Have you been awarded a project only to find that there were errors with your price? Maybe you misunderstood what was required, didn’t allow for difficult project conditions, misinterpreted the contract terms and conditions, possibly made a stupid arithmetic error, or assumed a material price instead of obtaining an accurate quote?
But I’m sure just as often you were not awarded a project because your price was too expensive? Sometimes the company who were awarded the project ended up losing money, but more often they made money! How did they win the project? Why was their price lower than your price, and yet they were profitable?
Estimating a construction project accurately involves some art, some science, knowledge of construction processes, experience, and more than a little luck. Of course, it also requires thoroughness – there is no place for careless errors or reckless assumptions.
10 steps to getting your price right
- Read the documents and understand the scope. What are you pricing? What are you committing your company to construct? What are the contractor’s obligations and what are the client’s obligations? If there are any doubts or concerns ask questions or qualify exactly what is included in the price. More than one estimator has failed to price some work they should have priced, while others have priced items that the client was supplying.
- Understand the contract document. Contract wording varies from project to project. Even an omission of a word or an addition of punctuation can make a difference to how the contract is administered. Make sure that the terms and conditions contained in the contract documentation are acceptable to your company and that the company can comply with them.
- Understand your client. Unfortunately, some contractors don’t take the time to carry out research on their clients to understand them. Do you know if your client has the money to pay for the project? What is important to the client? What are the client’s requirements? Some clients can be particularly difficult and demanding and this might have to be allowed for in the price. Other clients can be easy to work for, and may even have further projects.
- Know when the price is due, where it should be submitted and the format. All too frequently contractors spend time pricing a project only to have their price disqualified because it was received late, it was delivered to the wrong address or the client discarded it because it wasn’t in the format required. Even not signing in the designated place could invalidate the price.
- Visit the project site. Visiting the project site enables the contractor to obtain valuable information about the project site conditions. Most clients would expect the contractor to have visited the project and taken cognisance of the conditions. Not knowing the site conditions will be no excuse for a claim later.
- Understand the local conditions. This includes the local laws, taxes, weather conditions, availability of people, equipment, and materials, the local prices and rates of pay and the productivity of the workers. Conditions can differ hugely between areas and not understand the local conditions can be the difference between winning and losing a project – the difference between making or losing money on the project.
- Prepare a construction schedule (program). Preparing a schedule is essential because:
- It establishes whether the project can be completed in the time that the client requires. Too frequently contractors accept the milestones stipulated by the client in the pricing documentation. Sometimes these dates are unachievable and when the project is awarded the contractor’s team finds that they are locked into a construction period which they will inevitably overrun, resulting in the client imposing penalties or damages.
- An accurate duration for the project is essential to calculate the cost of the contractor’s overheads (preliminaries) as these are usually time dependent.
- Including a properly prepared schedule with your price often demonstrates to the client that you have thought through the construction process and methods and it can convince the client that the contractor is capable of delivering the project.
- Understand the opposition. It is beneficial to know which other contractors will be keen on the project and their pricing strategy. Sometimes it might not even be worth pricing a project if other contractors have a competitive advantage (they may have the right equipment available, they could be working nearby or they could have a close relationship with the client). On the other hand, I have increased our profit margin on projects that we knew our opposition weren’t keen on.
- Understand the project risks. Every construction project has some form of risks. Contractors have the choice to ignore some risks, price the cost of mitigating the risk, qualify the risk out by trying to pass it back to the client, or, they could price the cost of the consequences of the risk event happening. Unfortunately most clients won’t accept taking on these risks and trying to pass the risk back to the client may disqualify the contractor’s price. Allowing for each and every risk event in the contractor’s price will almost inevitably mean that the price is much higher than other contractors. By understanding the risks the contractor can make an educated and calculated call as to how to deal with the risk. Unfortunately ignoring all risks and hoping they won’t eventuate can destroy the company when things that weren’t allowed forgo wrong.
- Remember that price isn’t the only criteria for winning the project. Although many projects are awarded to the contractor who submitted the lowest price this isn’t always the case. It’s important to understand what is important for the client and understand the client’s concerns. Your price is more than just a price for carrying out the project, it’s also the contractor’s opportunity to convince the client why they are the best contractor that can deliver their project safely, to the required quality, with the least problems and on time. I have often won a project even when our price wasn’t the lowest. Clients will usually only appoint contractors that they have confidence in.
Good estimating means the company wins projects that are profitable. Good estimating means maximizing these profits. Sometimes there will be risks, but these need to be managed and be manageable. Good estimating means convincing the client that the contractor is the best contractor for their project. Good estimating requires the estimator to have a thorough knowledge of the pricing documentation, the contract conditions, the client and the opposition. Pricing a project properly is more than just filling in a few numbers.
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