Nail Your Numbers: A Path to Skilled Construction Estimating and Bidding

[Jerrald Hayes]

Okay has anyone picked up and read David Gerstel's new book Nail Your Numbers: A Path to Skilled Construction Estimating and Bidding?

David is the author of the classic Running a Successful Construction Company that I have been recommending here for years plus he has two recent articles in JLC of which this month he's written: ???????Taking the Slop Out of Estimating.

There used to be some really great long and detailed discussion on estimating and markup and pricing years ago I wonder if we can get some that going again...

[Allan Edwards]

Jerrald:

I read the article you linked to, actually read it 3-4 times, and came away asking "where's the beef"? It appears to be more of a light-weight pep talk than anything of substance regarding estimating. I guess for newbies, who need the basics like include a line item for overhead, it might be beneficial. But other than that what do you see in the article that is very illuminating?

[Jerrald Hayes]

Allan, I am constantly surprised by how many contractors survive or even succeed in spite of themselves.

I am shocked at just how many contractors use the “Eyeball Method” where they look at or envision the project and pull a price out of mid-air.

I am shocked by how many contractors out there estimate projects with formulaic methods like Materials X 2 equals Project Price Estimating, remember that?

Or where they just take the projects square foot footprint and multiply that by some number. Like “What is a good price for apt complex to install pressing doors, trim locksets and window trim, sq. ft wise” The answer is there isn’t any kind of square foot price for that kind of work.

Tasks that are based on a Unit Cost CANNOT be estimated based on the square footage of a project. There is no correlation. For instance, you can have two different 5000 sf projects where one has twice as many doors as the other, or twice as much trim to install.

If you look at this sketch of two floor plans which one do you think costs more to execute? From a finish carpenter viewpoint the lower plan has more trim. There is 408'-6" linear feet in Plan A and Plan B has 503'-9" linear feet. It also has more doors. Plan A may have only 8 doors where Plan B might have 13 doors. That’s a difference of 62%. And to make the trim part of this estimate even more relationally detached from any kind of Square Foot estimating technique some rooms might have built up crown and others might have no crown at all. How can a SF estimate possibly cover all those contingencies?

And just think I actually had a builder here once tell me years ago he thought the best way for me to estimate our projects was to call around and see what other contractors were charging and use that as a basis. WTF? Stunning, just stunning.

I think most contractors, the majority of contractors have sloppy or awful estimating practices and processes.

In a business where eighths, sixteenths, thirty-seconds, and even sixty-fourths sometimes really matter I think (like David) it is amazing how crappy and excuse-laden some contractors are about estimating.

As David wrote in the JLC article:

But the truth is that Frank is just one of many talented builders I have met who produce sloppy estimates because, even as they steadily strive to refine their on-site production skills, they put little effort into creating good estimating and bidding systems.

David also wrote:

Material costs can be accurately nailed down with thorough quantity takeo s and written—always written—quotes from reliable suppliers and contract protections against inflation.

Just the other day in another discussion group we were talking about “escalation clauses” were you bitching then saying “Hey doesn’t everybody know this already, this is really simple stuff” or do you just have a bug up your butt today? Are you saying we should talk about that subject here and now because its a waste of time? Did you really read this 3 or 4 times?

David brings up overhead allocation and tosses the Capacity Based Markup vs. Fixed Percentage aka Gross Profit Margin (GPM) method out. Are you saying that discussion is over?

I find it hard to believe that you read his article 3-4 times in that you have always complained over the years about having to read anything beyond a paragraph “Just give me the short simple version” and if you did really ready so scrupulously I am stunned you failed to get anything out of it. Stunned.

Here is what the first page of my PDF of the article looks like…

But I guess you just think everybody here knows all this stuff. SMH.

[Allan Edwards]

Jerrald: It is never a waste of time to discuss the business side of contracting, in fact it is one of my favorite topics. No doubt a lot of contractors are not thorough and exact enough with estimating. And I agree that ballpark estimating should not be used for a hard-bid job. Although I will say I have used preliminary estimating (successfully) for cost-plus jobs, some very large jobs. I further agree that direct job overhead should be included and factored into a contractor’s bid. That is, in addition to sticks and bricks (hard construction costs) there are other costs related to the job that come will either come out of your gross profit or must be a line item. Either way works, but must be accounted for.

