Estimating Construction Costs

I was talking with a contractor in the Midwest who told me his error factor was over 10% when he first started his company five or six years ago. He said that as he got more experience, he’d gotten it down to a little over 5%. I politely explained that 5% was still too high, and it was costing him money on every job. He agreed; that was why he called, he needed help getting his error factor down. He was having cash flow problems which made it difficult to meet payroll and pay his bills, and he believed that it started with the errors he was making in estimating.

I’ve talked a lot about estimating construction costs over the years and also in our book, Estimating Construction Profitably. I’ve tried to reduce the estimating process to a simple and easy to follow process that will get your estimate error factor down under 2%.

You and your sales staff have a choice in how you do your estimating. Some methods work well but some don’t. I don’t recommend the often-used WAG (Wild A** Guess) method or the more sophisticated SWAG (Scientific WAG) method. Some contractors are partial to stick estimating, which is fine if you have the time, but in my opinion, it isn’t any more accurate than unit costing. Once you know how, unit costing is much faster. We have another article on our website where I discuss stick estimating and unit cost estimating.

The whole purpose of an estimate is to know how much to price a job. If your estimate is too low, your price will be too low. You’ll pay more in job costs than you expected, and those higher job costs will come straight out of your profit. On the other hand, if you overestimate the cost of a job, you’re making it harder to sell.

Let me share a few things that cause estimating errors.

Getting Distracted While Estimating

When it’s time to start an estimate, you need to eliminate all possible distractions. The two biggest distractions (assuming you’re by yourself in a quiet room) are your phone and email. Turn the phones off. Not on vibrate, make them silent. That goes for landlines and mobile phones alike. Also turn off the ding-dong on your computer that announces the arrival of an email. Once you start thinking your way through a job, you need to stay with it. If the phone rings, you risk forgetting where you were and that makes it easy to leave off umpteen hours of material pickup and delivery, or port-a-pottys, or demolition, or framing, or finish time, or cleanup, whatever.

Distractions also keep you from thinking through the subcontractors part of the project. Even though you’re getting quotes on everything, you want to walk through those quotes mentally from top to bottom to be sure your subs didn’t miss anything. It also helps to make sure your sub quotes are reasonable.

Not Getting Quotes from Subs and Suppliers

The biggest mistake that gets estimators in trouble is not bothering to get written quotes from subs and/or suppliers. You should get a written quote on all items over $300. Depending on the size of the jobs you do and how much you can afford to lose, you could adjust that number a little higher to maybe $500 or $750, but I wouldn’t go any higher.

Were you ever surprised by an electrician’s invoice of $1,750 when you estimated $1,225 for the same work? You can argue with the electrician, but if the work didn’t change from when you guesstimated it, you’ll have to pay the bill. Wouldn’t it have been smarter to have asked what they would charge upfront instead of guessing?

For many contractors, it’s difficult finding subs, so make it easy for them to quote a project. Take detailed pictures of the project, write a detailed description of the work to be done, and email it to the sub. My coaching clients who’ve done this tell me they get their quotes back in one to two days. You need to have a pretty good idea of what the sub will look for and what they need to know so you can provide them with the detailed information needed for an accurate quote, but that’s what you’re paid to do when you’re an estimator.

Remember, if you don’t have the time to get a quote before you sell the job, you’ll need to take the time after the job is sold to talk to sub after sub, supplier after supplier, to find one willing to do the job at the price you guessed.

When you get a quote from a subcontractor or supplier, make sure you have an understanding that when they give you a quote, they’ll honor it. No surprises from either one of you. That means that as the estimator, you need to give them a thorough and accurate description of the work to be done and/or the materials that will be needed so they can give you an accurate quote. Our Subcontractor Manual has a sample form for submitting a subcontractor quote.

If you’re having a hard time getting your subs to provide a quote, are you treating them fairly? I talk about finding and keeping good subs here. They should be promised at least one out of every three quoted jobs that you sell. Don’t use them for free estimates, which you shouldn’t be doing anyway. When you show a commitment to your subs by hiring them to build your jobs, you’ll find they are more willing to help you estimate those jobs so you can make the sale.

Many of our coaching clients over the last 24 years have developed the discipline of getting written quotes for all their estimates. Their accuracy improved, and that made them more profitable. And being profitable is what you want when you’re in business.

“We ourselves feel that what we are doing is just a drop in the ocean. But the ocean would be less because of that missing drop.” — Mother Teresa

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