Razor Thin Margins – Now Until When?

May 21, 2012 – 6:00 am

We can tell our stories concerning the non-existent profit margins in the construction industry.  We can all point to the “other guys” as bidding below cost to get the work.  In a previous blog I pointed out the two low bidders were bidding below direct cost.  The sad deal is margins are tighter than ever for everyone involved in construction – architects, engineers, contractors, subcontractors, and vendors – the entire supply chain.

Now, it isn’t just the panicked ones that don’t know any better trying to capture work at any price.  It is the responsible parties going lower than warranted from their historical profit margins.  From some time ago it was shown that contractors could bid with a 5% profit but would only realize a 1% net profit.  Any contractor that bids a project at less than 4% profit on their direct and indirect costs will only have a chance to breakeven at best.  Every contractor that believes they are bidding at cost – without any profit – is actually paying the owner to build their project.

Contractors aren’t the only ones with this problem.  The architects, engineers and vendors are doing this too.  All are trying to stay in business.  Something has to give.

Oh, By The Way…  Reduced capabilities from reduced profit margins will be reality for some time for every size and type of firm. But will the remaining assets be good enough to stay in business when the market improves?

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , | Leave a Comment

Professional Trade Organizations

May 18, 2012 – 6:00 am

I was recently updating contact information for construction trade organizations and by the time I finished, I realized just how many different groups there are out there.  A majority of these groups I was already familiar with but I had never really looked at all of them in one large list.  There are groups that are specific to a trade such as the Mechanical Contractors Association of America to groups geared to estimators like American Society of Professional Estimators or for women like the Professional Women in Construction.  There is a plethora of organizations to choose from.

Belonging to these organizations have benefits above and beyond the benefits that the specific group offers.  One such benefit is it’s a great way to network with other trades and even your competitor.  It’s a great way to keep your friends close and your enemies closer.

If you don’t currently belong to any, I would suggest researching which groups have local chapters in your area and join one that fits yourself and your company.  If you already belong to one, I would like to challenge you to become more active.  The more involvement a group has as a whole, the better and more rewarding it will be.

By markmentele | Posted in Construction | Tags: , , , , , , , , | Leave a Comment

Design Intent

May 16, 2012 – 6:00 am

I have heard many complaints from design teams about estimators over the years. 

 From “it shouldn’t cost that much” to “you killed the project”.  One of the best was when I was told that I could only offer VE items as long as they did not “interfere with the intent of the design”.  Any VE item “interferes” with the design when you get down to it.  From choosing a more cost effective HVAC system or a more suitable glazing system, the intent is changed.

It sounds to me that what the design team is really saying is “it doesn’t matter to us how much it costs”. What does it sound like to you?

By Justin Short | Posted in Construction | Leave a Comment

Estimate and Bid Ethics – Contractor Estimates

May 14, 2012 – 6:00 am

I might as well go into contractor estimating and bidding ethics.  One of the main issues in estimating ethics for contractors, subcontractors and vendors is that of confidentiality.   That is confidentiality of the estimated cost or bid amount. It is against the law for two or more parties to let each other know the amounts they are bidding or agree to who will have the low bid.  This is collusion, also known as bid rigging. It can be between prime contractors, subcontractor and even vendors on projects.

However, there is another just as unsavory, unethical bidding practice that is not against the law. I consider it to be bid rigging too.  It is commonly known as bid shopping.  It is where two or more firms participate.  One firm, generally the one taking bids and quotes, will divulge the bid or quote amount from one firm to another firm.  This other firm then uses the known quote amount as a point to underbid the other firms on the project.  This can be repeated several times for any scope of work during and after the bid period.

The unethical contractors and vendors participating in the practice of bid shopping will likely never be eliminated.  Educating the companies and their people may help reduce it.  Proving bid shopping may be difficult at best.  Identifying subcontractors and vendors may slow the practice too.  Not awarding work to those that participate in bid shopping just may work to eliminate the practice.

Now you will need to educate the owners about bid shopping.  Many owners, including the federal government, regard bid shopping as an acceptable practice to reduce the project costs.  They even encourage it by their Best and Final Offer bidding practices.  Wow, are they mistaken! There are no winners in bid shopping.

