BlogAsk an Industry Pro Episode 1: Profitable Construction Estimating
By Construct-Ed Inc.
Welcome to our “Ask an Industry Pro” series!
If you could ask a successful industry pro one question, what would it be? Go ahead, we’ll wait while you think up your most burning construction industry questions. Ready? Great! Now, this is how you get your questions answered.
Just visit this page and submit your question in the form and keep an eye out to see if your question is chosen. And while you’re at the bottom of the page, check out our previous episodes!
At the beginning of each month, we will compile a list of questions that were submitted and feature them in our “Ask an Industry Pro” series. In this series our pro and 30-year construction veteran, Christophor Jurin, answers your questions about the construction industry.
In Episode 1, Chris answers questions regarding profitable construction estimating practices submitted by Brian. Here you go Brian! We hope this helps you with your construction career! You can also find a full transcript of the video below.
Hello fellow contractors, I hope your business is doing good! Welcome to “Ask an industry Pro,” where we take some of your questions and we shake them out and try and provide some thoughts on how you can move forward.
Just a reminder here, we don’t know your exact situation so what we share here as far as opinions is not to be misconstrued as advice for your unique circumstances.
OK, so the first question we’re going to look at here is actually a bundled-up question we need to unpack this a little bit. So, the question that was submitted is “how do you accurately estimate a project to make a 10% profit and still be competitive?” So, let’s unpack this, there’s actually three questions that are wrapped up in this one question here.
First: how do you accurately estimate a project; 2: How do you make a 10% profit; and 3: How do you remain competitive? Final question we’re going to look at here that was submitted is how do you compare your numbers with the competition without “showing your hand.”
So, let’s shake out some options here and take a look at some possible solutions.
OK, so first question, how do you accurately estimate a project? Well, estimating a project is a big undertaking and it’s unique to every company how you approach it.
So, we’re going to only hit on some real high points here within this question. So, the first solution is cost plus estimating. You have to learn how to complete your take-offs so that you’re capturing all of the details. A take-off is when you count your counts, your lengths, your areas, and your volumes that are on your job. Depending upon what your trade is or if you’re a general contractor.
Next, you want to determine your material pricing, including taxes, shipping and handling, and et cetera. So, if you’re buying something, make sure that you calculate in those shipping and handling costs. Especially in today’s environment where trucking costs and other things are very expensive.
Next you have to estimate your labor for the project and apply your labor rate. So how much labor is on the job? Are you basing it on man day, man hour? How are you basing your calculations for your labor?
Next you have to apply your overhead rate. And then you apply your profit rate so you have to develop your system. Your estimating process is going to be unique, it’s how you go about looking at your job, at your bids, at your estimates. The biggest thing that you want to do is be consistent in your process.
Be consistent from job to job. Don’t make constant changes in how you approach. Build a good foundation for your estimating system. Doesn’t mean it won’t change over time, but you need consistency in order to build your business.
OK, so your question here that we’re unpacking is how do you make a 10% profit? So, my first thought here is why did you pick 10%? Why not pick 5? Why not pick 15? Is 10% just a nice, round number?
That you want to learn from this here is don’t confuse your estimate with actual performance. Your estimate is your budget. It’s a management tool. So, you want to manage your project to maximize profit. You may set your target budget at 10% profit, but is that reality?
Well, if your expenses go over it doesn’t matter what’s in your budget, doesn’t matter what’s in your estimate, you’re not making 10%. So, you want to use that estimate as your budget for managing your project, and you want to work to beat that budget. But at the same time your profit is going to be a byproduct of exceeding customer expectations. You don’t want to sacrifice your customer satisfaction to make extra profit. You want to balance the two out.
One of the keys here is to define your scope of work clearly, and you want to be careful of scope creep. What happens in scope creep is that you bid to a certain extent, or you estimate to a certain extent, but then it creeps a little bit further and a little bit further, and then it eats back into the profits that you have set aside from delivering the project.
Next question, how do you remain competitive? First point to consider here is to understand your costs. When you know your costs, you know your position. You don’t drive looking in the rearview mirror. You drive looking out ahead. You know your costs you have coming up. You anticipate what’s going to happen. Then you want to understand, but don’t be distracted by, your competition. What I mean by this is that you want to focus on delivering high quality projects that are going to produce word of mouth referrals with your existing customers. Again, exceed customer expectations or under promise and over deliver.
You want to set a standard that your competition has got to work up to. You don’t want to just be the same as everybody else. When everybody is the same, price then becomes the differentiator. You want to exceed your customer expectations. You want that reputation that means your customers are looking at you as the standard and everybody else has to work up to you. One of the keys here, one of the tools here, is to use consultative selling practices to help educate your customers. Your customers want to know you’re an advisor. Become that expert that they can rely on so that when they have problems, they know you’re the go to person to help them solve their issues.
And the final question here, how do you compare numbers? Now the question that was submitted is how do you compare numbers without showing your hand? We have to be careful with some of the stuff. You’ve got to understand that there’s concepts of bidding versus selling. So, what type of jobs are you involved in? Are you negotiating the job or are you bidding the job? Bids require you to put your best number forward. That doesn’t mean in a bid situation that the job doesn’t go to the person who makes the biggest mistake. That happens quite a bit.
Now, if you’re going to sell, selling allows you to negotiate with your client. You may have a better opportunity to justify the price difference between yourself and your competition. You want to remain focused. A key here is to remain focused on solving your clients’ problems. Your customers are going to buy solutions, they have a problem. Are you the right person to solve their problem? The price is only part of the equation.
Now if your solution is the exact same as somebody else’s and you’re the exact same contractor, yeah, then the price is going to play a bigger part in making the decision. And the key here at the end is to show how your solution helps the customer solve that problem. If they feel as though you are a better problem solver than your competition, they may be willing to pay more for your solution or your abilities to solve that problem.
All right let’s wrap this up and summarize kind of what we’ve gone over here so far. So, the questions that we’re led out with is how do you accurately estimate a project? And how do you make a 10% profit? And how do you remain competitive?
So, we kind of unpacked some suggestions as to how to overcome those obstacles, those hurdles, and then finally somebody had asked how do you compare numbers without showing your hand. Well in construction when you’re running a company, every project has to start with an estimate, and if you want a good project, you’ve got to start with a good estimate.
In Scripture, Luke 14:28- 30 says, “suppose one of you wants to build a tower.” To me that sounds like a construction project. “Will he not first sit down and estimate the cost to see if he has enough money to complete it?” It’s telling you right there, the first thing you have to do is estimate your project.
“For if he lays down the foundation and is not able to finish it, everyone who sees it will ridicule him, saying, this fellow began to build and was not able to finish.” Where do things start with? They start with an estimate. You have to know your costs, so the next point here is know your costs. Knowing your costs equals knowing your position.
That is going to help you understand how you compare to your competition, how you compare to knowing what your customer wants and are you going to deliver value to them. You’ve got to start with a good estimate. So, what I would suggest if you need help on getting into estimating and understanding the process, shoot on over to Construct-Ed.com and take a look at our Estimating 101 Course. The editor is going to throw in a link below in the caption. Just click on that, that’ll take you over and you can take a look at the course that we do offer over there to help you build a better estimate. And when you build a better estimate, you build a better business.
Take a look at that and let us know if you have any questions.
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