I do not think that made up terms like Capacity Based Markup are a substitute for sound contractor accounting that has been available for years. Here is a good example:

https://www.nahb.org/en/Products/002...struction.aspx

[Jerrald Hayes]

(Deleting My Now Duplicated Post)

[Jerrald Hayes]

I posted what was essentially this reply last Saturday evening seems to be lost in moderation purgatory so after giving it four day I am writing it out and posting again.

Alan with all due respect back in 2005 in a discussion here you accused me of making up the term “Managerial Accounting” saying:

—“And you throw this “financial accounting is different from managerial accounting” idea around, but I think that is a little smoke and mirrors, I think they are both the same, and I’ve never heard Emma Shinn or Steve Matlman say differently. Obviously you take your financial statements and analyze them, if you want to call that “Managerial Accounting” that’s fine.”—

To which I replied:

—“Allan in my copy of Accounting and Financial Management for Builders, Remodelers and Developers 3rd edition by Emma Shinn she writes about Financial and Managerial accounting systems in Chapter 2 basic of accounting on pages 7-9. Maybe that's just smoke and mirrors though?”—

I actually read the books and articles I cite.

Robert S. Kaplan (an American accounting academic, and now Emeritus Professor of Leadership Development at the Harvard Business School) in his book Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits and in lectures uses the term capacity all the time and while he doesn’t call the method Capacity Based Markup (he calls it Time-Driven Activity-Based Costing) they are different flavors or models of the same thing.

John L. Daly (MBA, CPA, CMA, CPIM) in his book Pricing For Profitability: Activity-Based Pricing for Competitive Advantage uses “capacity” in discussion of what he calls “Activity-Based Pricing”.

What’s the difference between a GMC Yukon XL Denali and a Chevrolet Suburban Premier? There are a few subtle difference but they are essentially the same vehicle.

PROOF, Indexed, PIF (Profit Index Factor), Labor Based Markup, Differential Markup, Schedule-Based Markup, Fully Loaded Labor Rate, DORS (Dual Overhead Recovery System), MORS (Multiple Overhead Recovery System), Activity Based Markup, and PILAO (I discovered there are people who refer to it a PILAO which is name of the Excel Workbook I originally created off a discussion we had in these forums back in 2004) are different flavors or model of the same technique. I happen to like phrases Capacity Based or Activity Based since I think those names most accurately describe what the method is based on, your company’s capacity, capability to produce work product.

Allocation of overhead can be based on one of two things. It has to be a factor of the total Direct Job Total (Gross Profit Margin (GPM) Methods) or the hours, the time, the project consumes of the available hours, the capacity, the company has to produce projects in a year (the Capacity Method) i.e. the Billable Labor Hours the project generates. I don’t know why you can’t seem to understand that.

And the concept of using robustly developed Loaded Labor Rates (which is essentially Capacity Based thinking) as far as I have been able to tell through my reading on the topic goes back to accounting methodologies used by the government and the Navy in the modernization, replacing and/or updating of the warfighting fleet after the Spanish American War in the early 1900s.

So please don’t give what few readers do have wandering through here any of this ignorant crap about Capacity Based Markup being a made up term just because you don’t understand the math or mechanics of the reasoning behind why some of all call it Capacity Based Markup.

And as for your comment:

“I do not think that made up terms like Capacity Based Markup are a substitute for sound contractor accounting that has been available for years. Here is a good example: [link to her book]”

Emma Shinn’s book Accounting and Financial Management for Builders was first published in Oct 1988.

David Gerstel’s book Running a Succssful Construction Company which was where I got the term Capacity Based Markup was first published just three years later in December 1991.

Both books have been around for decades. And in conversations I have had with Dave he says he didn’t invent the term Capacity Based Markup so its been around even longer.

