesty is revealed in the supply chain just before the subs bids are due.  This is because the sales reps at distributors who sell to all the subs in a given trade have a vested interest in helping their customers to win.  Since everyone has the same deadline, the vendors can see who’s requested pricing.  Subs may have a lot of opportunities vying for their attention.  Sinking a few weeks of effort into bidding on one project may require turning down a lot of great opportunities.  Competitive bidding operates on principles of good-faith.  Once a sub knows the GC is willing to lie or cheat, there’s no reason to believe in fair competition.  Honest subs will choose to either withdraw from bidding or intentionally lose the bid so they can escape dealing with the dishonest GC.

In the decade that I’ve been an estimator, every profitless, contentious, mismanaged, and unpaid project started with some form of dishonesty.  It’s never the bid you lose that puts your business under, it’s the terrible job you won.

#7 Replace boilerplate bureaucracy with clarity of purpose

Modern construction is very litigious which is why companies call themselves “General Contractors” instead of “Builders”.   This is why GC estimators often think in terms of contractual liability.  Estimating is about controlling risk so it follows that many estimators would seek to reduce their risk by using standardized forms covered in catch-all provisions, clarifications, and exclusions.  This “boilerplate” can get so extensive that very little on the form is actually pertinent to the project at hand.

I’ve encountered proposals that were so riddled with boilerplate that they barely outlined the work to be done for the proposed amount.  Some GC estimators try to circumvent this practice by requiring their subs to use a “bid template” to standardize the format for the bid.  This is predictably unpopular with the subs because the GC’s formatting  limits the risky exclusions, clarifications, and notes.

Both of these examples illustrate how boilerplate bureaucracy swaps risk for cooperation.  The best cooperation is achieved when the risk is assigned to the parties who can best control the factors driving the risk.  Subcontractor proposals with boilerplate meant to replace a contract are false economy.  The GC’s ITB is a solicitation to bid on work under the terms of the GC’s subcontract.  While the GC’s get to set the terms of the contract, the subs are independent firms who must strike a balance between protecting their interests, and offering a useful proposal to the GC.  If the subs knew what the GC’s subcontract would require, they would have less risk to control.

Subs who don’t include the complete scope of work for their trade are generating liabilities for the GC.  The GC’s patience with those liabilities grows in proportion to their ability to find someone else to address them.  The more skilled the trade, the fewer options there will be.  This is why some “concrete” firms can get away with excluding rebar and/or concrete.  In contrast,  Electrical contractors are expected to include all wiring for the building, even when that requires a sub-tier contract for proprietary systems such as Fire Alarm, Communications, Building Management Systems, or Point Of Sale (POS).

Inexperienced GC estimator’s sometimes try to counterbalance their lack of knowledge with additional bureaucracy.  This translates to numerous and tedious bid revisions that steadily move away from a collaborative effort to win a job.  These revisions generate additional risk to the subs because risk-averse GC estimators are prone to losing bids.

Clarity of purpose is what’s needed here.  The GC estimator must understand it’s their purpose to profitably win work by controlling risk.  This is best accomplished by working collaboratively with market-leading subcontractors.  Demanding protection from all risk isn’t estimating, it’s one-sided policy that leads to profitless work.

Seven new estimating ideas to try

“I don’t know… something about light and heat, I handed it off to the estimator…”

In competitive bidding, profit may be considered to be a function of risk versus reward.  Making projects rewarding for subs increases the GC’s ability to attract top talent.  It therefore follows that reducing the risk for bidding subs will correspondingly increase the GC’s profitability.

It’s here that an engaged GC estimator can provide committed leadership to direct the best course of action.  The most common problems will pertain to what gets included, or excluded from the scope of work.  The design teams believes their primary function is to provide design intent, which the General Contractor  uses to develop a cohesive scope of work.  Design teams can successfully argue that even incomplete plans, convey the design intent.  As a result, the GC may find they’re facing a choice between losing the bid by including something or winning the bid by excluding something the design team expects you to have.

Many GC estimators are reluctant to carry subcontractor exclusions into the proposals they send to their clients. This creates a situation where the GC estimator must force their subs to remove the exclusions (pushing the risk onto the subs), or take the risk that they can be negotiated during the contract buyout (pushing the risk onto the build team).  Risk is always expensive, but problems get more difficult when there’s less time to solve them.

When a specific risk is dependent on the actions of the client or their design-team, it’s wise to clarify what’s included in the proposal based on your understanding of the design intent.  Giving the client insight into how you’ve managed the uncertainty clarifies your position in terms they can understand.  On bid day clients may interpret exclusions presented without context as inconsequential.  Yet when these selfsame issues cause a change order later on, they’ll feel cheated.  Empower the client to make informed choices by connecting their choices to project outcomes.

I hope these ideas push estimators to think beyond statistics, measurements and spreadsheets.  It’s easy to become confident in a process that has become complacent through repetition.  Estimators looking for an edge can set themselves apart by exceeding the standards of their competitors.  As Thomas Edison once said ; ” Opportunity is missed by most people because it’s dressed in overalls and looks like work“.

 

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© Anton Takken 2016 all rights reserved

 

 

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July 29, 2016

Perspective on percentages

By Anton Takken

Estimating involves a lot of details and mathematics which must often be communicated with great speed and precision.  Unfortunately, there are terms that are so frequently misused that the information being shared is of little value.  A percentage is a simple concept with great utility and flexibility depending on your perspective.

Sometimes 10% to one party isn’t 10% to the other

Subcontractors regularly call to request bid results of the General Contractor (GC) estimator to define how closely their bids are following market prices.  Estimating often requires discretion during the bid (before the deadline) in order to maintain a fair competition for the subs, and to protect the firms interests.  All too often, the focus on discretion leads GC estimators to be incredibly reluctant to provide their bidding subs transparency in bid results.  The best bid results many GC estimators will offer is a percentage presented in vague terms.  “You were 10% higher than the low bid” is a typical example.

For simplicity’s sake, let’s assume that the inquiring subcontractors bid was $100,000.  Ten percent of $100,000 is $10,000.  So we might think the low bid amount was $90,000 so far, so good. But it’s wrong!

Perspective on percentages

“Yep, that’s the look of someone who’s made a rookie mistake.”

If the low bid actually was $90,000, adding 10% would make the 2nd low bidder $99,000 not $100,000 because 10% of $90,000 is $9,000.

In order to figure out the low bid amount, using only the information provided we can lay out what we know in an equation.

The percentage given represents the difference between the low bid, and the calling subs number in proportion to the low bid amount.

Putting this into an equation gives us:

($100,000-$Low bid)/($Low bid) = 10%

Solving for low bid we have:

($100,000)/( 10%+1) = $Low Bid

$100,000/1.1 = $90,909.09

Deducting the calling subs bid from the low bid give us the dollar amount they lost by.

