Mark It Up!

“What are the” appropriate” markups for overhead, profit and contingency when budgeting facilities construction projects?” I get this question a lot from my architect friends when helping them budget their projects through the design process. The answer can get messy considering all the factors that can impact the bottom line. There are many variables to consider. With this blog I will answer the “markup” question for an average facilities project and try and keep it simple but still useful. Pay close attention to the math and follow the logic and in the end we will arrive at a useful range of markups that can be used for facilities budgetary estimating. Enjoy!

Starting with a Bare Cost: At the core of all budgetary estimates are BARE direct costs.These are the sticks, bricks, labor and equipment that are necessary to build the project. Bare costs can get murky if you wade too deeply into the details. Just the bare labor component includes adders such as fringe benefits, unemployment insurances (federal and state), social security taxes, public liability costs, and builders risk insurance. Beyond this, the installing contractor’s overhead(s) and profit will need to be added. In this analysis we will assume that our starting bare cost will include all the subcontractors’ burdens and markups. The bare costs here will represent that which is “bare” to the general contractor. With general contractors subcontracting the bulk of their projects this is a reasonable place to start the marking up. Note that for budgetary estimating many unit price and assemblies cost data reference books start at this same “bare” point when making reference to “including overhead and profit.” This typically refers to the installing contractors overhead and profit or more likely, the subcontractor unit cost.
   
Setting the Stage:  We now have a good definition of the BARE direct cost which we will markup to arrive at a total project cost. This is a challenge because there are a range of influences that an estimator should consider when choosing mark ups for a project. Contractors do! These include; the size of the project, the annual volume of the contractor, competition, public sector vs. private sector, the type of work, risk(s), the complexity of the work, remodel vs. new construction, availability of labor, and the time of year. The phase of design that a project is in will also influence the markups used. A project at a conceptual design phase would suggest a different markup than one that is 90% complete with construction documents. In setting the stage for this analysis we will assume an average repair & remodeling project of an aging government facility. We deal with them all the time. There are a few code issues to address, some re configuring of walls, new interior finishes, some tight retrofit, and of course many components of mechanical and electrical work. Our basis project will cost less than $500K and the design is somewhere between conceptual and the mid point of design/ development. The market is competitive. The bare cost is defined and the stage is set so let the marking up begin!

Estimate Contingency:  Defining and capturing the scope of work is the key to accuracy in estimating (and bidding) projects (particularly with renovation projects). For us budgetary estimators an estimate contingency is a “catch all” to account for missing, poor defined or hidden scope of work. Estimate contingency should not be an excuse to skip the due diligence. It is still necessary to scope the project thoroughly. The markup on bare costs for an estimate contingency varies through the design process. As a project becomes clearer in definition then theoretically an estimate contingency should disappear. Contingency markups are as low as 2% and as high as 25%. With our average repair & remodeling project in mind I am going to suggest an average contingency of 15%. This is not unusual at the early to mid-phase of design. If our BARE direct cost were to be a unit of 1 then a 15% contingency on the BARE cost would be 1 x 1.15 = 1.15 x Bare Direct Project Cost. This will make sense when we pull all the markups together into ONE markup on Bare Direct Project Cost. .

General Requirements:  A general contractors site management expenses for such necessities as a superintendent, project manager; site trailers, schedule management, quality control, daily clean up, security, safety, site phones, record drawings and project commissioning all fall under the category of general requirements OR project site overhead. At the later phases of design when these requirements are better defined it is more accurate to itemize and unit price these. At the earlier phases of design a markup allowance of  5% to 15% of the TOTAL Project Cost (TPC) is within reason. Large new construction projects would approach 5% of TPC and for smaller renovation projects 15% of TPC is reasonable. For this analysis will use a mid-range of 10% x TPC as an allowance markup for general requirements.