[David Gerstel]

Hello Allan, Pleased to meet you.
I appreciate your reading my article. I can understand why you characterize it as a "pep talk." In part at least, that is what it was intended to be, for it is just one in a series of four articles on estimating and bidding. In the other three articles, I get more into the "beef" that you call for and go into the specifics of issues such as evaluating leads and nailing down subcontractor and in-house labor costs.
I did feel, however, that as part of the series I needed to deliver that "pep talk" (perfect phrase, btw) and encourage builders, especially those who are just starting out or who continue to struggle with estimating and bidding, to realize that success is possible.
From your comment, it appears you are way past that point, but from what I have seen, a relatively small percentage of builders are really on top of their estimating and bidding.
Many struggle with it for years, partly because they have bought into the rationalizations that it can't be done with precision and as a result they adopt crude methods such as those Jerrald discussed that end up producing bids that are often way off the mark. That is why I take space in the article to debunk the rationalizations and then promise in future articles to describe straightforward practices that any builder can learn to use in order to produce reliable estimates.
Perhaps even veteran and skilled builders such as yourself will find an idea or two in those articles that they can make use of. One such builder, an administrator for the wonderful Facebook group Building Knowledge, is now reading my book Nail Your Numbers, A Path to Skilled Construction Estimating and Bidding. He wrote that he is finding many useful ideas in it and that it should be required reading for all startup builders and is recommended for established builders.
As for "capacity based markup," actually I did invent the phrase, though I have learned from Jerrald since meeting him recently that other folks have arrived at very similar ideas. Btw, It's not just a phrase. It is a process I have described in both of my books, though better in the new one. I don't think capacity based markup is a final perfect solution to the challenge of appropriately marking up project direct costs. But I do think it has some advantages over other methods. I won't try to go into it here, but I hope that at some point you will give it a look. I would like to hear your evaluation. The more analysis of it that I can get, the better I can make it.
Best, David Gerstel

[Allan Edwards]

Jerrald & Dave:

Estimating is one of the many skills a contractor needs to be proficient in to be successful. Certainly not the only skill nor even the most important, but certainly one that is important.

I build new custom homes in the $3-$7 million range, sometimes a little less, sometimes a bit more. I also occasionally do whole house remodels. Broadly speaking I estimate the items that comprise a new build or remodel, maybe 125 or so various line items, each of those might include several sub-items. So basically, all costs that make up a job.

My estimates are comprised of the following:

1. Allowances for major fixtures type items, primarily used where selections/choices/specs are not defined or function as a placeholder for later client selection.

2. Hard estimates from subcontractors for the material/labor they are furnishing. I provide plans and specs for them to provide a bid.

3. Some items are very basic and can be determined quickly or even “ball parked”, like permits, utility taps and costs, dumpsters, cleanup costs, portacans, insurance costs, etc. Call these “educated guess” items. You have strong historical costs and they are minor in nature.

4. Take-offs of material and labor, that is counting items, assigning a unit costs, arriving at a projected estimate. Example, house has 300’ of cedar fencing 8’ tall with our other typical specs. Fencing of this type costs us $30/lf. We can arrive at estimate of costs. A driveway is 3500 sq ft of pavers, the pavers spec’d costs us $10/ft installed. We arrive at an estimate of total costs for driveway.

And of course we also have line items for indirect costs and job admin costs. We also might include an inflation factor if we think a particular line item might increase.

Obviously we look at special conditions that might affect some of our line items. In the example above for pavers, if there were site conditions that might affect that line item, we factor that in.

I believe estimating is arithmetic, not calculus. Doesn’t require complicated forumlas, special names, magic, or complex methods.

[Allan Edwards]

I also subcontract 99% of my labor.

[Jerrald Hayes]

I also subcontract 99% of my labor.

If you sub 99% of your work are you "estimating" there work product and then handing over those numbers to them or are they reviewing the construction documents, plans etc and then giving you a price for their scope of work.

In your item #2 above you wrote:

2. Hard estimates from subcontractors for the material/labor they are furnishing. I provide plans and specs for them to provide a bid.

So it sounds to me like 99% of your project costs you’re not really estimating or pricing work product. Your subs are estimating and pricing their work and then you are collecting those number and tallying them to see if they fit into your projected budget.