$100,000 – $90,909.09 = $9,090.91

This means the calling subs was $9,090.91 higher than the low bid.

Rounding to an even $9,000, it’s plain to see that the calling sub would have needed to cut 9% from their $100,000 proposal to match the low bid amount.  Since the entire point of bid results is to define what you’d need to improve, it’s imperative to correctly interpret what you’re being told.  The GC’s is telling the sub they are 10% higher than the low bidder, when the Sub actually needed to cut 9% to match the low bid amount.

That simplified example might lead you to think 1% is no big deal, and on smaller projects, that might be true.  Have a look at what happens when we run through that example again with a 30% difference.

($100,000)/(30%+1) = $Low bid

($100,000)/(1.3) = $76,923.08

$100,000 – $76,923.08 = $23,076

Round that to $23,000 and the sub only needs to cut 23% from their bid to make up a 30% difference at the GC’s desk.  A 7% difference in perspective can lead to completely wrong conclusions.

Just to sum up, the GC is calculating the bid-result difference as follows:

($Sub bid – $Low bid) / ($Low bid)= % Higher than low bid

The sub is calculating the percent they must cut their amount to meet the low bid as follows:

($Sub bid) / (1+ % Higher than low bid) = % to match low bid

Many GC estimators prefer to give bid results in percentages because this minor obfuscation  spares them from actually speaking dollar amounts aloud where they might be overheard and misconstrued as bid shopping.  Bid shopping is when a GC informs a colluding subcontractor of their competitors price for the purpose of soliciting a lower bid.  In some cases bid shopping is illegal, and in all cases it’s unethical.

Subs calling for bid results should be prepared to think on their feet to rapidly calculate the hard numbers behind the percentages.  Responding to the percentage provided with “So the low bidder was $XYZ amount?” gives subs a chance to confirm what they’re being told, without obliging the GC estimator to speak the number aloud.

514007541_1bd174d191_z

Photo by Andrew Dobrow

Contractor cloaking technology isn’t very sophisticated

Subs should be especially conscientious about clarifying the bid results they receive from  Project Managers (PMs).  PM’s traditionally “buy out” the estimate which means they’re checking their estimators work, and addressing the problems they find.  They might have discovered that the  bid-day low sub was missing some costly scope inclusion, which made a different bidder the legitimate low-bid.  This vital error-checking process naturally requires  discretion to avoid the appearance of impropriety.  PM’s providing bid results after all that review may be looking at a considerably different situation than their estimator presented.  Honest PM’s will do their best to work out the errors in the order of bid-day performance.  If the corrective addition to the low bid makes the new total higher than the 2nd low bidder, the PM will hire the 2nd low bidder (provided their scope is complete).

I should mention that it’s a curious coincidence that many of the most dishonest PM’s I’ve encountered have a habit of saying every bid was “close” or “within 2%”.  Estimators should be particularly wary of clients showing any signs of dishonesty.  The false pretense of a  hotly contested bid is a potential warning sign of bid-shopping, especially when similar projects deliver a larger spread between bidders.

Where percentages work, and where they really don’t!

There are several components of an estimate that operate on percentages.  Profits, taxes, fees, and bonds are frequently calculated as percentages of the total costs.  There are some estimators who believe that overhead should be calculated as a percentage of project cost despite the many ways this goes wrong.  Unfortunately, this archaic thinking is sometimes bound into contractual terms where change orders are limited to predefined percentages for overhead and profit.

Overhead is the cost of doing business over time, which is not directly driven by the project cost.  Imagine a one month duration project that has a slightly cheaper level of finishes, resulting in a lower total project cost.  Did that decline in finish alter the rent at your office? No, your rent is the same regardless of what your client’s project costs, so why jeopardize the means to cover your overhead by pricing it as a percentage?   This practice virtually guarantees that projects above a certain value will be overpriced, while projects under that value will be under-priced.  In extreme cases, you’ll never win big jobs, and you’ll go broke doing little ones.

The difference between markup and margin

All business is a balance of risk versus reward; estimators calculate that potential reward in terms of profit.  It’s here that we encounter some terms that are often misunderstood, and misapplied.  Let’s say we’ve got a project worth $100,000 after all the costs are included.  Now for that $100,000 worth of work (risk), we’d like to see 25% profit (reward).  This percentage is known as markup.

$Subtotal X Markup % = $Profit

$100,000 X 25% =  $25,000

We add that profit to our subtotal and our bid amount is $125,000.

Now let’s say we won ten such jobs in one year.

10 x $125,000 = $1,250,000

That means the company had a total revenue of $1.25 Million.  So the boss is reviewing the books at the end of the year which will show all the costs, and all the earnings.  The difference between all the costs and all the earnings is your total profit.

We know that every estimate had $25,000 for profit, there were ten jobs, and to keep things simple, we say everything went perfectly according to plan on all of them.  This means the total profit should be $25,000 X 10 = $250,000.

Let’s take that $250,000 total profit and divide it by the $1,250,000 total revenue to determine the percentage of profit we’re actually earning.

($250,000) / ($1,250,000) = 20%

The percentage of profit we’re actually earning on our revenue is known as the Margin. As we can see, a 25% markup yielded a 20% margin.  This is where estimators need to consider what’s going on from an owner’s perspective.  The overall risk versus reward to the firm is the total revenue versus the total profit.  They’re not working off the subtotals of every estimate, they’re working off the contracted total amounts.  Margin makes sense when you’re working off of revenue amounts, because it directly speaks to the profitability of your entire operation.

Imagine how serious it would be for someone who misunderstood markup to be margin.  The 5% difference between 25% and 20% may not seem like much until you consider that profit to be their annual income.  That would be like working five days a week and only getting paid for four!  Many entrepreneurs  have failed because they didn’t understand this concept until it was too late.

Photo by strange_r

Photo by strange_r

Jim knew things weren’t adding up, but he couldn’t figure out why.

Just like the bid-results example above, the differences grow with the percentages in question.  A 25% Markup results in a 20% margin, whereas a 33% markup results in a 25% margin.  The percentage of markup is always higher than the margin percentage.

Putting this into formulas we get:

% Margin = (% Markup)/(1 + %Markup)

% Markup = (%Margin) / (1- %Margin)

We can calculate the total with a specific margin by using this formula:

$Total = ($Subtotal) / (1- %Margin)

So why do people get this wrong all the time?

The construction industry is very competitive which means that contractors must bid with lower profit percentages in order to win work.  It’s quite common for hard-bidding GC’s in tight markets to bid with less than 5% markup.  The difference between markup and margin is quite small when the percentages in question are in the single digits.  If the project isn’t worth very much to begin with, these differences become even less significant.  Sadly, many firms have leadership that developed bad habits when they were small and just starting out, that are ruinous to the larger operation they oversee in the present.