Overhead: Overhead is the markup for the general contractor’s home office overhead. Typically general contractors will calculate their annual home office expenses and set them up against there projected annual volume of work to arrive at a projected markup to recoup office overhead. This markup will vary from contractor to contractor and can be under 5% for large volume contractors and greater than 10% of TPC for smaller contractors. For this exercise let’s use 8% of the TPC as a reasonable allowance for home office overhead.

Profit: The general contractors profit markup will change from project to project and it is usually stated as a function of the Total Project(s) volume. A low end profit markup might fall below 5% and high end could be over 15% of TPC for projects with great aggravation and risk. For this analysis we will use 8% x TPC as an allowance for profit. The market is competitive.

Do the Math: For typical facilities repair & remodel type project under $500K a reasonable markup on direct BARE cost totals can be calculated from the assumptions made thus far. Let’s do the math. The Total Project Cost (TPC) would equate to the sum of direct bare costs marked up for contingency (1.15 x BARE Totals) plus the general requirements allowance (10% x TPC) plus the general contractor’s home office overhead (8% x TPC) plus the allowance for the general contractors profit (8% x TPC). The math function would look like this; TPC = 1.15 BARE Cost + 10%TPC + 8% TPC + 8% TPC.  Solving for TPC =  = 1.15 Bare Cost/ .74. Therefore TPC = 1.55 x Bare cost. This suggests a 55% markup on the BARE direct costs would equal the TOTAL Project Cost estimate. This total would include an estimate contingency, general requirements, home office overhead and profit. This markup does not include sales taxes, bonds and AE fees.

Variation on the theme: A 55% markup on direct bare costs is reasonable for average facilities repair and remodel projects under $500K. Going through the same calculation for simple, new and larger projects the overall markup on BARE costs would be less; TPC = 1.10 Bare Cost + 5%TPC + 5%TPC + 5%TPC which equates to roughly a 30% markup on BARE direct costs. A high end calculation for complex, smaller, remodel projects would be; TPC = 1.15 Bare Cost + 15% TPC + 12%TPC + 15%TPC. Which equates to roughly 100% markup on BARE costs. Keep in mind that these markups are all being considered at the conceptual to mid point of design on a project. In summary the range of markups on direct BARE cost to arrive at at TOTAL project cost are; 30%, 55%, and 100%.


Email me at  r.woolsey@thegordiangroup.com  with your comments.

Scope, Again?

I realize this is a repeat but for one I don't have any extra time this week and two scope cannot be over emphasized in the construction estimating process. Scoping complicated projects is like eating an elephant; one bite at a time. Construction estimating is exciting (in a sick way) in that if done right you get to build projects without actually having to build the project. If you want to improve your skills as an estimator then improve your knowledge of construction scope. All estimators should be forced to work a trade in the field for a few years to get a better sense of construction materials, means and methods and the challenges of the environment where projects are built; all scope. Enjoy again....Scope, Scope, Scope!

Heaven, Hell and Estimating: They say that all good jokes are based on bits of truth. I don’t know if this is the case with all humor but it does hit close to home with a joke I heard about the estimating skills of us engineers. The joke went like this; Question: What is the definition of an “engineer’s estimate”? Answer: The cost of construction in heaven.  Not so funny, but so true. The reality is engineers (and architects alike) do not have the best track record for budgeting project costs accurately. Why would this be when typically these folks are great with math and numbers? The answer is that construction, (particularly remodeling) has so much more to do with the “hell” of sight specific challenges and hassles than it does with the “heaven” of neat, organized plans and specifications where lines always meet and things neatly fit together. Accurate budgetary estimating requires the estimator to know and include both the good (heaven) and the project specific challenges (hell) in the estimating process. They all have a cost!