[Allan Edwards]

If you sub 99% of your work are you "estimating" there work product and then handing over those numbers to them or are they reviewing the construction documents, plans etc and then giving you a price for their scope of work.

In your item #2 above you wrote:



So it sounds to me like 99% of your project costs you’re not really estimating or pricing work product. Your subs are estimating and pricing their work and then you are collecting those number and tallying them to see if they fit into your projected budget.

Jerrald:

Bids from subs represent a substantial % of an estimate, what % varies, I would guess maybe 40%? Some new homes we build our initial estimates are more in-depth than others, it just depends. Our goal is to get a committed budget with hard bids that we convert into Purchase Orders, which is our preferred method. All of our custom work is cost-plus.

[Jerrald Hayes]

I believe estimating is arithmetic, not calculus. Doesn’t require complicated forumlas, special names, magic, or complex methods.

So I’m working with a contractor on pricing as he has produced plans for a nice custom kitchen. It’s a beaded inset walnut face-frame project. There are a lot of distinctive details such as a custom hood over the stove and applied raised panels on appliances and on exposed ends. There are some carved elements, architectural components, and two kitchen islands.

• It took him 35 hours to produce the shop drawings and based on those plans...

• He figures there are material costs (including procurement costs) of $32,633.42

and he figures…

• 295 hours in the shop for fabrication

• 205 hours of finishing

• and 74 hours of installation

So using your estimating methods with “no complicated forumlas, special names, magic, or complex methods” how should he go about figuring out what to charge the builder?

[Allan Edwards]

Jerrald:

I would advise your contractor client the following:

1. To answer your question and to determine how to charge for his product, he needs to obviously recoup his hard costs, soft costs and indirect costs allocated to this job, and of course make a profit. Contractors should know their internal #’s including overhead so they can charge properly, that is probably the biggest mistake contractors make. As to profits over and above costs and overhead, that is up to each individual contractor to determine. It might vary from job to job, might even vary based on how busy a contractor is or other factors, but it needs to be sufficient to make the company profitable based on risk and effort.

2. The market reigns supreme. The market does not guarantee him a profit. Just because his costs are what you say they are, that does not guarantee him payback on those costs. Perhaps he is wasteful, inefficient, slow. Maybe his competition can produce the same product, same quality for 80% of his costs. On the other hand maybe it is just the opposite, maybe he has an excellent product and his costs are in line with his competition, or even better perhaps he has a very well run operation and he can produce 20% less expensively than his completion. Then he is owed a premium. Point being, I would not narrowly focus on how he charges irrespective of other factors.

3. A lot of talk about markup, margins, and profits. That’s fine, profitability is very important, but something never discussed is volume. Total $’s made is more important than % of profit.

[m beezo]

David,
Thanks for joining the discussion. Your being here and I hope more chiming in is something that I have wanted to see from those who have articles in the magazine but never appear here on the forum site. I said as much in the thread about air sealing.

I did notice that this is one of 4 articles so will probably wait some for all of them to come out before I make too many conclusions. However from your first article I will make a few comments.

I agree that many of us don't do a very good job of estimating our jobs.But I also agree that your analogy with getting close to the target can balance itself out. For some of the guys that I know they get really discouraged if they miss one no matter how little it is. I see all kinds of factors that go into some of my bids that only come from lots of experience and from some sort of track record. The guy just starting out does not have that going for him and that is why I think so many go out of business in the first 5 years or so.

Besides not estimating right there is the insight of things like balancing your work and your life, purchasing tools and maybe a vehicle, trying to take on every job even if it is not exactly what you want to do, learning what might be your sweet spot. And in my case now comes age. I do not move as quickly as I did 30 years ago but still produce a lot of work because I have learned how to make most steps count. But there are days and tasks that I used to do myself that I now hire someone to either help with or do.

Those are some of the things that I have learned about myself and my work and my estimating. I can no longer roof a house like I used to do and make money at it. So I don't even bother estimating it. But I can paint a room and all the trim and such and still make money at it. I can still gut a bathroom and put it back and make money at it. Same with a kitchen and a deck or porch. But some of that has come with 30 years of being in business. And even so I still can miss it when I estimate jobs. Not as much as I did but it still happens.

