Tag Archives: Risk

August 13, 2014

Making Bidding Fun!

A much overlooked aspect of what it takes to be a successful in business is the fun of actually doing the work. Estimating need not be boring, anti-social, or frustrating. The key is to maintain some perspective on what you’re actually doing.

A different take

In most offices, the estimator’s role is stiffly defined as “pricing stuff to win work”. While there’s certainly some truth to that, there’s a lot missing as well. For example, most entrepreneurs would view every invitation to bid as an opportunity. Every opportunity is a chance to further their goals. Every success opens new avenues to further opportunity.

The entire entrepreneurial plan is based on cultivating excellence from what’s available. Estimators interpret challenges in terms of risk versus reward. Reward often get’s narrowly defined as profitable. By limiting the appraisal of reward to profit exclusively, much of the entrepreneurial mindset is lost in the exchange. Along those same lines, estimators frequently interpret “unknown” to mean: “not worth it“.

Estimating becomes drudgery when you’re grinding through pricing exercises without any focus beyond covering your hind end. Estimators control risk and there will always be risk on an estimate. Certainly there’s more risk in doing something new. Quantify the risk and make it possible to push your boundaries. Don’t squander opportunities with unqualified pessimism. Eagles and Moths share the gift of flight, but Moths use it to bang into windows.

Winning bids is more fun than losing them but finding a perfect client is better still. Finding that rare profitable niche where your firm offers some unique value to the client is a watershed moment for a business. You’ll know when you’ve found it because you’re able to beat market pricing, exceed market value, and make more profit for work in that niche. It’s a great feeling to be at the top of your game.

Like this guy for example…he’s having a great time!

Getting there from here

Before you go off thinking that happy estimating is simply optimistic bidding , there are a few points to be made. First off, let’s start by making everything you bid rewarding. Every bid must have a primary, secondary, and tertiary reward.

The primary reward is to professionally represent your firm, your vocation, and our industry. In a perfect situation, you profitably win the job.

The secondary reward is to gain knowledge about the bidding environment. The bidding environment is a complex intersection of clients, design teams, competitors, market conditions, and local factors. Success is going to hinge on your judgment which is informed by paying attention to what happened on every bid you participated on. Just as estimating is often about taking a huge amount of unknowns and systematically filling in the gaps, so too must the post-bid investigations. Track what you can and interpolate the rest. You absolutely must gain new information from each bid, otherwise you’re going through the motions which is depression with spreadsheets.

The tertiary reward is networking. To many estimators this is largely limited to clients and design teams. New subcontractor talent is a market control that can not only ensure competitive pricing, but market value. Institutional inertia is a potent force in the construction industry. Many new technologies, techniques, products and services get stymied because established firms don’t face serious competition from companies that are doing everything they can to gain market share. Many estimators seek to reduce risk by focusing exclusively on “their team” of subcontractors. Somehow it escapes their notice that low risk bids are often long-shots in the competitive market. Get new talent involved whenever you can. Figure out which subcontractors are doing work for your competitors and not for you.

Over the course of your career, the bid list is a silent marker of the professionals you’ve encountered. Nobody wants to bring more confusion into their world. It often seems like every group has a few difficult characters. Herein lies a quiet advantage. New contacts are fragile things. If a new subcontractor turns out to be a turkey, you’ll have little regret taking them off the invite list. It’s much harder to be rid of difficult people with whom you’ve had a long working relationship. But once again, new competition might solve that problem for you.

Yeah, this guy definitely needs to go…

Turning things on their head

Lots of people hear “estimators must control risk” and think that means putting money into the bid equal to the dollar value of the uncertainty. That’s entirely wrong for a variety of reasons. First of all, it’s an estimate which means there must be risk. If there’s no risk, there’s no reason for an estimator to be pricing it. Second, bidding is not done in a vacuum which means that competition forces the winner to be the best market value so padded bids are often losing bids.

Third, if you actually know the value of the uncertainty, it’s not a risk, it’s the cost of making a decision.

For example: If a low bidder is 5% cheaper than 2nd low, you firm’s risk in hiring them is 5%. If the low bidder fell through (or raised their price) before starting the job, your firm would have to come up with the 5% difference to hire the second low. The greater the price gap, the more likely that is to happen.

That’s all fine but it assumes that all the risk is resolved prior to contract award. If a subcontractor “falls down” on you during the job, it will cost much, much, more to get the job back on track. This is because you can’t simply sever a contract with the first subcontractor, then hire the second contractor for the bid-day difference in their proposals. The first Subcontractor has legitimate pay applications up to the point they fell down. The 2nd subcontractor has to price the amalgamation of new work using whatever they can salvage of the first guy’s work within the now-compressed timeline for project delivery. Basically, you’re asking the 2nd guy to take on a much harder project than the bid day proposal addressed. Their price might be less than their bid day amount, but the sum-total spent on that scope of work will be much more than the low bid amount. Notwithstanding the inevitable court costs.

Successfully controlling risk is about judgment far more often than monetary padding.

