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If this isn’t correctly calculated for the bid, then the final esti- stantiated with accurate job-cost information. This way, the num-
mate is merely a guess based on unsubstantiated suppositions.
■ Reducing the bid by an arbitrary number without consider-
ing the impact on profit – Often, bids are created like this:
Owners estimate the labor and add in a little extra money just in
case. They then estimate the materials and realize they don’t buy
that effectively so they add money to that figure. Then, they
guess at a dollar amount for equipment rentals and mark it up
slightly. Finally, they think of an overhead number and again add
to the profit mark-up. They cut some money off the final totals,
and the bids are finished.
In reality, entire estimates are just guesses because they are not
backed up by actual job cost numbers. Owners, therefore, don’t
know where the money came from that they slashed off the final
estimates to make them competitive. Did it come from labor or
materials? There is no way to track that backwards in the system
and make corrections in the future. Most likely it will negatively
impact the owners’ profit. To rectify the situation, every time a
series of figures is put together for an estimate, they must be sub-
bers can be refined continually and thus realistically account for
any efficiencies and deficiencies that exist.
■ Not establishing a break-even point for estimates – Break-
even is defined as the point in revenue where variable costs are
covered and overhead is recovered. If owners understand what
the break-even point is on the bid, then they know how low of
an estimate to submit without taking a risk of jeopardizing the
company or underbidding the job.
■ A failure to obtain production or other department
approval, leading to dilemmas – Anyone in the company with
specific knowledge about the type of work proposed in the esti-
mate, the products to be used, vendors, outside contractors and
even the competitors is a great source of information for the job
estimate. As the process develops and the estimate is being final-
ized, calculations and assumptions should be verified by second
and even third parties. This is especially important if the project
is of a substantial nature with associated risk. Production per-
sonnel must verify productivity rates and equipment require-
ments, while senior management needs to sign off on the break-
even number and establish the proper profit mark-up.
■ Underestimating labor and materials – An enormous prob-
lem with estimates is the failure to include a line for overtime.
Overtime is run on almost every job, yet the company is unable
to cover that cost from the job contract.
■ Not allowing enough time to review the estimate before it’s
submitted – In a typical scenario, the estimating department is
under the gun to get the numbers together and is frantically run-
ning around trying to get all the prices. They haven’t taken the
time to verify resources or confirm with production the job can
actually be done for the time and effort planned. Also, subcon-
tractor bids and cost estimates have not been reviewed.
Management and Accountability
Although it is crucial to prepare accurate bids, without proper
management and employee incentives, even the best bids will
not be profitable for the company. For management, this means
clearly communicating what’s expected of employees and how
performance will be measured. It is equally important to holding
employees accountable. Sometimes this can be difficult, but the
principle is the same as creating the job estimate. It states exact-
ly who has what responsibility and when to perform it. When
this is accomplished, the job estimate be precise, but once the job
has been awarded, the employees will have more incentive to ful-
fill the bid requirements in a timely and efficient manner. ■
J. Mike Rudd is a consulting services project manager with International
Profit Associates and Integrated Business Analysis (IPA-IBA). For more
information, call 847-495-6786 or visit www.ipa-iba.com.
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