Avoid Profit Fade with Smarter Estimating
Like most contractors, you've probably worked one or more projects that continued to incur unanticipated additional costs even though the projects were close to completion. And more often than not, you may have ended up with a much smaller profit margin than you originally projected when you first put in a bid. Known as "profit fade," this occurrence often results from weak estimating processes.
Here are some suggestions that can help strengthen your estimating procedures so that the profit you ultimately earn on a project will be very close to your original estimate.
Analyze Past Projects: As a first step, look closely at past performance. Choose several projects that were highly profitable and others that weren't. Compare each project's estimated costs to the final figures. Analyze the major assumptions that were used in preparing the estimates to see if the assumptions were reasonable.
Study the Design Specs: When preparing an estimate, review the design specs several times so that you can figure out with as much accuracy as possible the quantities of material required on each job.
Review Wage Rates: Double-check your estimates on wage rates for each job. Be sure that the rates have been updated to reflect any changes in wage scale or in union rates. At the start of a job, make sure the project manager is aware of the labor costs that were incorporated in the bid.
Stay Within Profit Targets: Consider whether your company should have a written policy that states the minimum amount of profit you are willing to accept on every job. Don't bid on a job if that minimum can't be achieved.
Update for Contract Modifications: Every time an owner or architect changes a contract specification, review and revise your estimates. It's one of the most effective ways to protect your business against profit fade.
Follow Up on Completed Projects: Compare your estimates to your final cost reports. If there are significant differences, you'll need to go back and find answers. Once you've identified what accounts for the differences, you can develop procedures to prevent a reoccurrence.
Accurate estimating is absolutely critical to profitability. You should regularly review and reassess your estimating processes to help ensure that your profit margins remain solid.
"Compare each project's estimated costs to the final figures."
