Ideally, sound job estimates are the foundation for every new project. If done correctly, they enable the company to operate effectively and profitably. Unfortunately, many estimates contain costly errors, which often produce bids that are too low or too high. If they are too low, the company can actually lose money on a job. If they are too high, chances are the company won’t get the job in the first place.

The Accounting Picture
To better control the bidding process, companies use a chart of accounts (COA). The COA is a listing of all the accounts used to record the financial transactions of the business. It represents an accounting picture of a company’s operations and is an essential tool in the job estimating process. The categories include assets, liabilities, equity, income and expenses. This chart details different income categories, and can be broken down into building or service types, including new construction, remodels, tenant improvements, industrial and commercial. To prepare a solid bid, owners need to know and understand what the real costs of doing business are in each of the service types. That means asking two key questions: “What do I need to know, and when do I need to know it?”

Within the expense category is a cost of goods section. This is particularly important to the job estimate. Cost of goods includes variable costs, indirect overhead and fixed overhead. Variable costs are items such as labor, materials, subcontractors, equipment rental and other expenses related to the production of the project. Indirect overhead is the measurement of overhead expenses related to the production of the project, but they are not directly associated with any specific business activity. These costs can include supervisors’ wages, estimating wages, small tools, consumable supplies, repair and maintenance of equipment and trucks, field communications and fuel and oil.

Fixed overhead, on the other hand, is stable and doesn’t fluctuate, regardless of revenue. Sometimes, this category is known as general and administrative overhead and includes items such as interest expense, lease expense, depreciation, owners’ wages, office wages, advertising and utilities.

Data from these categories can help business owners understand the costs of doing business and establish break-even points on every bid.

Estimating Oversights and Solutions
Without a comprehensive understanding of the company financials, estimating oversights and errors occur frequently. Some of these include:

An inability to apply an overhead rate to the bidding process – Many companies develop their pricing mechanism based on arbitrary numbers that have little to do with the genuine overhead or profit of the company. Every company has to recover its overhead on every single job. Knowing this rate and how it applies to variable and fixed costs allows owners to establish break-even points. If this isn’t correctly calculated for the bid, then the final estimate is merely a guess based on unsubstantiated suppositions.

Reducing the bid by an arbitrary number without considering the impact on profit – Often, bids are created like this: Owners estimate the labor and add in a little extra money just in case. They then estimate the materials and realize they don’t buy that effectively so they add money to that figure. Then, they guess at a dollar amount for equipment rentals and mark it up slightly. Finally, they think of an overhead number and again add to the profit mark-up. They cut some money off the final totals, and the bids are finished.

In reality, entire estimates are just guesses because they are not backed up by actual job cost numbers. Owners, therefore, don’t know where the money came from that they slashed off the final estimates to make them competitive. Did it come from labor or materials? There is no way to track that backwards in the system and make corrections in the future. Most likely it will negatively impact the owners’ profit. To rectify the situation, every time a series of figures is put together for an estimate, they must be substantiated with accurate job-cost information. This way, the numbers can be refined continually and thus realistically account for any efficiencies and deficiencies that exist.

Not establishing a break-even point for estimates – Break-even is defined as the point in revenue where variable costs are covered and overhead is recovered. If owners understand what the break-even point is on the bid, then they know how low of an estimate to submit without taking a risk of jeopardizing the company or underbidding the job.

A failure to obtain production or other department approval, leading to dilemmas – Anyone in the company with specific knowledge about the type of work proposed in the estimate, the products to be used, vendors, outside contractors and even the competitors is a great source of information for the job estimate. As the process develops and the estimate is being finalized, calculations and assumptions should be verified by second and even third parties. This is especially important if the project is of a substantial nature with associated risk. Production personnel must verify productivity rates and equipment requirements, while senior management needs to sign off on the break-even number and establish the proper profit mark-up.

Underestimating labor and materials – An enormous problem with estimates is the failure to include a line for overtime. Overtime is run on almost every job, yet the company is unable to cover that cost from the job contract.

Not allowing enough time to review the estimate before it’s submitted – In a typical scenario, the estimating department is under the gun to get the numbers together and is frantically running around trying to get all the prices. They haven’t taken the time to verify resources or confirm with production that the job can actually be done for the time and effort planned. Also, subcontractor bids and cost estimates have not been reviewed.

Management and Accountability
Although it is crucial to prepare accurate bids, without proper management and employee incentives, even the best bids will not be profitable for the company. For management, this means clearly communicating what’s expected of employees and how performance will be measured. It is equally important to holding employees accountable. Sometimes this can be difficult, but the principle is the same as creating the job estimate. It states exactly who has what responsibility and when to perform it. When this is accomplished, the job estimate is precise, and once the job has been awarded, the employees will have more incentive to fulfill the bid requirements in a timely and efficient manner.