Fiddling with your fee

Sometimes markup is known as a fee which can get confusing when we are dealing with cost-plus contracts.  Cost plus contracts are invoiced on a “time and material” basis with either a fixed fee (set dollar amount), or a fixed percentage.

In the case of a percentage based fee, it’s absolutely critical to understand whether the fee is actually a markup, or a margin.  Contracts stipulating that the contractors fee may be no more than XYZ% of the total invoiced amount, are allowing the fee to be calculated as a margin.

Conversely, contracts stipulating that the contractors fee may be no more than XYZ% of the total time and material costs, are requiring the fee to be calculated as a markup.

This same logic applies to contractually stipulated overhead and profit percentages on change orders.  It’s been my experience that if the client took the trouble to stipulate overhead and profit percentages, they’ll likely limit those percentages to markup only.

I hope this article has helped to shed a little light on how percentages change with perspective.

 

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© Anton Takken 2016 all rights reserved

 

 

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March 28, 2016

A Modest Suggestion to Improve Budget Checks

By Anton Takken

I’ve written before about conceptual estimating and some of the challenges that it presents.  We conceptually estimate whenever the plans and specifications are too incomplete to facilitate a normal contract.  This means that conceptual estimates do not constitute a binding contractual obligation the way they do on a “real” or “hard-bid” situation.  Correspondingly, the client is typically under no obligation to award a contract, or even select a contractor for future award based on a conceptual bid.  It’s supposedly mutually understood that conceptual bidding is a courtesy that contractors extend to clients and their design teams to facilitate future work.  Many General Contractors (GC’s) see conceptual bidding as an opportunity to get in front of the client.  They hope that their investment in conceptual bidding will lead to contract before all the drawing stages are completed.  This is known as client capture.

A Modest Suggestion to Improve Budget Checks

You’ve got to enjoy those victories

The Architect knows more than they’re letting on

Before we go much further we need to address some of the misconceptions about what’s really going on.  First and foremost, we need to understand that the professional with the most information, and the most authority to make informed decisions to align the design with the budget is the Architect.  The American Institute of Architects (AIA) has recommended policies and procedures for the project process.  These policies aren’t shy about demanding not only budgetary information, but insight into how the budget gets approved, who might be opposed, and what can be done to ensure the job moves forward.  The Architect knows what features must be included and they know the budget they’ve got to hit in order to get the job approved.

Further, any Architecture firm with sufficient experience has an impressive backlog of information for the costs of past projects.  This information is far, far, superior to what any individual GC might have because they have access to not only the awarded bidder’s proposal, but the losing GC’s bids as well.  This is profound feedback on their design that they can collect every single time their plans are bid.

Not only are the Architects sitting on competitive bids for their plans, they’ve also seen the change order costs for all the projects they’ve built.  They have a uniquely accurate insight into how costly missing, incomplete, or changing information can be on an issue, by issue basis.

Inflection point

This brings me to one of the most canny contractual moves I’ve ever seen.  The AIA writes the vast majority of construction contract templates.  It’s therefore not surprising that these contracts absolve the Architect of any responsibility for the financial outcome of their work. So when the lowest bid they received blows the client’s budget, the Architect isn’t responsible.

This makes a certain degree of sense because the Architect is independent of the GC’s bidding the job.  They can’t be held responsible for market conditions, or contractor business decisions that are outside of their control.

A Modest Suggestion to Improve Budget Checks

However, this absolution of responsibility has opened the door to corruption.  Architects and their design teams can, and do, sole specify vendors who inflate their prices because they’re protected from competition and transparency.  Everyone in the distribution chain realizes that exposing the corruption to win a single job, may cost them competitive pricing on everything else they’re bidding.

Playing dumb is a costly game

It’s obvious that an Architect can’t do their job without knowing the clients budget as well as their project expectations.  It’s also obvious that an Architect couldn’t be expected to balance the project expectations with the clients budget, unless they had a sense of how much their design would cost.  This working knowledge is a function of the Architects experience.  Taking this one step further, it’s therefore obvious than an experienced Architect has very little excuse for blowing a clients budget.

GC estimators receive Request For Proposals (RFP’s) from the client or their architect which outline the expectations and obligations for the bid.  These vary in formality, however the basics of the bid and subsequent project are provided to all invited bidders.  Some government projects are required to show the estimated project cost on every RFP.  It’s very rare to see this information provided anywhere else.

Conceptual estimating requires the bidders to fill in the gaps in the documents.  This means that a conscientious bidder is forced to make design decisions and price them in a competitive setting.  While there may not be a contractually binding obligation to honor their conceptual price, a bidder is aware that it is unprofessional to provide erroneous or misleading information  Experienced bidders know that clients and design teams virtually never remember the qualifiers, clarifications, or exclusions.  The lowest number they got is what they’ll remember.   In tight markets, clients may have several GC’s bidding each stage of plan development.  This can mean three or more rounds of competitive bidding before the final contract award.  Every GC may have two dozen trades, with three or more subs per trade.  The collaborative cost of all these estimators pricing a project through its document development is staggering.

A modest solution

The entire point of a budget check is to verify that the design cost won’t progress outside of the clients ability to pay.  If things aren’t adding up right, it’s easier to scale back earlier in the process so the final Construction Documents (CD’s) attract acceptable bid amounts.  The budget checks are tied to plan development stages which are known to the design team and the client.

For example, a 50% design set may only have the major  Heating Ventilating, and Air Conditioning (HVAC) equipment located on the plans.  The Mechanical Engineering consultant may need to run some calculations to make their final specification selections, but they know the magnitude of the final system and how it will correlate to the mechanical portion of the project budget.

If the 50% drawings don’t provide the estimated magnitude of the system so the HVAC bidders are forced to fill in those blanks to conceptually bid the job.

A Modest Suggestion to Improve Budget Checks

Efforts to improve engineering transparency are ongoing…

Basically the conceptual bidders are pricing their vision of the project rather than the design teams vision of the job.  Design changes implemented on the conceptual pricing feedback aren’t actually based on universal comprehension of the original plan.  If the HVAC bidders filled in the gaps with unnecessary or inefficient selections, they’re pricing a completely different design than the design team had in mind.  Since conceptual estimators are wary of angering clients when the low-cost assumption is shot down, they may skew to higher cost answers to guard against the unknown.

We have a situation where Clients are asking if the design is on track, and the bidders are playing guessing games with the designers intent.  None of the answers are meaningful because the most insightful information isn’t provided.