Selecting contractors for a construction project is not like buying a refrigerator or a car.  The final costs are known with these items before they are sold to the consumer.  Contractors will not know their final costs to the owner (consumer) until long after the price has been set.  By then the bid shopping has taken its toll on all parties.

Oh, By the Way… Bid shopping is still bid rigging.

 

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , | Leave a Comment

The Dangers of Spreadsheets

May 11, 2012 – 6:00 am

Spreadsheets can be a great tool to quickly calculate numbers but just like any estimating tool, it can’t be trusted 100%.  Human error can still occur from the initial setup to the input.  Whether you are using a calculator, spreadsheet, slide rule or any other type of device to perform mathematical calculations, I believe the total should have a gut check.  A person should have a rough idea what the answer should be and question/check the total if the adding machine differs substantially from your estimate.

I was recently proofing/updating numerous spreadsheets for a client and found several formulas that were incorrect.  These formulas had been used for years without anyone realizing that the computer was “spitting out” wrong numbers.  While the errors didn’t cause a large variance, the answers were still wrong.

When creating spreadsheets to make a repetitive task easier, it’s essential that the formulas are checked to ensure the calculations are being performed correctly.  Double or triple checking the form is well worth the time since the form could be used for many years down the road without anyone ever checking the formulas during the input.  The old saying “garbage in, garbage out” not only holds true to inputting the data, but also in developing the spreadsheet.

If the formulas are incorrect, it doesn’t really matter how accurately you enter the data, the output will be wrong!

 

By markmentele | Posted in Construction | Tags: , , , , , , | Comments (1)

Estimate and Bid Ethics – Owner Estimates

May 9, 2012 – 6:00 am

I have brought up estimating and bidding ethics on previous occasions.  I am doing it again because it is extremely important that owners understand and know their costs before and at the bid opening. The costs in this period will influence the entire project along with the costs of it during the construction period.

The estimates representing the owner’s interests should be developed independent of outside influences on the numbers.  This would include political influences from management to raise or lower the estimated costs.  It would cover owners and construction managers using subcontractors to prepare the pre-construction estimates.

Just these two areas alone are major factors in creating problems and raising havoc on projects.  Ultimately it is the estimator that will receive the blame, not the person that influenced the preparation of the estimate.

Experienced estimators know ethical estimating practices for owners ALSO include:

  1. Not releasing specific budget numbers prior to the bids being received. However, identifying an anticipated cost range is acceptable.
  2. If receiving bids, have a public opening the contractors can attend. If not a public opening keep all bid amounts confidential until after the contract award.
  3. Raising constructability questions during the design period
  4. Identifying sole sourced specifications

Following ethical estimating practices will yield positive results for projects with less wasted time and money.

Oh, By The Way…The good/great estimators have a high degree of ethics.

 

By Don Short | Posted in Construction | Tags: , , , , , , , , , | Comments (1)

Just Where Is The Bid Market Today?

May 7, 2012 – 6:00 am

A vast majority of my clients are contractors.  We usually prepare bid estimates and pre-construction estimates on their behalf.  I also do a lot of work for owners. Usually we prepare the budget and pre-construction estimates along the bid evaluation estimates.

On a recent industrial project for an owner we prepared the bid evaluation estimate.  There were seven medium to large pre-qualified bidders for the work.  Three were substantially lower than the “pack” of four bids.  The pack of four had a spread of 12%.  The three lower bids were 10% to 54% below the lowest bidder of this pack.  The owner wanted to know what was going on.

The bid format contained labor and material breakouts so this assisted us in the effort.  We were able to benchmark our estimate against the bids with a high degree of confidence.   We found the pack of four bidders had bid the project with costs covered and included amounts for indirect costs (mobilization, management, temporary facilities, materials and employee testing, etc.) and profit.

We found bidder #3 (the one who was 10% lower than the pack) was bidding slightly above direct cost.  There may or may not have been complete coverage for the indirect costs and no profit. Bidder number three had a lot of confidence.  If the job could be managed successfully with minimal indirect costs, could break even.

