Many estimators in today’s market attempt to bid any and all projects regardless of the type of work. The company’s need to secure work can cause some estimators to lose sight of one of the primary goals of an educated bid—understanding the true cost of a project as it relates to their company.
Unfortunately, the true cost for one company to complete a project may not be the same as the true cost for another company. Work force productivity, project experience, capital equipment, tooling, facilities and management capabilities are just some of the things that create true cost differences between electrical contracting companies. The simple fact is the estimator must know, with total objectivity, the anticipated true costs for his or her company to perform the contract he or she is bidding. Preparing the bid price without knowing this true cost is purely an exercise in guesswork.
The major components of the true cost of a project can be categorized as material, labor, direct job costs and company overhead. The estimator must analyze each of these costs and consider their actual effect as if his or her company has been awarded the contract.
Bid documents normally specify the type and quality of the material required for a project, and the estimator is responsible for determining the quantity of material. Since quality and quantity of material are established in the estimate, fluctuating cost is the one condition that could create variations in total cost. If a bid on a project is successful, the copper wire may not be needed for several months, but the estimate being prepared today must include the cost for this wire. In an effort to prepare a competitive bid, the estimator must analyze the most likely conditions and apply them to the material’s pricing in the estimate. Will copper prices double in six months, or will they decline? How will he or she address this possible fluctuation in the bid being submitted?
The true cost of labor is the most challenging component for the estimator to determine and is the most common category that can separate one company’s costs from another. Two individuals will never perform the same task at the same pace. Likewise, no two companies will perform similar projects at the same pace. The key element for the estimator is to recognize the true performance capabilities of his or her company’s work force and calculate the estimate accordingly. There is a tremendous opportunity for the company possessing the most productive work force to estimate a labor cost below the competition’s and bid a project at a lower price while still covering true cost.
Direct job expenses
In the performance of a construction project, there always are operational costs that the contractor must pay, and the estimate must include these costs. These costs directly relate to the contract’s performance and are usually spelled out in the bid documents. They may include items such as building permits, additional insurance, tools and equipment, and other costs directly related to the contract’s performance. This component of the estimate can also result in different costs for each bidding contractor. The estimator is responsible for analyzing and accounting for all of these true costs and making them part of the estimate. The company that must rent a piece of equipment to perform the work on a project must include the rental rate in the estimate. However, the company that owns the equipment may need to include only the cost for maintaining and operating the equipment. These two costs could differ significantly, making the gross cost for one contractor higher than the other.
Overhead may be the most misunderstood and ignored cost in the entire estimate. Sadly, the approach some estimators take when estimating a highly competitive bid is to cut overhead allocation. However, each contracting company exists because of overhead. If a company makes no overhead, there is no company. In simple terms, it is the amount of money required for the contracting company to deliver a service to the customer. If a company does not bill and collect enough money to pay all elements, including overhead, of a project’s true cost, the company will not be able to survive. As with the other costs listed above, overhead may vary from one company to the next, and the estimator must understand its importance and allow for this cost in the estimate.
When preparing competitive bids, estimators cannot afford to rely on guesswork in calculating true costs but must know with certainty the true costs that their company will incur if it is awarded the contract. Armed with those true costs and adding what may be a modest profit should provide estimators with the most competitive bid that their company can submit. A lower bid could lose the company money. A competing contractor may submit a lower bid, but based on the best analysis of your company’s true costs, you will have determined your most competitive bid price.
MOOTY is the estimating management consultant for NECA’s Management Education Institute. He began working for an electrical construction firm in 1973 as an apprentice electrician and eventually became president of the firm. You can contact him at firstname.lastname@example.org.