I propose that RFP’s for budget checks include a design-team estimate breaking down the clients budget into Construction Specification Institute (CSI) Masterformat divisions.  The Mechanical Engineering consultant in the above example would provide rough magnitude descriptions of their planned equipment along with budget allowances for each component.

The context of the RFP completely changes because the design teams budgetary assumptions become the baseline of conceptual estimating.  Instead of asking what some poorly rendered thing costs, the RFP asks if their plan is on track.

The GC’s responding have a uniform means of quantifying the scope, and they can identify budgetary inaccuracies on a line-item basis.  This not only improves the design teams understanding of what’s driving their budgets, it also reduces the GC’s risk in answering conceptual questions.

This also resolves the ticking time-bomb of last round changes to the plans that suddenly reveal costly items that were always expected but never communicated during earlier budget checks.

A Modest Suggestion to Improve Budget Checks

“We found a few concerns in the Landscaping budget…”

What would need to change

For starters, Architects would need to become more transparent and accountable for the impact of their decisions.  Currently, budget checks are like a theatrical production intended to feign concern for staying on budget, while collecting the means to blame GC’s when the job comes in over budget.  Budget checking doesn’t need to be a charity effort in an Architects theatrical production of “The budget is blown” starring “The angry client”!

Budget checks are not offering a fair contract award to the lowest bidder in exchange for a free bid.  Since there is no legitimacy without reciprocity, the bids shouldn’t be free.  If we can agree that it’s a professional courtesy that’s necessary to foster market growth, we should be able to agree that Design teams need to be more respectful of the markets time.  Basically, if the design team knew what they were doing, checking their budget should be a simple process.

There is an obvious need for Architects to have their own in-house estimating, scheduling, and management professionals.

Likely resistance

The fundamental link between design intent and cost outcome cannot be waived aside in the context of a budget check.  Either the Architect is a responsible and capable professional, or they’re just hoping whatever they draw will pass budgetary muster.   Architects may feel they have little to gain by transparency in inverse proportion to their professionalism.

Admitting that to their cost knowledge may lead to clients demanding that they pay for design errors and omissions.

A Modest Suggestion to Improve Budget Checks

Even when they’re spiraling out of control, Architects will color coordinate!

Of course, there would be fewer change orders if the budget-check process was actually grounded in a meaningful process to correct the Architect’s course via contractor feedback.  Also, the budget-checking may provide sufficient pricing information to later argue that change orders are overpriced.

Incompetent design-teams won’t likely be any better at estimating than they are at Architecture.  Budget checking an obviously flawed estimate isn’t going to be fun for GC’s looking to impress the client.  However GC’s will benefit from having a real black-and-white illustration of the Design teams competence to refer to on bid day.  Clients may fail to recognize the nuance of a complex architectural depiction, but they’ll be able to see how their Architects work fell short of what they promised.  It’s politically difficult to tell a Client they’ve hired the wrong team, but a red-lined estimate showing where and why things were wrong may send the same message.

Adding estimating and management staff to a design firm may be seen as an onerous obligation. Many design teams have been able to operate on fuzzy program designs that fall well-short of being an accountable estimate.  Plausible deny-ability is built-in via sloppy and opaque documentation.  Nevertheless, design firms are selling their clients a promise to responsibly translate their clients vision and budget into a successful project.  Clients looking for a qualified architect should focus less on computer-aided design innovation, and more on sound business practices.

Likely blow-back

The entire concept of client capture via conceptual estimating would be effectively turned on its ear.  Rather than telling the most compelling story of how the job might be done, conceptual bidders would be editors to the Architects narrative.  For firms that have been successful with client capture, the budget check as I’ve proposed would offer much less latitude to sell the client on your companies abilities.

There’s nothing about my proposal that addresses the possibility that the final round of bidding could still exceed the clients budget.  Market factors like seasonal rushes or shortages can have profound impacts on the bid-day amount.  We all have to cope with factors that are outside of our control.  However, it’s worth pointing out that GC’s could inform their potential clients of changing market conditions that would affect their budgets.  Additionally, the Architects estimate defines the limits of the scope intent which reduces risk, which in turn lowers pricing from the GC’s.

By a wide margin, the group most likely to oppose my proposal are the cabal of corrupt professionals who would find it harder to maintain their business practices.

A Modest Suggestion to Improve Budget Checks

Derek is just trying to build the only way he knows how…

If Architects were to reveal the actual cost of corrupt vendor material, it would immediately attract the clients attention.  Even having a placeholder for a future sole-specified product would attract the bidders attention leading them to offer more cost-effective options.  If the Architect attempted to add the sole-specified vendor in the final round of bidding, the budgetary impact would be easily audited. GC’s who participated in earlier rounds of budget-checks would be quick to identify the chicanery to the client to explain why the budget jumped.

Some GC’s may be opposed to my proposal because it indirectly illustrates their faults.  If the architects estimate is based on contracted amounts of similar work, they’re providing accurate information about what market value pricing is supposed to look like.  There are some GC’s who’ve never actually seen a market-value subcontractor bid because their approved subcontractor roster is so limited.  These GC’s will initially inform the Architect that their budget for that scope is too low.  Architects with several GC’s checking their budget may find that they can tell when a GC has an overpriced sub on their roster.

The next round of budget checking would tell all the bidders how they compared to the winning team.  This neatly side-steps the insidious nature of GC’s who withhold bid results from their subs.  It won’t help the GC’s who prefer to avoid transparency, but it will help the industry to be better informed about the going rate for work.

Final thoughts

If the market is helping the client to achieve their goals, it’s only fair that the process should help the market to be more successful. Estimating should never be free.  If you’re not winning a contract award, you should receive feedback on how to win the next time.

Lots of subs would be far better off by bidding to a more competitive GC.  GC’s need to know when they’re failing to attract market leaders so they can correct course.  Bureaucratic inertia and dysfunctional relationships lead to lots of wasted opportunities.

Architecture firms seeking to market their abilities to potential clients would have a market-proven means to show that they can design within the clients budget.  Undermining this fundamental concept is where our industries contractual adversity takes root.  True professionals must raise the industries standards to shed daylight on the scoundrels operating in their shadow.

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© Anton Takken 2016 all rights reserved

 

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March 16, 2016

Warning Signs

By Anton Takken

Will Rogers once said “Good judgment comes from experience, and a lot of that comes from bad judgment”.   While there’s certainly some truth in that statement, an awful lot of suffering can be avoided by recognizing some common warning signs. It’s been my experience that all the truly awful projects had one thing in common; dishonest people. I realize now, that every one of them put off some warning signs right at the beginning. So in hopes of sharing my hard-earned good judgment, I’m going to start with some background on why people disregard warning signs.

