I started writing last summer about the common threads for those contractors who are highly successful, as opposed to those who are just barely making it, or in some instances, are no longer around, and have put them into a top (or bottom, depending how you look at it) 10 list.
Recapping to date, No. 10 was Poor Project start (link here), No 9 – Documented Processes, a.k.a. semi-organized chaos, No. 8, Poor project communication, No. 7, Support systems – software and infrastructure, that don’t support organizational success and last time we covered No.6 – Information Silos. I want to get through the entire list this year, so we’re going to cover two this time- Number 5, Bad estimating, and Number 4, broken change order processes.
Getting into the top five – you could make the case that any of these could be the most important issue for any contractor. –
The impact of bad estimating is clear to most contractors – consistently bid too high, and you don’t win enough business, too low, and you end up with low margin or losing jobs, a sure recipe for disaster. Then there is the opportunity cost when good margin work is available but you can’t bid it because you are fully booked with low margin jobs.
Everyone we talk to is busy, and margins are generally healthy, reflective of the great growth in construction work since the great recession. But we all know it won’t last forever, making it important now to develop and maintain good estimating practices.
The consistently profitable contractors have an estimating process in place. I doesn’t matter so much which estimating system is used – even that Excel spreadsheet template is fine – as much as how it is used, starting with the selection of which jobs to bid in the first place. Do you have a template of your ideal job, the “sweet spot” that you know you can profitably execute on?
Something that I think every contractor should know, but I think very few do – what is your cost to bid a job? If you take your entire estimating cost and divide it by the number of jobs bid, and number of job won, what is does each estimate actually cost? Sometimes knowing that number helps you decide what kind of jobs to avoid spending estimating resources on.
Beyond that, does your system provide a consistent review process? Do you allocate enough time for review and revisions? How about estimate evaluation – does your system allow you to collect and analyze bid and job performance by relevant metrics – by type and size of job, by estimator, by GC or owner type, etc? Do estimators get feedback on actual performance of jobs they bid in the past, to help them avoid those mistakes in the future, and to repeat successes?
Putting a consistent system in place that documents each step, provides time for review and for end of job feedback, and takes in account the cost of estimating, will help you get where you want to be with job profitability.
A related issue is how change orders are handled. Bad mistake No. 4 is broken change order processes. This mistake typically starts at the very beginning of a project, with the project start-up. Like most processes, the break-down is usually in the “hand-offs” from one person or department to another. The new job comes in, a project manager is assigned, and all the details of the job are handed off from the estimator to the project manager. How well is that hand off accomplished – how timely, in how much detail? Are potential areas of risk identified right from the start?
Now the job has to be staffed – superintendent, foremen, specialists, laborers, etc., depending on your specific job staffing process. Each of those people will have a great idea about the exact scope of work and what could constitute a change, and knows exactly what to do when they discover such a change, or are asked to do what could be “extra” work, right? There is a process that provides a mechanism daily to report on potential changes, correct? Those potential changes are communicated in enough detail to allow the change to be quoted and processed? And once quoted, the changes are documented and followed up on in a timely manner for approval, billing and collection?
Very rarely do I get a yes to all of those questions. If you are able to answer all those in the affirmative, congratulations and keep up the good work. For the rest of you, the break downs in your change order processes are for sure costing you money.
Stayed tuned next edition for numbers 2 and 3 on the list.