We found the two lowest bidders were bidding below direct cost.  They bid at direct cost, without any overhead or profit.  Bidder #2 wasn’t as bold as the low bidder.  They only bid 4% below direct cost.  Bidder #1 must have really wanted the work – they bid 17% below direct cost.

The two low bidders were willing to pay the owner for the “pleasure” of performing the work.  The four higher bidders wanted to profit from performing the work.  I won’t say who was awarded the work, but it was not the low bidder.  There were great concerns about getting the work completed without major problems on the project.

Oh, By The Way…  The bid market is such that the goofy low contractors are ruining the market for the responsible contractors.  They will cause problems on projects if the owner does not pay attention to anything except the bid dollars.

By Don Short | Posted in Construction | Tags: , , , , , , , , , , , | Comments (1)

Construction Terms – Part 2

May 4, 2012 – 6:00 am

A continuation of Justin’s blog on the construction industry vocabulary…

Decking – Actually belongs inside a building, not out back.

Extra Heavy – Don’t need to work out to lift this pipe.

Fresh Air – Doesn’t involve physically going outside.

Grade – Not what caused you to be grounded, but literally the ground.

Glazing – No ham needed.

Joints – Don’t have to worry about being arrested for making one of these.

Lavatory – is a sink, not a room.

Risers – Many different meanings even within the trades.

Registers – That never have any money.

Sweating – No B.O., just the smell of the flux heating up.

Vacuum – Carpet cleaning is not needed.

Wye – Why not?

With a little more thought, a whole book of terms could be written.  If I missed any good ones I would love to hear them.  Just please keep it relatively clean, I know there are many terms that could be considered offensive by some readers that we use on a regular basis.

 

 

 

 

By markmentele | Posted in Construction | Tags: , , | Leave a Comment

Disagreements In The Construction Industry

May 2, 2012 – 6:00 am

One of my better clients, who does a substantial amount of design build work, disagrees with my opinion that design-bid-build is a cost effective construction delivery method.  I disagree with his opinion that design-build is more cost effective.  What I don’t disagree with is his method of implementing the services provides a significant value to his clients. 

My client sets up three criteria that are important in their success as Construction Managers and to have a successful project.  These are:

  • The Owner must hire us before or simultaneously with the hiring of the Designer.
  • Both the Owner and the Designer must pay attention to us and give due consideration to our recommendations during the design period.
  • Both the Owner and Designer must consider us as professional service providers just as the Designer and other professionals.

He’s absolutely right in regards to these areas.  This is a win-win for him and each of his clients.  This is the best possible outcome one would want.  Nobody can disagree with these results!

Oh, By The Way… These criteria are not just applicable to his operations.  They apply to any firm operating in construction whether it is the owner, designer or contractor.

By Don Short | Posted in Construction | Leave a Comment

Learning to Be an Estimator – 5

April 30, 2012 – 6:00 am

Some key areas in learning to be an estimator have been covered in my previous blogs.  However, there is an important area that has yet to be brought up.  That area is ethics.  Ethics is important from day one of an estimator’s career.

The good/great estimators have a high degree of ethics.  They learn the numbers they are dealing with are extremely confidential.  This applies to their own and those of subcontractors or suppliers that provide them with numbers at bid time.

Dealing with numbers on bids and proposals is a confidential process.  The estimate numbers used by the owner should not be released prior to bid time.  After all, these are confidential numbers used to evaluate the bids of the contractors.  And let’s face it; there are contractors out there that will bid to the owner’s budget without regard to the true cost of the work.  Rather than release a set number for the project size prior to the bid, the owner can release a range that is anticipated on the project.

The prime contractors and subcontractors deal with numbers that are developed individually.  While they will be developed along similar lines following good estimating practices, they will not be identical in the final price.  This is due to differences in personnel, practices, company operations and other factors.  Each bidder will have a unique set of circumstances that need to be met with their estimate.  The circumstances need to be kept confidential due to there may be primes, subs and vendors that will engage in the highly unethical practice of bid shopping in order to gain work.

By Don Short | Posted in Construction | Tags: , , , , , , , , , , | Leave a Comment
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