What I see and does not really discourage me, what happens when I miss an estimate is usually something that I have no real control over. Recently I was building a front porch for a homeowner. On my 3rd day of work there was a water main break 2 houses away from my jobsite. So I show up and cannot get to my jobsite so all my materials and tools that I needed had to be hauled in to the job from about 8 houses away instead of pulling into the driveway to unload them Of course this is the day that I have a truck load of material to bring in.. How you going to estimate for that? What was supposed to be an hour of set up time that day became 4 hours of set up time. And the next day I still could not get in the site so another load tho smaller and another couple of hours of extra time that was not accounted for. It looks like my estimated price will still be the same but my profit will not be as much because my time will be off for what I expected to be able to bill out.

Even with 30 years in the field there is no way to estimate for that. I am certainly not going to add 6 hours of extra labor to a job based on that one job. So I will be glad to hit close to the mark.

[Jerrald Hayes]

Allan I already know what directions I’m going with the contractor but you say your method of “estimating is arithmetic, not calculus. Doesn’t require complicated forumlas, special names, magic, or complex methods.” and I am always interested in broadening my horizons. I still have no idea how it works or how to apply it.

Contractors should know their internal #’s including overhead so they can charge properly, that is probably the biggest mistake contractors make.

DUH! That’s called “Allocation of Overhead” and that has been my point for years. But just knowing your numbers isn’t enough you have to know what they mean how they affect what you are going to charge.

This guys knows his numbers and we have his schedule C to work off of. In fact he has 22 years of these records. The question is how to properly use them to come up with a price fro the project.

So how should he go about distributing that overhead to come up with Sales Price for this project? How do you do that according to your technique without “complicated forumlas, special names, magic, or complex methods?

As to profits over and above costs and overhead, that is up to each individual contractor to determine.

Well, finally after all these year we can find something we agree on. You are talking about Net Profit right? Because that is different from Gross Profit and you didn’t distinguish which one you were talking about so I assumed it was Net Profit? How much profit is a subjective decision but there are some guide lines that I think help define what any contractor should earn in terms of Net Profit.

According to my notes at least two times in the past here I brought up an article by George Hedley entitled "How Much Net Profit Is Enough“ and even conducted a poll but you have never commented. Would you care to comment now on how much net profit you feel is enough or appropriate?

As for Gross Profit that is where I thought your “ no complicated forumlas, special names, magic, or complex methods” process would fit in. How should I/we figure out how much Gross Profit that project should generate?

2. The market reigns supreme. The market does not guarantee him a profit. Just because his costs are what you say they are, that does not guarantee him payback on those costs.

Yeah, yeah, yeah, we all know that. But if the market doesn’t allow you to recoup your costs it time to shut the doors and get out isn’t it. Why should anyone produce work product that doesn’t cover the costs of production. Or do you “make it up on volume”?

F.V.C. is pretty efficient as far as I can see with no glaring problems and while I am sure there are things that can be improved on that is true of any and every business no matter how good they are. (One of the things he is considering is moving to a new shop and adding some CNC machinery)

The competition is all around him both higher and lower than him but both he and I think he is in the upper third if not the upper quarter of the kitchen cabinet market so his Prices are in line with his competition (you wrote Costs where I think you might have meant Prices but I’m confident his Costs are in line with his competition too).

He has done over the last three years an average of $1,600,000 in volume with four employees in addition to himself although last year (2017) he did just $1.5 and change. Including himself 3 are full time and 2 of them are almost full time. He says he gets (closes on) 50% of the estimates he does but 50% sounds like a manufactured number to me. He didn’t say anything like last year he got 19 out of 40 leads (50%±) so I’ll have to look into that further as well as check on a whole bunch of other numbers he’s given me.

So for 2017 we’re talking…
• Labor Hrs 10,113
• Labor Costs — $419,534.93
• Material Costs — $541,907.68
• Subcontractor Costs — $48,203.41
• Total Sales — $1,500,642.67

So what would you recommend he do for the project I described above. How does he price that project according to your “arithmetic, not calculus. Doesn’t require complicated forumlas, special names, magic, or complex methods” technique?