If you don’t want scope creep and unforeseen expenses to ruin your profit margins, try improving your estimating process.
You planned for your project to make 14 percent, but you end up with 8 percent. That elusive project profit variance is often caused by many different factors, and can be very difficult to control and mitigate. So what has caused this loss of potential revenue that your firm was counting on? Is it deficient project management? Scope creep? Lack of systems and processes? Poor scope development and management? Very often it is all of these. But the number one way to start a project off with the highest chance of success is with a great scope and estimate.
Estimating is one of the most crucial steps to ensuring a successful project, yet many estimators do not have the tools and skills to develop a scope and estimate of costs that will stand up to all the challenges faced during project execution. From unexpected delays, changes in clients’ staff, regulatory issues, unplanned meetings, and unrealized client expectations, your estimate must anticipate and account for anything that could happen.
The recession and all the bad habits it created are long gone, yet many estimators still try to cut corners and lower fees believing they must shave fees to get a job. Your greatest negotiating power is before you sign a contract, so taking the time to get it right and plan for all the possibilities is critical to making your full margin on your projects.
These 10 factors often contribute to poor estimate development. By improving these elements, you can be assured your projects have a stronger foundation on which to deliver.
- Failure to understand client expectations. Many estimators rush through the estimating process. This is often because they are under the gun to get a proposal out the door, because a client is asking for a quick quote, or because they believe the project is similar to others they have previously worked on. Taking the time to ask the right questions can ensure you understand your client’s needs, expectations for time and quality, and put you in a better position to ask for a higher fee.
- Estimating process. If all your estimators do things their own way then probably only one (or none) are doing it the best way. By developing a streamlined estimating process, you can improve consistency and give your team a better chance of getting the scope and estimate right. The likelihood of the following eight estimating mistakes can be reduced by implementing an effective documented process, including an estimating checklist, that ensures that your team is not omitting any significant details that can reduce your profit margin.
- Not comparing top-down and bottom-up estimates. A common practice that can cause projects to fail down the road is only creating a top-down budget as a starting point. This often happens because estimators pick a dollar amount that they believe should be the target for the estimate, and build their assumptions to match the target. Very often a bottom-up estimate will show a large discrepancy between the assumed target number and the results of taking the time to develop the details first.
- Accepting hourly not-to-exceed limit contracts. An hourly contract with an NTE limit is the worst possible type of contract you can get. It puts all the risk on the consultant and little financial risk on the client. In fact, many firms find that T&M contracts are not as profitable as well-managed lump sum contracts. If you are forced to accept T&M, and the client wants an NTE, ask them for a lump sum which will enable you to make a higher profit if you manage the budget well.
- Using bad templates/spreadsheets. If you do an assessment of the estimating templates and spreadsheets your estimators are using, you may find a lot of problems including miscalculations, omissions, and poor design. Many templates get changed over and over through the years, and with all of the cutting, pasting, and re-programming, they get fraught with errors. Templates should be cleaned up and assessed regularly and approved by your accounting department.
- Using incorrect rates. Another common mistake is using old rates or rate tables that fail to account for increases over time. Building an estimate up from low rates to begin with guarantees that your project will not make the profit margin you desire. For multi-year projects, your contracts should include escalation clauses to account for known increases in overhead, salaries, and subcontractors.
- Lack of automation. If your estimators are reinventing the wheel every time they do a proposal they are wasting time and not leveraging technology to the fullest. A fully integrated estimating and proposal management system will save time and allow better project management down the road by converting project estimates to budgets when jobs are won.
- Underestimating meetings and contingencies. In order to avoid scope creep and ensure that your project will be profitable, it is critical to include assumptions for the number of meetings, and an allowance for contingencies. One way to get clients to pay for these is to include them as separate line items and present them as a separate cost that they can help control.
- Not enough details in the estimate. If your scope is not detailed enough, it can be tough for your project managers to get change orders when a client asks for something they believe is outside the scope. The more detailed you can make your estimate and proposal language, the easier it will be to justify your requests to get paid for extra services.
- Lack of training. Knowing how to put together an accurate estimate that ensures a profitable project takes a lot of skill, attention to detail, and experience. The more training you can offer your estimators, including training around contracts and scope creep, the better your chances of having successful projects with fewer problems.
By focusing on how your estimators are currently creating their estimates and giving them the processes and tools to ensure accurate cost projections, you can avoid many of the issues that appear down the road and avoid losing some of that precious profit margin that you need to allow your firm to grow and thrive.
June Jewell is author of the best-selling book, Find the Lost Dollars: 6 Steps to Increase Profits in Architecture, Engineering and Environmental Firms. She is president of AEC Business Solutions, providing business assessment tools and online business management training for AEC project and firm leaders to improve profitability. Connect with her on LinkedIn and learn more about how to improve your project financial performance at aecbusiness.com.