Warning signs

“I’ve got three good reasons why we should turn back…”

Judgment isn’t an insult

Right off, we have a popular perception that exercising judgment on the actions of others is an unkind or hurtful act. In simple terms judgment is the ability to make considered decisions or come to sensible conclusions. We have to exercise judgment to make good decisions. Estimators exist because there is uncertainty. If it were possible to simply add everything up, our job would be done by cashiers or accountants. It naturally follows that estimators must exercise their judgment if they are to do their jobs successfully. Estimators cannot afford to limit their perspective to the documents they’ve been provided. The project will happen in the real world, which means the uncertainty and risk of everything involved in the project should be considered. There are times where the people involved are the greatest risk of the project. Ignoring or underestimating the harm a key player can inflict, is a potentially ruinous mistake. If giving everyone the benefit of the doubt was a universal business practice, contracts wouldn’t lock in the estimated price.

Critical thinking

Getting back to influences that shift perspective, we must move to ethical reasoning. Critical thinking, also known as the Socratic Method is the classical means to grapple with moral dilemmas.   The basis of the approach is a line of inquiry meant to draw out ideas and underlying premises. A series of hypotheses are presented, and each is tested to rule out those that lead to contradiction.

The clean and clinical Socratic Method takes a turn when you’re considering what to do with potentially dishonest people. It’s here that we entertain “devil’s advocate” or “how would you feel” arguments about the merit of your concern. I’ve worked with diplomatic and polite professionals who simply couldn’t bring themselves to see potential malice in others. Naiveté and bad judgment are constant companions. A lot of wrong-headed policy decisions are made by people who want to appear virtuous without doing the work to ensure a moral outcome.

For example: A General Contractor (GC) may become aware that their client isn’t conducting a fair bid. Their competitors are benefiting from additional time or information that’s not shared formally or equitably.   Nevertheless, this GC upholds their “policy” of bidding according to the terms of the Request For Proposal (RFP) simply because they were invited to bid.

 

Virtue-signaling

Virtue-signaling, is more about the appearance of virtue, than acting with moral fortitude.

Warning signs

Sure Al could bike to work and avoid the traffic, but then nobody would see how superior he is.

In my example above, the GC is knowingly consuming their subcontractors (subs) time chasing a bid for an unethical client. Not only are they unlikely to win the job, they’d be contractually bound to a dishonest client if they did. Obviously it’s not the GC’s fault that their client is acting dishonestly. However the GC has options to act with integrity. The GC could contact the client with their concerns and withdraw from bidding if they were well-founded. The GC could also opt to submit a conceptual courtesy bid to give the client, their subs and themselves a face-saving exit from a bad situation.

Hope and second guessing

Entrepreneurs are an optimistic bunch. Seeing an opportunity in every difficulty is a critical component of their success. Estimating is a craft but lots of entrepreneurs start to see bidding strictly in terms of competition. Estimators may take pride in landing a few percentage points apart on bid-day because they’re aware of how hard it is to get to that total. Unfortunately, narrow losses are still losses. Tight markets increase the pressure on estimators to capitalize on every opportunity. Lots of desperate estimators jump at the chance to bid on turkey jobs because they’re hoping more than they’re thinking. Second-guessing your hard-won knowledge is using your best tools to build a trap for yourself.

Warning signs

Legitimacy and reciprocity

Take a moment to consider how construction estimating relates to clients, the market, and to contracts. From the RFP to the contract award there are a chain of events that proceed entirely on good faith. The client expects free bids from the GC’s according to the construction documents (CD’s) by their deadline in exchange for fairly awarding the contract to the winner of the bid.

There’s a lot to unpack in that last statement. The GC’s are committing their resources and the resources of their subs to providing a bid based on the client’s CD’s. Those resources are expensive and they are limited. So what’s in it for estimators facing lots of competition? The client is promising to fairly award the contract to the winning bidder. This obliges the client to prove the bid was fair by providing bid results to everyone. So each estimator is guaranteed to get either win a contract, or information on how to win their next bid. Anything that’s true at the Client-GC level is equally true at the GC-Sub level.

Estimators have an obligation to responsibly invest their company’s time in legitimate pursuits. Therefore the legitimacy of a potential opportunity, is dependent on the client’s reciprocity. Estimators must understand that a foolish investment cannot be recouped. So it is especially important to pay attention to early warning signs.

Warning signs

Warning signs

#1 The CD’s don’t support the clients schedule

For example, a client with a set of 50% complete drawings dated yesterday who claims they’re already in for permit so they can start the day after bid-day.

Unless the job is very small, it’s implausible that the clients design team could finish half their work in the time it would take you to bid the job. Even if that were the case, why pay to submit plans that aren’t likely to pass building department review if the completed drawings were forthcoming? The job is obviously not going to start when the client claims, so what is really going on? Bidding on incomplete drawings means that the estimator will have to creatively “fill in the blanks” of the design. Some clients use this ambiguity to request alternates or Value Engineering ideas for their project. These clients take the best ideas from the “free” bids and direct their design teams to include them in the final plans before putting the whole thing back out to bid. Feigning urgency and in need of assistance is a tactic to attract bidders looking to convert a conceptual estimate into a contract. I’ve seen clients who consumed so much of a GC’s time in estimating that the job was no longer profitable to build. That’s a very expensive way to give your competitor a job!

#2 The plans are ancient

Warning signs

“We’re working with a familiar design…”

Most legitimate projects on the hard-bid market will have plans that are dated within a month of the RFP. Design development can be a lengthy process that taxes the clients’ patience to get underway. Most clients are in a tremendous hurry to get their projects out to bid because it’s a major step in getting their project built. CD’s that are several months old could indicate that the project has previously bid. Savvy estimators might figure they must have come in over-budget so they’re re-bidding the job. They might be right, but it’s worth considering that a budget-blowout is cause for design/scope revision.   Revised drawings get new dates, and that didn’t happen. Clients who simply felt they could get a better price by re-bidding are violating the basic reciprocity that makes them a legitimate client. They’re simply beating the bushes looking for someone below market value.

#3 The plans show more scope of work than the RFP requires

They’re called Contract Documents for a reason. The contract requires everything shown on the plans and specifications. Vague and/or informal instructions to “just bid this part” of a larger project creates a situation where the contractor can’t simultaneously follow instructions, and address their contractual risk. Why wouldn’t a legitimate client pay their design team to define the limits of project scope in a contractually enforceable manner? In my experience, these clients are feigning a competitive bid to collect information for later negotiations.

#4 The plans have the wrong address

Believe it or not, this is an incredibly common practice with chain stores and restaurants. Plans for a project in a different state are put out to bid with instructions to bid as though it’s identical to the proposed location. When the client won’t invest enough to revise their drawings for a new location, it’s a warning sign that they’re not sincere about writing a contract with you.