If you find it’s not possible to define the value of an uncertainty you’re almost surely out of your depth, don’t bid.

So how does this apply to me?

If everything in the estimators purview is defined in terms of dollars and fears, there’s no light of opportunity making the job something meaningful. Estimators have a wonderfully unique position in the market that gives them information, insight, and leverage that’s profoundly influential. The key to unlocking this worldview is exercising judgment.

Go faster, good tools make everything but excuses.

In order to “buy time” to do all this thinking, investigating, interviewing, and planning you must understand the continual need to accelerate your QTO’s and estimate building. It’s incredible how many estimators are choosing to short-change their success by spending so much time with the phone off and door locked trying to pound out a take-off.

Market leading software solutions are plagued with poor input systems, frustrating file management, and stodgy workflow arrangements that are seemingly “optimized” for befuddled pensioners.

Get used to the idea that you’re going to have to push the envelope by adapting to this adversity. Take the time to learn keyboard shortcuts, menu sequences, and drop down lists. In some cases, it’s possible to learn entire shortcut “phrases” which quickly move through routine tasks. Speed is your friend and flexibility is critical for swift progress. Inexplicably systems continue to be developed with monstrous lists to represent every variable of a construction project rather than allowing the input to be logically derived by the user. Get to a point where the “counts and measures” aren’t consuming the lion’s share of your time.

Rise to the challenge

Estimating is an executive position that bridges sales and production. Embrace the opportunity to thoroughly understand the job and what drives the cost while aligning the job’s needs with the best your market has to offer. Be a market leader, and motivated professionals will flock to you. It’s a lot more fun.

Maybe not as fun as bear walking, but still… pretty good!

In most places, the construction market experiences severe fluctuations in roughly ten-year cycles. Many firms find it’s tough to quickly adapt to a downturn and few professionals feel the pressure so acutely as the estimator. The furious tempest of chasing every bid opportunity is starkly contrasted by how little work goes to contract. It’s a sad and predictable fate for the unprepared. Estimators should take heart, there is always opportunity for the willing.

Knowing the market, and knowing the market pricing means you know what it takes to win. These informed insights are invaluable to the firms decision makers. As an observer, you should be on the constant search for quiet market sectors. The more diverse these sectors are, the better. Market downturns are not always uniform and many firms find themselves uniquely positioned to expand during such times. Be sure to maintain a long list of clients to call upon when that happens.

Judgment is all important

Much of the joy in work is about having a purpose to what you’re doing. Fear, survival, and inertia are the three leading reasons miserable estimators reply to: “why are you bidding this job?” All three options are passive acceptance of a very corrosive notion. The idea that winning a bid is little more than simple chance barring some bidding error. The overwhelming focus on “not missing anything” obscures the much bigger picture. By and large, most competitive bids come in quite close between bidders. That isn’t a function of luck or missing something huge. Most of that difference is professionals doing their best with what they have. After all the adding, calculating, scoping, and measuring, take a moment and look at the job and it’s cost. Find a past bid that’s similar to this one. Is this job’s cost in line with the winning amount on that project? Now think!

If your total on this bid isn’t looking competitive, it’s time to figure out why. Maybe the schedule could contract, maybe you carried the 2nd low sub on something expensive. Resist the urge to simply tinker with the profit percentage until no other options are available.

What you’re doing right now is controlling the risk of losing the bid. You’ve put a lot of yourself into this effort, make sure that you finish strong.

You should know exactly why you made whatever changes you made so you can connect your actions to the outcome.

This is where estimating steps into its purpose. Estimating is not simply harried mathematics, plan reading, or typing proposals. It’s not just guessing, bargaining, or gambling either. It’s about hitting the mark in a complex, dynamic, and demanding environment. Picking an opportunity, positioning yourself properly, and landing a profitable job for your firm is a wonderful rush. There isn’t much room for “fat dumb and happy” on the hard bid market. Stay sharp and you’ll find that even in a crowded market, you can make it happen.

Final thoughts

To recap a little: an estimators purpose is directly tied to the entrepreneurial mindset. In place of optimism, the estimator brings market knowledge, and nimble problem-solving to turn opportunity into success. The estimator is a scout, a guide, and an adviser to help direct the firm’s actions. Personally, the estimator is a well-known professional who can earn a reputation that opens doors at every level of their career.

In many ways, seeing “the job” for what it really is (or should be), fundamentally changes how it feels to work every day. Be the change you want in your life. Make bidding fun!

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1 Comment | tags: market pricing, market value, Risk, Uncertainty, Winning | posted in Uncategorized

August 13, 2014

Principles of Estimating

By Anton Takken

“So…how do you figure out how much it’ll cost?”

There’s a lot to it but everything builds on one concept; estimating is about systematically getting closer to the answer. The most simplistic method is bounding the answer. By defining the range that contains your answer, you’ve reduced the problem. The next step is to determine what you need to know to reduce that range further. As counter-intuitive as it may seem, asking yourself what you don’t need to know can be very helpful. The idea is to reduce uncertainty by systematically answering questions that divide the range sort of like playing “I spy”. For example: a client asks for conceptual pricing on an office remodel. The number of occupants and what paint colors they’d choose are irrelevant. The square footage of the space won’t change in a simple remodel and the cost of paint isn’t typically driven by color choice.