Types of Scope: The accuracy of a construction cost estimate is directly related to the estimators understanding of the projects complete scope! Painfully many project owners have been faced with the dilemma of the real cost of their project proving to be much higher than the budgetary estimate. This happens all the time. Some of this difference can be explained but too often the difference is due to an incomplete understanding of the whole scope required to build the project. All contractors have faced this at one time or another where they were low bid on a project and learn as the job unfolds why they were low bid. It is painful and it all comes back to scope, scope, scope!! The design professionals define the project scope in plans and specifications; plans being the defined quantity of work and specifications being the defined quality of the work. For construction estimating the Architect/ Engineer Scope is incomplete. Scoping construction for estimating purposes goes well beyond the plans and specifications and must include field specific or Context Scope realities such as:

·        On-going operations

·        Weather

·        Time of year

·        Access/ egress

·        Soils conditions

·        Security

·        Protecting the existing

·        Traffic volume & control

·        Travel distance

·        Market factors

·        Local restrictions   

These and other context specific issues can significantly impact the cost of a project and are variable from site to site. The third type of scope common to all projects is that which is required to execute the work or the required “means and methods” for building the project. Execution scope varies from contractor to contractor and site to site but includes thinking through the processes of building what the AE defines within the realities of the context. Some examples are:

·        Equipment requirements

·        Staging

·        Safety requirements

·        The critical path order

·        Labor needs

·        All means and methods

Good estimators are made great through their knowledge of construction and their ability to mentally build the project multiple times before the project is actually built. If you want to improve at construction estimating then improve at knowing construction. That is construction estimating….build it before you build it, think like a contractor, scope beyond plans and specifications!  Some of the best estimators I know are those that come from the field and understand that estimating is NOT just about unit costing and a good spreadsheet but more so about capturing the complete AE, context and execution scope on a project. Welcome to the world of heaven and hell in construction estimating.  

  

It Don't Come Easy!

Construction management in a nutshell is the planning, organizing, implementing and controlling of a projects time, costs, resources and cash flow. Construction projects are made up of hundreds of interdependent tasks that have a specific order that they must occur. Success in construction management begins with a well thought out plan for the unfolding of events. The secret to a good plan for construction; build it before you build it. Without first a good plan all else is chaos.

Following establishing a good project “plan” is the organization of that plan into tools that can be used to implement the project. Examples of project organizing tools are budgets, schedules, cash flow diagrams, manning charts and resource schedules. The secret of success here is that they must be realistic. Unrealistic tools tied to an unrealistic game plan is a sure way for construction project failure. Successful construction management always starts with a realistic organized plan.

The organized tools, tied to a realistic plan, are used to implement the construction project. These tools are the sheets of music that each member of the construction team will play from. The secret to success here is having the right team in place to implement the project. The “right” team is one that is operating in sync with the other members and the organized plan. Leadership is key to the success in the implementing of a construction project.

Construction projects never unfold exactly how they are planned; this is a given! Success in construction management allows for deviation from an organized plan as it is being implemented. The key to success here is the timely revisions to the project plan, updating the tools accordingly and then implementing the changes without missing a beat in the orchestrating of the project. Here again, leadership is key. Construction project leadership comes with experience.

Successful construction management does not just happen. Any construction project failures, the results of which are overrun budgets, costly court battles, project completion delays and poor project quality, could have been avoided if time and effort were put into these principles of succesful construction management. It don't come easy!

Costing Construction

Let’s start with a little bit of sarcasm. Imagine an advertisement for the latest construction estimating software; “….. With click and drag speed you can choose from thousands of line items of unit cost national average data and build accurate cost estimates….blah, blah, blah! ” This is not a real advertisement; I made it up to make a point. Thrifty, speedy estimating software coupled with unit cost construction data does NOT an accurate estimate make!!!  

There is No Time: Let’s be honest; we all get lazy particularly when we are pressed for time. We are always looking for shortcuts in our “means” to get to an “end.” The facilities manager is already strapped for time with another demanding tenant, tight timelines, on-going operations, and emergency fixes. Budgetary estimating is just another pesky necessity that gets in the way of progress. The problem is that decisions on facilities issues are generally made based on cost considerations. There is always someone asking “how much is it going to cost?” The budget estimate is just another task that takes from the already limited time in a day.
The truth is that when time is tight, shortcuts are taken. Sadly, some budgets are derived from a “click and drag speed” application of software. Unit pricing is thrown at a project from a data source with little thought given… verbatim! It is then “ipso-presto” and another budget cost estimate is ready to wreak havoc on a project as reality is revealed. Just because it comes from a published resource and is well-known does not make it correct for your project. Choosing, Clicking, and dragging is not construction estimating. Much like the old adage “you always get what you pay for” for accurate budget estimators this is “you get the accuracy from it from the accuracy you put into it.”

