Expert Estimating Part II – Gathering Costs, Determining Mark Up Percentages and Reviewing the Data

By John Kenney, Cotney Consulting Group.

Accurate cost data is a key to profitability.

Part 1 of this Expert Estimating series reviewed how the estimating process begins, the benefits of well-trained estimators and the importance of having strong processes and procedures.

In this article, we will cover how to determine your costs and how to properly markup those costs as well as the importance of a strong review process.

Stage 3 - Assembling Your Cost Data

Every item in your estimate must contain an associated cost. That's a lot of cost pricing to get together.  It is advantageous to identify them one at a time. There are many sources for you to obtain reliable costs.

Historical Data from Your Previous Projects and Estimates

One of the best sources to look for cost data is your last job, provided the estimate for your previous project was accurate. Historical cost data should be used cautiously. Changes in prices and labor production efficiency may have substantial impacts on project costs. 

Supplier Quotes

A good practice is to obtain a quote from two or more vendor sources. You will achieve a better understanding of the overall going market rate for items in your estimate. You do not want to lose your advantage if you use only one supplier quote and lose a job because your competition had better pricing from supplier "B." 

Subcontractor Quotes

Subcontractors quotes for specialized work on your project that you don't perform in-house is a great way to lock down costs for that scope of work. Whenever possible, obtain your quotes from a subcontractor you have worked with previously and have a mutually beneficial relationship.

Published Cost Data

Although I am not a fan of randomly using cost data from third party sources, they do have their use in estimating. Cost databases are well researched and maintained by professional cost engineers experienced in the industry. If you are unable to obtain a qualified subcontractor or supplier quote, you can rely on these sources for average itemized costs when needed.

Organizing Your Data

During this stage of the estimate, you have a large amount of data, and all that information must be assembled, organized, and analyzed. That's a lot of information to get one's arms around. You need to put a system in place to handle it all efficiently. Remember, the goal is to transfer everything from the takeoff to your cost summary once, without reworking.

The Summary

Once you completed the pricing of direct costs and reviewed your pricing on the cost analysis or consolidated estimate document, you are ready to transfer total costs for each section of your estimate to the Estimate Summary, where you add your markups. During this process, be sure to double-check your steps, for the reason that errors are easy to make.

It is a good practice to create a standard Estimate Summary document that lists items repeatedly estimated to save time. Your column headings or categories for your Estimate Summary include:

You are now at the point of the process where you apply the appropriate markups to the total dollar values. In general, different percentages are added to the sum of each column to account for indirect costs, including:

• Sales Tax

• Company Overhead

• Profit

• Contingencies

Stage 4 - Establish an Estimating Review Process

The primary purpose of an estimate review process is to present information about the estimate and the project in such a way that it allows the reviewer to evaluate the quality of the estimate to verify it sufficiently meets its intended purpose. The review process should comprise of a series of estimate reviews, starting with internal estimating department reviews, project manager reviews, with final reviews by management or ownership depending on the structure of your organization.

Estimating Team/Estimating Department Review

The first review of the estimate should be conducted by the estimator that prepared the cost estimate. This is essential screening to ensure that the math is correct and that the estimate is documented correctly and adheres to estimating department guidelines. In the next stage of the review, it is checked by the lead or head estimator for accuracy and compliance.

Project Manager Review

Once the estimating team has reviewed the estimate closely, it is ready for review by the project manager. The objective now is to gain the project manager's support of the estimate. This is also the first point where the estimate needs to pass an overall validation test, as well as a quality review.

The project manager should also review the risk basis of the estimate and agree with the analysis of cost risk associated with the project and should agree with the risk assessment provided by the estimating team. The project manager and estimator must able to defend it in subsequent review to upper or corporate management.

Lastly, the project manager should reconcile the current estimate to previous successful estimates of similar projects. This is an important aspect of the overall estimate review process but often overlooked. 

Management/Ownership Reviews

The company management or ownership conducts the last series of reviews. These reviews are conducted at a very high level of analysis and usually do not involve the details of the estimate. Management will be interested in the cost risk assessment. The estimator should be able to clearly and concisely explain how the contingency amount was developed, and what the levels of risk are. It is the responsibility of management to accept the level of risk indicated or change the amount of contingency and accept more or less risk for the project. When reviewing the risk analysis, it is always important to discuss the areas of high risk and how to mitigate those risks.

The goal of an estimate is to predict the cost of a project accurately. The purpose of an estimate review is to determine that an accurate and high-quality estimate has been prepared. The review process should ensure that the proper estimating methods, procedures, techniques, data, and guidelines have been engaged in the preparation of the estimate. By using a structured estimate review process and review techniques, you are ensuring that quality estimates are consistently prepared, which effectively supports the decision-making process by management.

In part III, we will discover how to calculate gross profit and develop a winning selling strategy.

Learn more about Cotney Consulting Group in their RCS Directory.

John Kenney has over 45 years' experience in the roofing industry. John started his career by working as a roofing apprentice at a family business in the Northeast to operating multiple Top 100 Roofing Contractors. As Chief Operating Officer, John is intimately familiar with all aspects of roofing production, estimating, and operations. During his tenure in the industry, John ran business units associated with delivering great workmanship and unparalleled customer service while ensuring strong net profits for his company before joining Cotney Consulting Group. If you would like any further information on this or another subject, you can contact John at jkenney@cotneyconsulting.com.