Right off the top it’s important to understand that it’s very hard to remove all uncertainty. Better design, or past-project similarity can help to reduce the uncertainty but some will always remain. I like to think that estimating is actually about controlling risk rather than pricing stuff. There are lots of ways to arrive at a price – heck you might even win a competitive bid by throwing darts at numbers. But here’s the thing that makes the estimating mindset different from an Entrepreneur. It’s never the job that you lose that puts you out of business, it’s the job you win. Look at it this way, the total bid amount is the company’s minimum risk for not completing the job. That risk goes down as the project reaches milestones, and only goes away entirely after the warranty period. All the projects a company has underway have risk which added together amounts to running risk. More than one company has had to drop everything to jump on a project that was going badly. That can make every job suffer which is why it’s important for someone to be thinking about this at the bid stage. Every time I think about the risk to reward ratio in the construction market, my respect for the entrepreneurial spirit grows.

Especially the cat washing contractors…

So how do you reduce risk? As a bidder there are several approaches. The most common is to define what is included and what is excluded from your bid. Contract parlance refers to these as inclusions, and exclusions which appear on the bid proposal. These can range from standards like “daytime working hours”, to more project specific details like “excluding carpet on floor two”. Remember they’re called “General Contractors” instead of “Builders” for a reason!

Another way to reduce uncertainty is to put part of the work out to bid. Things go out to bid for several reasons. The first and most obvious is to use market competition to keep the price down. A less obvious reason is to reduce risk. Let’s say that three subcontractors bid on a project. The two low bidders are 3% apart. If you win the bid with the low bidder amount and later learn they’re missing something huge, or they back out, you can hire the 2nd low for 3% more which makes your minimum risk 3% for that trade.

A good principle of business is to have a policy of “the record is always on”. Anything you put in writing, you should expect to be saved and used later. The subcontractor bids will have inclusions and exclusions on them. Comparing them against each other is very illuminating. It won’t take long to see that exclusions are the embodiment of the expression “The devils in the details“! I’ll get more into reading bids which is called “Bid scoping” in a later post.

For now, it’s important to see that risk is contained by knowing the spread (difference between bids), and knowing the differences in the exclusions. Sometimes the high bidder picked up on something significant that the competition didn’t which spells disaster if you’d hired the low bidder. Remember to call your clients attention to anything you’ve included that was tricky to see, or understand. For example: the plans may show something is existing that you find missing during your job walk.

It’s a terrific illusion that the construction documents will provide enough information to know every quantity, every time. In the commercial construction world, the owners and architects expect the estimator to “make reasonable assumptions” often based on “standard means and methods” when a design fails to cover something. The consequence of these expectations is the practice of stating assumptions via inclusions and exclusions on the bid form or proposal letter. Control risk by clearly defining what you are and are not including in your scope of work.

This brings us to the Estimators Paradox which is:

When you win you worry about what you overlooked, but when you lose, you worry it’s because of something you shouldn’t have included.

Next I’d like to cover a few principles of effective estimating. It’s hard work to count and measure everything on a project. Conceptual or budgetary efforts for a client or an Architect are “free” services that consume valuable resources. Many times historical data, allowances and minimal research will provide adequate accuracy for the purpose. Having Subcontractors price conceptual work should be studiously avoided whenever possible. Every bid should be retained for use as historical pricing. I’ll get more into how to track your files to make this easier in a later post.

Historical pricing is only as useful as your records, and your efforts to improve on what you’ve learned. At the General Contracting level there is a tremendous range of acceptable detail for estimating measurements called Quantity Take offs. (QTO). In my experience, a more detailed QTO is a more useful QTO provided the detail exists on the plans. For example, If the plans resolution is to the nearest foot, there is no advantage to QTO’s carried to the nearest inch. While on the topic of inches, it bears mentioning to those inclined to the metric system that a decimal foot is a far more useful system for QTO’s i.e.twelve feet, six inches would be notated as 12.5′. No accuracy is lost and the spreadsheets are immensely simplified.

Measurements alone are not useful without showing how they relate to cost. I’ll provide some simple template ideas in a future post. Speaking of units, the unit of measurement for materials aren’t always obvious. For example carpet is measured by the square yard whereas floor tile is measured by the square foot. The “RS MEANS” series of books will provide valuable insight into both the units of measure, and what ballpark price to use. There are other similar resources, but I’m most familiar with RS Means. Beware of trusting one source implicitly. There are many factors that must be adjusted to reflect the exact situation you’re facing. Anything that strives to be all things to all people fails on both fronts. Get used to the idea that you’ll have to use multiple references to check accuracy.

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2 Comments | tags: Estimating process, GC, Risk, RS Means, Uncertainty | posted in Uncategorized