The Consequences: Starting a project with a poorly thought-out project cost plan is simply setting the project up for budget overruns, under runs and run away froms. Failing to plan is planning to fail! In the long run it is easier to put the time in up front to establish a correct budget then it is to deal with the project in a crisis mode as the job unfolds. The first crisis will occur when the contractor bids are greater than the budget estimate. Ooops! It is here that you can ask the customer to cut scope or return to the funding source and ask for more money. Good luck on either account.  Accurate budgetary estimating requires a thought out effort of building the project before the project is built. All scope, quantities and unit pricing must reflect the realities of the project or suffer the consequences.

Construction Costing: The process of construction cost estimating starts with scope and ends with the pricing of the project quantities. Pricing the project is a lot more than a spreadsheet and unit prices from an average cost database. Contractors have pricing sources such as vendors, subcontractor’s, suppliers and their own historical costs. They are usually secretive about these prices because they reflect their own discounts and productivity…things that make them competitive. Budgetary estimators must rely on their own sources such as the internet, select vendors and published cost data. Published costs are not generally site specific and they reflect an average job, with average productivity and average hassles. This is typically not your project. Unit costs will have to be adjusted away from an average to fit the realities of your project. Unit costs for direct activities include material, labor and equipment. These are the direct costs; directly attributable to the physical final project. Then there are the indirect costs; these are all the cost items that support to the direct activities.

Direct Costs: The direct construction costs are those that are attributable to any of the direct activities or tasks required to put the components of the project together. The hard costs for construction materials, labor and equipment are the direct costs. Many of the national average published cost data unit costs are focused only on direct costing of construction in a place of average productivity in an average context working environment. Average is the starting point. The estimator will have to make necessary adjustments to the average unit construction costs to fit the complex specifics of the project being estimated. These adjustments come from knowledge of the “average” of the database and how the project deviates from that.
Then there is the issue of bare costing or total direct costing. Bare is exactly that; it is the bare cost of the direct activities less any mark ups for labor burden, taxes, bond, overhead and profit. The total unit direct costs should then include all the direct additions to labor, materials and equipment. Labor is adjusted for necessary “burdens” such as social security (fica), federal and state unemployment (futa, suta). All direct costs are then adjusted to include home office overhead and profit for the installing contractor. All these adjustments to bare direct construction costs can get complicated and must be understood as applied to the specific job but also understood in the published unit cost data. Are they included in the data or do they need to be added? The adjustments to very bare direct costs can be 40% to 50% higher depending on the mix of labor and material. The misunderstanding of direct costs and published cost data is usually where the first mistakes are made in construction costing.

Indirect Costs: The indirect costs are those project costs that are indirectly attributable to all the direct stuff. Site specific indirect costs include site superintendent, site trailers, permits, temporary utilities and other support for all the direct activities. Site overhead costs can be 5% to 15% of the overall project cost. Other indirect costs include performance bond, payment bond, sales taxes, contingencies and markups for overhead and profit for the general contractor. This markup is over and above what a subcontractor will mark up for overhead and profit on the direct costs. This double mark up of overhead and profit is the reality of construction and construction costing.

Costing Construction: You can see that a simple application of unit costs from a national average cost database from a quickly applied software module is not construction estimating. Costing construction is much more than just an application of unit prices. Don’t get me wrong, estimating software is great and helpful. Published construction cost data is also very helpful for budgetary estimating and for checks and balances in bidding. It is in the application of the software and unit costs where some budgetary estimates go very wrong.

The Estimating Process; Get it Right!