#5 The plans have a different contractors name on them

Its common practice for contractors engaged in design-build projects to have their names and logos put on the plans they develop. So when plans are put out to bid with a different contractors name on them, it’s an indication that a design-build contract fell through. Most contractors make their money on the build portion, so it’s unlikely that they’d happily give up that work. I’ve encountered situations where a competitor was suing the client because they were never paid for their design. It was difficult to imagine a successful project emerging from that debacle.

Warning signs

“Laugh all you want Tim, they’re your client now!”

#6 The client is still looking for money

Charity organizations are often obliged to fund their projects with some combination of pledge drives, donations and loans. There’s nothing wrong with that however an estimator needs to be aware of when a client’s ambition exceeds their finances. I’ve been to job walks for church remodels with a pledge drive “thermometer” showing they’d only raised a fraction of their goal. Those projects never got off the ground despite the client’s optimism.

#7 Unprofessional plans and bad clients

Clients tend to attract design teams with similar priorities. Truly excellent clients are generally willing to pay for the best professionals so their projects are successful. The worst design teams tend to work for clients with risky priorities. Projects that are run by committee like Education, Religious, and smaller Government facilities are bastions of poor decision-making. These groups are often seeking to spend their entire budget so they generally require a multitude of alternates that allow them the means to “upgrade” from their basic project without seeking additional funds. Vague, misleading, and incomplete plans are par for the course because these clients want to spend as little as possible on their design. In many cases, the committee members have no construction experience so decision-making and leadership will be haphazard at best. The design teams focusing on this market are well-versed in the arguments that poor plans create. No matter how incomplete the plans, these design teams will make certain they’ve laid all responsibility on the contractor.

#8 Past as prologue

Chain stores and restaurants have a tendency to use a “universal” design for all their locations. Over time, the company builds new stores and encounters change orders for something that was wrong in the plans. The client directs their design team to change the plans for all future work which generally takes the form of an added note on the plan. Over time this “universal” plan becomes inundated with obscure, trivial, and often pointless notes that solely exist to prevent change orders. The clients desire to avoid change orders creates a situation where the relevant scope is concealed from the bidders. A better plan would require fewer notes and would communicate more effectively, but the client isn’t willing to pay for that.

Similarly, clients with onerous RFP requirements designed to facilitate future arguments speak to the clients history. While it’s understandable that a client would want to avoid past mistakes, it’s worth considering what the client learned from that experience. Dishonest clients are often convinced that everyone is trying to cheat them. These clients tend to believe that cheating is simply a matter of beating the contractor to the punch.

#9 Nobody gets the same story

Clients and/or design teams that only answer questions off the record may pass it off as a means to rapidly respond, or to foster a “friendly” rapport with the GC. The bureaucratic process of writing an RFI, and getting it answered via an addendum is admittedly a lot of impersonal work. The great advantage of the formal process is that it’s the only way a bidder can change the contract documents. Moreover, the formal process also provides a measure of assurance that your competitor is getting the same information. If the client and their design team won’t provide direction formally, there’s a chance it won’t be a fair bid.

#10 The job has bid before         

Reciprocity is tied to legitimacy and that’s especially true when it comes to clients who aren’t willing to award a contract to the low bidder. Lots of clients put their projects out to bid at the Schematic Design, and Design Development, stages to “check” that their design is within budget.

Warning signs

Conceptual bidding: a process of going nowhere until you reach your destination.

Unbridled optimism leads GC’s to think their conceptual estimate will be so good that the client awards the contract before the Construction Document’s are finalized.  This process is known as “client capture” and it’s great when it works out. However unless the client has made promises to that effect, it’s more likely that the client expects this professional courtesy to be free of any reciprocal obligations.

There are some clients who maintain this perspective even on their “final” drawings. They are constantly beating the bushes for better prices by re-bidding the job with different contractors.   Developers are particularly given to this practice. An absolutely staggering amount of market resources are wasted on these pricing exercises.

Clients aren’t the only ones who use this tactic, unethical GC’s who’ve won a bid will solicit new bids in a gambit to find a cheaper subcontractor. The subs who brought the GC their bid-day victory, are rewarded by a craven attempt to gain profitability via their competitors after the fact. Whether the GC is technically engaging in outright bid-shopping or not, it’s absolutely wrong.

You may discover your project was previously bid when vendor quotes are faster than normal and carry the date of the original bid. Distributors will often call subs to ask why something is bidding again. These same people will contact the previous bidders tipping them off that the job is back out to bid. GC’s who suddenly receive an early proposal from an uninvited sub may have good reason to suspect they’re not the first to bid the job.

As warning signs go, learning that a job has bid before should be cause for serious concern. There are very few legitimate reasons why a client would be forced to re-bid a job. Clients with contractors or financiers backing out of the deal would be a legitimate reason, however this is extremely rare. Subcontractors should be especially concerned about any GC who’s trying to get a sub proposal after the GC won a bid. The best case scenario is the GC had a sub back out on them. Any GC who’d accept proposals from hack bidders to win a contract isn’t willing to control the project’s risk. Why sign up to work with a rogues gallery of misfits who will drive the project into failure? It’s far more likely that the GC is trying to undercut the subs who helped them win in the first place. These GC’s won’t become more honest after contract award.

A note for the cynical

Oscar Wilde once said; “A cynic is a man who knows the price of everything and the value of nothing”. Estimators spend a lot of time figuring out what things should cost. It can be easy to lose sight of the bigger picture where estimating translates to controlling risk. Every enterprise will rely on people acting in their interests, in accordance with their nature. My answer to the cynics is to pay attention to people’s nature. Most of the problems we seek to guard against fall into patterns of behavior that are more complex than avarice. From the estimators point of view, there may be more risk in working for the indecisive, or ignorant than the greedy.

Many estimators fail to grasp the significance of picking good opportunities to pursue. Successful estimating starts with culling the lost causes, and the wastes of time. Impressing a client who won’t hire you isn’t worth much when your company needs work. It’s very important to understand that our industries malefactors are perfectly aware of how hopelessly optimistic contractors can be in hard times. Feigning legitimacy is their stock-in-trade so hard-times call for serious consideration of who you’re dealing with. Estimators working in a down market must recognize these warning signs as a basic survival skill. Working for a bad client in hard times has put many companies in dire straits. It doesn’t take much for a single bad job to pull an entire operation down. Estimators have a duty to protect their firms by heeding warning signs and steering a better course.

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© Anton Takken 2016 all rights reserved

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February 24, 2016

Why people won’t follow instructions

By Anton Takken

If you work long enough, you’ll eventually have a moment where you’re stuck wondering why someone didn’t follow your instructions. Estimators, especially estimators working for a General Contractor (GC) struggle to get their subcontractors (subs) to follow instructions all the time. It would be easy to suppose that typical explanations such as inattention, or laziness explain this behavior but there are overlooked reasons that could be playing a role here.

