I continue this blog series to break a decades-long silence in the construction industry -the nine true secrets of successful estimates.
EIGHTH SECRET
The eighth secret is the profit amount. How secret can profit be on a project? Profit on a project that has not yet bid is somewhat secret. I definitely wouldn’t let anyone know how much or little profit I was putting in any bid I was preparing. But the amount of profit is not too hard to reasonably determine prior to, or even after, a bid opening by any of the other bidders. This can’t be true can it? Yes, it certainly can!
Let’s consider the estimating process for a minute – the other secrets from above. The quantities should be similar, and in many cases the same, for all of the companies. The labor hours to perform the work should be similar, and in some cases the same, for all of the companies. The hourly rates to perform the work should be similar, and in many of the cases the same, again – for all of the companies. This also applies to the material and subcontractor prices, and the indirect costs. Why? Because hopefully the companies are all determining the estimated cost for the project with the same or a similar set of project conditions defined in the project documents! This means the only other significant area in an estimate is the profit amount.
Successful companies maintain bidding records. These can be simplistic or sophisticated. On the simplistic side, the bidding records would indicate that if Competitor “X” is bidding the project then I should pass on this project because “X” always has a lower price than I can bid. On the sophisticated end of bid analysis, the records should be analyzing labor, material, equipment indirect costs, etc, along with profit. From the overall perspective, historical determinations can be made as to profit amounts. If a company has a cost basis similar to their competitors (this should be the case, but there are exceptions), the profit of their competitors can be determined with a reasonably high degree of certainty after a project has been bid. By analyzing historical trends in the bidding process, one can determine, with a reasonable amount of certainty, the likely amount of profit on an upcoming bid by the competition.
Wow I have almost revealed all my secrets! Don’t miss #9 – check back on January 13th!