I am running tight on time this week so I am posting an article that my son Matthew and I co-authored for an architect/ builders magazine. The article outlines the process of construction estimating....yes it is a process! It has been summarized here. In future articles I will expand on these topics. If you are interested in an expanded discussion on the most crucial step in the estimating process then go back and read my blog on "Scope, Scope, Scope!" Enjoy!

The estimating process begins with a thorough understanding (and visualization) of the project's scope of work. Architects and engineers define scope in plans and specifications but for construction estimating this scope is incomplete. Successful "hard bid" contractors know very well that scoping construction goes well beyond the AE scope and must include field specific scope. The realities of the site such as weather, on-going operations, soils conditions, access/ egress, security, safety, site lay-out, environment protections and other context scope must be considered as well as the means and methods that the work will be executed. These all impact the overall cost of the project.

A big part of the estimating process is mentally building the project multiple times before the project even breaks ground. Scoping construction requires a knowledge of the construction processes, thinking like a contractor and building the project before the project is built. Some of the best estimators I know are those that come from the field and understand that estimating is NOT just about unit costing but more about the impact that AE, context and execution scope have on each unit cost.

Quantifying the project is the next step in the estimating process. The "take-off" is just another opportunity to go wrong....many have! Converting scope to quantities requires a solid understanding of math, drawing scales, swell and waste factors, plan reading, common construction practices, and conversion factors. Indeed, an accurate quantity take-off representing the complete scope of work is then the solid foundation to which unit prices are applied.

The third step in the estimating process is the application of unit costs to the quantified scope of work. Competitive bidding contractors will get their unit costs from subcontractors, vendors, suppliers, and their own cost records. These are excellent resources for pricing but typically they are not readily available to budgetary estimators such as architects and engineers. Budgetary estimators get their unit costs from some of the above sources but also from published national average cost data. Just "knowing" a construction cost database does NOT an estimator make. Pricing a project goes well beyond cost data books. In pricing a project the aggregate project total is more than just the summation of unit material, labor and equipment but must also include labor burden requirements such as social security contributions by the contractor, unemployment taxes, insurances, subcontractor costs (including their overhead and profit), sales taxes, bonds, and finally the general contractor's overhead and profit. Typically the published unit costs do not include all the above. Each reference construction cost database handles these components differently. Pricing must be comprehensive and include all the direct and indirect costs associated with the project AND the cost of being in business as a contractor.

The final step in the cost estimating process is to double check the results. It is good practice to set the cost estimate up against historical project costs, another estimator's review or comparable costs per unit floor area or assemblies costs. It is very easy to go through a project scoping, quantifying and pricing and still miss a costly component. In a rush to meet a deadline once I missed the landscaping in the back parking area and did not catch this until a final review of the estimate...ooops!. Even this engineer periodically gets lost in the details and has missed pieces of scope before; please keep this between the two of us.

Just Trust Me!

This week I have chosen to change things up a little bit with an article I wrote back in 2004. For contractors and those of us working with contractors this discussion of TRUST is very relevant particularly in the current competitive market. As an example, Job Order Contracting has a strong partnering component that thrives when founded in TRUST. When the TRUST fades so does the contract! I realize that I promised a blog with topics on construction estimating and this is not exactly on topic but it is very much related and relevant. Enjoy!

Transitions: All American businesses are in transition. They now operate in an environment of global competition, rapidly changing technology, and more demanding consumers. In the scramble to be more competitive, businesses are re-engineering, reorganizing, downsizing and outsourcing. The question is: How are contractors impacted by these changes and what actions can they take to be more competitive and thrive (with some it is a matter of survive) in the current economy?

Low Bid; Best Bid: Historically facility managers have had their hands tied with acquisition regulations that required the award of projects to the lowest bidding contractor. This has typically been the case with publicly funded projects. Too often the low bid winner would prove to be the contractor that made the most mistakes in their bid. There are also the stories of the low bidder capitalizing on imperfect design documents with change orders as the project unfolds.

It is true; a selection process that ignores a contractor's past performance and awards contracts only on the basis of low bid is flawed. Experienced contractors have seen the "after the fact" failings  of the low bidder and they would agree: low bid is not necessarily best bid!