Why people won't follow instructions

“Wait,  I can explain…”

 

A reflection on risk

Let’s start by considering something that all estimators have in common; risk. Risk is the uncertainty of a return and/or the potential for a financial loss. If we really think about it, controlling risk is more important than simply winning work. For example; winning a risky job is worse than losing a profitable opportunity.

The GC’s contract exchanges the liability of the entire project scope for their bid amount. The GC controls the risk by contracting portions of the project scope out to subcontractors. Once the project scope is divided and attributed to the subs, the GC’s remaining risk is greatly reduced because they have the contractual means to enforce performance.

This means that the GC estimator is primarily concerned with “complete” sub proposals. Exclusions, clarifications, or limitations that leave uncertainty for the GC estimator are considered potential “holes” in their plan. It’s understandable that subs not following instructions is a common frustration for GC estimators.

Perspective on the plans

The sub estimator has a profoundly different perspective because there is very little contractual latitude when it comes to accepting liability for their scope of work. Sub estimators are keenly aware that they must bear responsibility for misunderstanding, overlooking, or underestimating the scope of work shown in the Contract Documents (CD’s).

It’s incredibly rare for design teams to accept financial responsibility for misleading, incomplete, contradictory, or incorrect information on their designs. Specifications often stipulate that any design errors or omissions must be brought to the design teams attention BEFORE the bid via a Request For Information (RFI). Many projects obligate the bidders to walk the job. Some specifications even require bidders to verify hidden conditions during the walk regardless of how impractical or impossible that really is.

Why people won't follow instructions

“We’re all along for the ride, but Engineer’s hate field trips…”

Essentially the design team expects the CD’s to be vetted and reviewed for constructability before the bid deadline, free of charge, and they believe this is grounds to dismiss change order claims based on the inadequacy of their design at bid time.

A competent GC estimator understands that they are empowered to write RFI’s, and bid directives to communicate the questions and answers necessary to work around issues with the CD’s. Sadly, many GC estimators assume a passive role when it comes to inadequate CD’s because timelines are tight, Architects might get cranky, and it’s a lot of extra work. Some GC’s won’t write an RFI unless there’s a subcontractor “revolt” where all the subs of a given trade refuse to bid unless an issue is resolved. This attitude starves the subs of any recourse to address uncertainty in the plans, so they resort to exclusions, clarifications, limitations, or outright declining to bid.

Last minute bidding and why we’re all in a hurry

Lots of GC estimators maintain a rigorous bid schedule. There’s lots to do, and little time to get it done. Subs rarely have the luxury of working for a single GC, so they deal with exponentially more projects than the average GC. Their scope is limited, however they’re liable for every single component which makes it very stressful to keep up.

As I mentioned earlier, RFI’s are part of the bid process which inevitably leads to changes in the CD’s or scope of work. Design teams love to answer all questions a day or so before the deadline. Maybe this is because they’re hopelessly optimistic that they’ve resolved every possible issue for the bidders. In truth, it’s very common for addenda answers to actually create more problems than they solve.

Why is it so hard to know what changed?

Every year, fewer and fewer design teams bother with addendum change narratives which itemize the changes made to the CD’s. The assumption is that the Architectural standard practice of “clouding” or “bubbling” changes to the CD’s makes it clear what they’ve done. In reality, there are often changes made that aren’t bubbled. Presumably the assumption is that everyone is using digital take-off systems that can do overlays to reveal the hidden changes.

Overlays can take a lot of time to do. Minor changes shown on an overlay can induce eye-strain, making the addenda a literal headache! Often it’s less work for the Architect to simply revise the entire drawing set and transmit it digitally. This can mean overlays of pages without any changes at all. Larger projects may have several such Addenda, which can quickly overwhelm a subcontractor.

For the sub who’s always several bids deep, the most efficient way to handle this deluge of information is to do their quantity take off (QTO) at the last moment. Bidding off the final addenda set avoids all the misery of earlier overlays, but it leaves them with little time to complete their estimate.

GC estimators looking for less drama on bid-day should itemize the changes made in each addenda according to their bidders scopes. Maintaining a running list of changes and supplementing with instruction/ direction where necessary limits the amount of scrambling a bidder has to do to deliver a complete proposal.   GC estimators who strive to lower their subs risk get better pricing. The GC with the best sub-pricing can be simultaneously cheaper, AND more profitable than their competition. I know of a few GC estimators who’ve rejected an Architects addendum until they provided a change narrative and bubbled drawings. Setting a precedent with the design team at the start of the project kept the addenda from becoming unmanageable.

Email mountain

The ease with which information can be transmitted via email can lead to inboxes that are inundated with messages. Bid letting software allows an estimator to mass-communicate with all the invited subs to share every document, file, and change. Many bid-letting programs automatically send out reminders to bid, often to multiple contacts at each subcontractor. On the receiving end this can mean upwards of a half-dozen emails per project, per client, and per contact. Projects with short deadlines can go from invitation to bid, to addenda, to bid day reminder within 24 hours. Many of these systems don’t communicate the basics about the project in any of the emails. Subs have to log in and navigate to files they must download in order to find out what they’re being asked to do.

Sure, the information is available, but it’s parceled out into several “Go find what I sent you” exercises that waste the subs time. If GC’s want their instructions followed, they should put themselves on the receiving end of their systems to see what’s going out to their bidders.

Why people won't follow instructions

“Our servers improve your fitness by exercising your patience”

Cloud based file sharing has become incredibly popular because all the documents are constantly available to everyone. Some teams are careful to separate different editions of the CD’s to maintain documentation of the changes. Other teams make no real effort to retain older CD’s which means the documents can and do change between the invitation to bid and the deadline. This can create a real hazard to the bidders who may not receive any notification of the changes. I’ve worked for unscrupulous GC’s who replaced the CD’s after the contract was written in an attempt to avoid paying for change orders. All the supposed benefits of shared files pale in comparison to the risk of being unable to prove what was and wasn’t on the CD’s at bid time.

I encourage every estimator to download and save the most current CD’s on bid-day into a time-stamped file.   Keep that file for your records, because it may not be there later on.

Smarter than you think

So far, I’ve focused on information and risk management reasons why a bidder won’t follow instructions. The GC estimator should provide leadership to clarify, consolidate, and communicate what needs to be done. There is a lot of trade-specific knowledge required to understand and bid the scope of the skilled trades. A lot of GC estimators aren’t sure what to do when they’re presented with a complex issue, so many default to asking for alternate or breakout pricing. Alternates can double or triple the amount of work to bid a project. Not only is it more work, alternates might be misunderstood, misapplied, or used against the bidders interest. Arming the client with information that leads to wrong decisions is bad business.

