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Estimating: How to Improve Your Profit Margin

by Michael Stone

Estimating is one of the toughest jobs in construction, and having taught estimating in 44 states to well over 15,000 contractors, I can assure you that it doesn't get easier. It's a tedious project that requires careful thought, every time.Issues That Eat Your Profit Margin

And blunders happen. "Naw, blunders won't happen to me. I make a few mistakes from time to time but my estimates are always right on the money." Estimators who say that will lie about other things as well. We've all missed estimates and some of those misses were by miles. And looking back, we say, "What in the world was I thinking?" Or, "Was I thinking at all?"

There's a reason it's called "estimating", not "exacting". We give it our best shot and hope we're right. In this article, I'd like to talk about some of the more common mistakes that estimators make. Taking care of these issues will help make your estimates more accurate. And that's important, because estimating errors cost money.

Labor. Missing a labor estimate is almost always due to either a lack of experience on that particular job, or just plain guessing. For example: if you've ever framed a curved wall, you know the minute you look at the plans that your normal labor is going to run at least 1.5 to 2 times what a straight wall will require. If you've never framed a curved wall, and you don't ask someone who has, the actual framing labor on the job will far exceed your estimated time and you'll lose money.

I'll bet you can think of other jobs where you've missed a labor figure because you didn't have experience in that kind of work. The solution is to put your ego in your pocket (Cardinal Rule # 4) and ask someone who's done the job how long it took them and if they have any tips for you to keep the estimated time in line with the actual time. Don't guess.

If you don't have the time to compile an accurate estimate, then don't do the estimate. Give the job to someone who cares about the company profit margins.

Subcontractors and Materials. Bad subcontractor numbers and low material costs are almost as common as missing the labor on a given job. Again, this is almost always due to guessing on the part of the estimator. My 6th Cardinal Rule is: You shall get written quotes on all items that exceed $300 on your estimate. Not some of them, all of them.

"Oops", "oh-oh" and "ha-ha's". They happen. Somebody grabs 4 boards from the pile of 2" x 6"s. The problem is that the ones they grab are 12' instead of the 10' board they should have used. So someone gets to make a return trip to the lumberyard and that time comes right out of your profit.

Stuff happens, and if you're wise you'll add a percentage to all of your estimates to compensate for stuff. You can call it a miscellaneous factor or an error factor, but it's the wise and prudent estimator who adds an extra factor on every estimate to account for mistakes, both yours and others.

To calculate that factor, compare your estimated costs to your actual costs on jobs completed. You can make it a lump sum comparison of labor, materials, subcontractor and other costs, or (better idea) compare each area individually. If you look at each cost area individually, you'll know where your biggest estimating errors are occurring. Use that actual error percentage on future estimates. Watch this over time – as you get better, your goal is to get that error factor down into the 1 – 2% range.

Estimating is a skill, and skills can be learned. The better your estimating, the better your profit margin; it's worth taking the time to do it right. 

Note: Many of you received our "Estimating Tips" whitepaper when you signed up for our newsletter. If you didn't receive it, subscribe again here. (You won't receive duplicate copies of our newsletter if you use the same address.) Also consider our Profitable Estimating training class.

(originally published May 8, 2013)

 

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