Trends in Acquisition: Today contractors are being evaluated with a greater consideration of their past performance, records of quality, safety, integrity, on-time delivery and team resumes. These points are being critiqued and quantified for a fair evaluation. This is a good trend.

This being the case, the most valuable asset any contractor can have is its reputation of positive past performance and business practices. Building a TRUST relationship with customers through a proven track record is essential. The single best strategy a contractor can employ to improve business volume and profitability is to invest in the asset of TRUST.

Building Trust: So how do you go about building a high-trust business organization? You could just say that you are "trustworthy" and even profess it on the company letterhead....this has been tried. The fact is it is not enough to say it and read it; you have to be it and do it. Trust outside the company is the result of being internally trustworthy.

In low-trust organizations the operations bog down with bureaucratic rules and regulations, policies and procedures that are inefficient. An organization of high-trust reduces the social friction and encourages creativity, ideas and knowledge sharing. At the core of trust is the competence and character of the company and the people it is made up of. Investing in the competence and character of the individuals that make up an organization is an investment in trust. This is a simple premise that can have a powerful impact on the bottom line.

Investing in Competence: Investing in competence in an organization is a key component to building high-trust. Competence is an individuals level of qualifications, skill and ability to function at a task or job. A workforce lacking competence would not foster trust with peers, subordinates or with the customer. Put another way; would you allow an inexperienced steel worker to install critical structural pieces of an elementary school project? Certainly not; trust would be limited.

There is much to be said for in-house training programs that keep the communication open on the latest technologies, methods, systems and practices. Investing in education with the rank and file is an investment in the organization's competence in the marketplace!

Likewise, investing in the human resource systems for screening and hiring construction folks is also an investment in competence. Hiring practices are important. Continuing to populate the workforce with marginally competent people will never nurture a high-trust culture. The competence of the workforce is an asset of the organization that should be maintained and upgraded.    

Character"istics": Character is equally important to building high-trust in organizations although it is more difficult to measure and quantify. An individuals character and the collective character of the organization are revealed with time and trials in the workplace. We have all experienced people and organizations with low-trust character "istics" such as impatience, duplicity, dishonesty and ingratitude. These are the opposites of the "istics" that should be nurtured and encouraged such as patience with the customer, honesty, integrity, perseverance and contribution.It is here along with a competent workforce that high-trust is built. The rank and file will follow if it is clear that these "istics" are not to be compromised at any level of the company. Eventually they will become an obvious part of the culture.

Just Trust Me: An organization's workforce is its' most valuable asset for its continued health and profitability. Trust strengthens the company, the workforce and its relationship with the customer. Social friction is the result of a culture with low-trust. High trust will minimize this friction and will improve the overall efficiency and effectiveness of systems and processes. 

Contractors can see  marked improvements in work volume and profitability by investing in the competence and character of the company. Trust resulting from competence and character will lead to the building of a high-trust organization!

Losing Your Shirt Under Perfect Control

I heard the Critical Path Method (CPM) defined once as a management technique for losing your shirt under perfect control! Not so funny if you have ever been at the management end of a tight timeline, in an old facility, around on-going operations with the concrete truck on its way and the formwork delayed because the backhoe is out of fuel!! Welcome to the world of construction; stuff happens! With construction nothing is ever really under “perfect control” but with the right systems in place you can get close.  

The Metrics: Just the knowing that a project is out of control is crucial to keeping a project under control. Put another way; isn’t it good to know you are going bankrupt as you are going bankrupt?  At least then you can make some adjustments to avoid the disaster! The secret is in the knowing first and reacting second!  Projects that spiral towards failure are those that can’t break out of reacting because the “knowing” is incorrect or it does not exist. Knowing what? Knowing where the key project metrics such as time, costs, resources, and cash flow are relative to a datum (the project plan). Good project managers will always know where these project metrics are because they are indicative of the immediate health of the project. In a project management cycle the metrics are Planned, Implemented, Measured (actual vs. budgeted) and then reacted to, correcting for deviations by making changes to the original plan.  This is the project control cycle and it is continuous as a project unfolds. It is inevitable with all the things going on in construction; stuff just happens! Plans must change. The project control cycle will show the deviations to the plan which will help in making corrections as long as the original project plan was accurate. Comparing project “actuals” to a false plan will lead to poor corrections that can spiral the project more out of control. A poor plan for time, costs, resources and cash flow is sometimes worse than no plan. Good planning matters!!

