Don’t compete on cost—invest time and effort in the estimating process to realize greater success.
by Mike Clancy and Cynthia Paul
June 26, 2013

How many times have your estimators or you uttered the phrase, “That firm is bidding below cost”? While not all contractors are responsible bidders, if you are facing credible competition that seems to be bidding below cost, you probably need to ask yourself if you know your costs to execute work. About 40 percent of firms in the marketplace do not track their costs with significant rigor to conduct a detailed analysis of bid versus final profit.

Understand Your Costs
Specialty contractors understand the importance of accurate take-offs. However, many general contractors and construction managers have essentially outsourced this function to their subcontractors or work with cost databases that are a year or more out of date. While it would be unreasonable to expect a GC or CM to conduct a detailed take-off of each line item on the job, simply “square-footing” the take-off or using another quick estimation method is a surefire way to undermine cost certainty.

The best GC and CM firms develop meaningful assemblies and use real-time cost-performance data to achieve a faster and more accurate take-off process. If real-time data is not readily available, you should scrub your database at a minimum of twice a year to ensure you are not working with old information. This will reduce wasted time in preconstruction and ensure that you take on as little risk as possible in your estimation and bidding process.

Craft a Winning Strategy
Chances are, most of your marketing and sales budget is spent on estimating work. Are you spending that money on opportunities you have no chance of securing?

A shortcut to greater success is to build your systems around delivering what the customer wants, in the way he or she wants it. Do not spend time and money chasing jobs you have no chance of winning or cannot perform effectively. There are five key inputs to an estimating function based on this type of focused strategy:

Strategy—If you lack a strategy that gives you an edge, the only way you can win bids is by cutting your fee. Instead, focus only on project opportunities in which you have identified an advantage for yourself.

SOPs—As with project-management best practices, consistent estimating practices will lead to greater results and provide a training curriculum for new hires.

Systems—While estimating technology is not a magic bullet, it is what the military calls a “force multiplier.” In other words, effective technology use can leverage each estimator to be able to accomplish more.

Subcontractors—Without the right partners, a GC cannot expect to be competitive on bid day. Subcontractor outreach and relationship development can be a source of significant cost advantage.

Skills—If you have too many or too few employees, or the wrong blend of skills in your estimating department, your estimating cost will be more and the department will be less effective than those of your competition.

While all of these functions are vital to accurate and efficient estimating, the leading factor in bidding success is strategy. It is crucial that you build a compelling approach to get the customer’s attention. Do this by digging into major cost components. Identify the top three to five cost items on your project. If subcontractor scopes are on this list, reach out to trusted allies in your subcontractor corps for innovative approaches to fulfilling these items.

Also, find one or two key cost drivers and push them down a bit. As an example, are there ways you can save a subcontractor time, and thus save yourself money, through careful phasing and management? You need to find a few areas where you can get leverage.

Finally, use business development and market intelligence to uncover the customer’s unspoken hot buttons. Ask good questions. Asking the customer about a project not only demonstrates interest, but it delivers the insights needed to help you win work.

You do not want to be in a fair fight with competitors; you want an unfair advantage. If you cannot create an advantage, the only option is cutting your price to win the work, and that is a poor long-term strategy. A winning strategy marries the customer’s hot buttons and requirements with your capability, approach and pricing.

Find all the Pennies
Using process mapping as well as standardizing best practices will lead to improved estimating performance. Each estimate needs a project manager, and your estimating department needs a chief estimator who spends far more time leading and managing than estimating.

Since most projects are won or lost based on one or two percent of the cost, reinventing the get-work function is all about “finding pennies.” Staffing effective bid teams helps you find those pennies. Your project team should have a good mix of skills and experience and be directed by a lead estimator with the management ability to run the team. Junior, less-skilled estimators then have an opportunity to contribute accordingly while learning from colleagues with more experience.

Finding pennies is also about project selection. By developing selection criteria to prioritize project opportunities according to the strategy you have developed for your company, you can reduce the amount of time wasted estimating projects that you have no realistic chance of winning or executing at a profit.

By investing time and effort in the estimating process, you will see higher hit rates on profitable work. In addition, you will be able to win projects when you are up against even the toughest competitors. The answer is to maximize your estimating time and talent by knowing your costs, knowing more than your competitors know and pursuing the right work.