If the GC estimator don’t understand the issue, it’s unlikely that they will clearly communicate the alternates to their client. Some GC estimators in this position will simply add up all the alternates just to “be sure” they’re covered. Subs see these GC estimators losing bids because they don’t exercise good judgment with the information presented. In some cases the sub is truly trying to help the rookie or fraidy-cat GC estimator win, by ignoring their alternate request.

Don’t kick the hornets’ nest

Material specifications don’t happen by accident. Design teams are paid to select, define, and enforce the material specifications for their projects. This becomes a very contentious issue when a specified material is overpriced. Corruption thrives wherever transparency, competition, and accountability are lacking. Some material vendors and distributors have extensive relationships with design teams who protect them from competition by sole specifying their product. Lots of GC’s will request alternates for Value Engineering or Alternate equal pricing to replace overpriced material. If the difference is significant, they present it to the client.

Subs may refuse to provide this pricing for several reasons. First off, the design team has a vested interest in their specified vendor. It’s therefore unlikely that they will happily accept an alternate product that would expose their budgetary irresponsibility.   Second, the more extensive the corruption, the more control the malefactors have in the system. Releasing material pricing just before the deadline is a favored tactic because it precludes bidders from seeking another option before the deadline. The subs may simply not have time to find an alternate solution. Finally, the sub understands that solving the GC’s budget issue isn’t a guarantee that the sub will be awarded a contract. Many GC estimators see no problem using one sub’s alternate in conjunction with another subs proposal. They figure their low sub will be able to find the same deal on the alternate material later on. So the sub who kicked the hornets’ nest gets noncompetitive pricing on all their material bids, while their competitor lands a contract.

Why people won't follow instructions

 Chris has plenty of time to consider how his hard work left him in the cold.

A lot less than nothing

It bears mentioning that lots of GC estimators entertain endless post-bid client requests to value engineer the job. Some clients instruct their design team to incorporate all the best ideas, then put the job back out to bid. I call it “Design by bid” and it’s an incredibly expensive way to give your competition a job.

GC estimators looking for a solution here should consider writing RFI’s requesting alternate specifications for sole-specified overpriced materials. In some cases, it’s smarter to ask for performance specifications because it’s difficult for a design team to go on the record refusing to accept an equally performing product.

Most design teams stipulate that alternate materials must be submitted for approval before the bid. Since it’s virtually impossible to know precisely how overpriced the material will be before the deadline, it’s hard to tell when this will be worth doing. Experience in a given market will expose the relationships underpinning the corruption, so long as you’re paying attention.

Defensible decisions beats conditional clarifications

Contradictory, misleading, and confusing requirements are part of an estimators life. Controlling risk often comes down to judgment calls on the information you’ve got at hand. It’s a weird quirk of estimating that people tend to overlook justifiable confusion during the bid because they’re sitting on the post-bid answers. “Of course they wanted X instead of Y, here’s all the supporting reasons that make it obvious…” Nobody cares that there may be just as many compelling reasons to support a preference for Y, because now the client’s telling you what they want.

This mindset carries into reading proposals at every level. The presumption is that your proposal is presenting a complete scope of work for a bid amount. Clarifications, especially complex conditional clarifications are seen as fine print or worse; weasel wording. Anything that savors of sneaky dealing works against the estimator. From a practical standpoint, it’s better to articulate your scope of work in terms of defensible decisions. The more simple and defensible your decision-making is, the more your client trusts your motivations.

Let’s say there’s an obvious conflict in a design that could potentially go three different ways. If a sub sent over a base bid with two alternates to cover all the options, they’re taking a risk that the GC won’t know how to scope their bid against their competitors who didn’t price any alternates on their proposals. These alternates make the GC estimator responsible for the outcome of their decision-making. Lacking knowledge, experience, integrity, or time, the GC estimator may make the wrong decision. These moments can have real costs in terms of bids, relationships, and reputations.

The imaginary alternate

Some projects have a long list of alternates that are scarcely defined in the CD’s. I’ve seen projects that had four elevation drawings of a single occupant restroom, yet an alternate for an additional building was defined entirely by three sentences in the specifications! I call these “imaginary alternates” because they exist only in the client/architects imagination. Experienced estimators know that any price you provide can be used against you. Imaginary alternates offer no tangible defense for decision-making. The only defensible decision, is to not price them. Estimators should respond to imaginary alternates with “To Be Determined”, or “Price Pending Design”.

The bid template

Just about every rookie GC estimator who has scoped a stack of sub proposals gets tired of how difficult it is to simply compare one against the other. The myriad ways that bidders word their way around promising to “have everything” can be very frustrating. Their grand solution is a bid template which not only orders the information, but neatly prevents the subs from excluding anything inconvenient to the GC. The GC estimators plight is understandable, but misguided because they’re ignoring the autonomy of the subs. It’s the subs autonomy that makes them an effective risk diversification strategy for the GC. Attracting market-leading subs not only lowers the GC’s prices, and raises their potential profit, but it also reduces the risk of subcontractor failure. GC’s with a myopic focus on bid templates convey higher risk to the subs. We’re estimators because there is uncertainty. If we can’t address the uncertainty via clarifications or exclusions, the risk becomes unmanageable without raising the price. Bid templates are an excellent way to efficiently lose bids and repel market leaders.

Why people won't follow instructions

A better alternative

A bid checklist is a subcontractor level list of applicable scope items with columns to confirm, add, or subtract funds to correspond with the GC estimators plan. Not only does the form automatically tabulate the “apples to apples” amount between bidders, it provides all the bidders with the same criteria, and equal time to respond. Getting the subs “on the record” in terms of unclear scope inclusions is invaluable for when Project Managers are writing contracts. Perhaps best of all, the checklist allows the subs to protect their interests and control their risk by supplementing rather than replacing their proposals. If done correctly, it’s possible to use the GC estimators actual estimate to output bid checklist forms, thereby saving considerable time for everyone. It’s easy to overlook just how much time a GC estimator spends trying to call the subs individually. Bid checklists can be mass-emailed to all bidders. The answers return in black-and-white terms that simplify decision-making.

Clear, well-reasoned instructions backed by good faith efforts to make the project successful make all the difference.  Bidders want to be on the winning team, and will happily do their part to the extent they believe it will benefit them.  This means that ignored instructions communicate something counter-productive to the bidders.  Estimators who build on this feedback may find ways to re-focus their efforts and get the results that matter.  If our purpose as estimators is to win profitable work, we should evaluate our processes with clarity of purpose and keep only what works.

 

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© Anton Takken 2016 all rights reserved

 

 

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