Failing to Plan is Planning to Fail:  Imagine a trip from Seattle to San Diego using a road map to Dallas, Texas. As you travel south the road signs point you in a direction that does not match the plan causing great consternation to the driver. Hasty plans make for troubling travel.  Failing to plan a project (correctly) is like setting your project up for failure. We have all been at that place where the physical project must start because time is tight (it always is) and “there is no time to waste.” Myself, I would much rather “lose” a few weeks at the upfront in properly planning a project and regain that time many times over as the project unfolds. All good projects are built several times before they are finally physically built.  Absolutely!  Poorly planned projects are often found spiraling downward into a reactive mode which will just add to the lost time, increased costs, inefficient implementation of resources and negative cash flow. As the saying goes….failing to plan is planning to fail!

 Cost Control:  In the project control loop the projects actual costs are measured against budgeted costs. This measurement will show the deviations in planned vs. budgeted which is key to controlling a projects cost. With a well thought out “cost plan” (the budget) the deviations will be manageable and adjustments can be made to minimize the impact on the final cost of the project. If a project budget does not exist or is poorly thought out, then controlling costs is difficult (someone please explain this to the executive branch of our federal government). At the heart of and crucial to controlling costs is an accurate cost estimate which translates into a cost budget. A cost estimate then is very important to cost control. The four phases of cost estimating and in turn accurately budgeting a projects cost are:

Scoping Phase: The best approach to scoping a project is to think through building the project from the ground up. Think like a contractor and include the scope of means and methods for executing the work as well as the scope issues relative to the context (location, weather, traffic, safety measures, economic conditions, availability of resources…) of where the project is built. Construction scope is much more than that which is spelled out in plans and specifications. Anticipating context and execution scope are often times overlooked in budget estimating. Scope, scope, scope!! The best estimators that I have ever worked with are those that come from the field because they know scope from the ground up. A prerequisite to construction estimating and budgeting should be the working at a trade to learn the field end of construction which is so important to capturing correct scope. Scope is the foundation to every other phase of construction estimating. If scope is wrong a project budget is wrong. Enough said!

Quantify Phase: Quantity take-off is the converting of all tasks of scope into quantities so that they can be priced. Mistakes in quantities can be significant. Common errors are generally with math or converting units from one measure to another. If the scope is well thought out then quantities will follow. Quantities should always be checked and double checked.  

Pricing Phase: Pricing is the application of accurate unit costs to the project task quantities. Common mistakes are applying unit costs where the units are different from the quantity take-off (i.e. Cubic Yards vs. Cubic feet). Note also that a project’s overall cost goes well beyond just the direct costing of direct activities. A project cost should also include the indirect costs such as site specific overhead (indirectly attributable to all the project direct costs and can be 5% to 15% of project cost), home office overhead, profit, bond, sales taxes and even certain contingencies.

Double Check Phase: All good cost estimates are checked and double checked prior to establishing it as the project budget or bid price for a project. An estimate double check is always most effective by putting the project down for a day and return with a fresh mindset.

Keeping Your Shirt Under Perfect Control:  At the foundation of project cost control is an accurate cost estimate. In actuality the foundation to any of the project metrics of time, costs, resources, and cash flow is also an accurate estimate. Time schedules, resource schedules and cash flow plans all come from a well thought out cost estimate. Building a project before a project is built!  Having a complete and accurate plan for a project is the secret to keeping your shirt under perfect control!

Email Comments to: rory@woolzee.com