Using Construction Software: EstimatingOctober 25th, 2010 by admin
As I mentioned in a previous post, there are many benefits in using construction software. Because the benefits are all interrelated, it’s difficult to start at one point and go from there. For example, creating a good estimate allows you to do better job costing, and better job cost information allows you to create better estimates.
So, rather than try to find the beginning of any sort of cost benefit tree and start there, I’ll just start with the beginning of the construction project management cycle: the estimate.
In the end of the day, the bottom line is whether you make or loose money. That’s why they call it “the bottom line”. Because it’s the bottom line of a ledger in which you record your income and expenses. If your income is more than your expenses, then you make money; if your expenses are more than your income, then you loose money. That’s the bottom line.
Some contractors operate like this:
1. Make a bid.
2. Do the work.
3. Invoice the customer and deposit the payment.
4. Check the bank balance. If I lost money, ask for more.
This is may be the best you can do if you don’t have a way to accurately anticipate and track your construction costs. The disadvantage of this approach is a difficult customer relationship, and more important, you don’t know where you are making or losing money, so you can’t do any better estimating the next job. So the cycle continues.
Construction estimating software allows you to:
• Create detailed, itemized job estimates,
• Track the actual costs and labor hours,
• Report the difference between estimated and actual costs – by item or summarized by job phases or cost categories – for one job or for all jobs.
This is the only way you can know whether you are making or losing money, and, more importantly, why you are making or losing money. But you can only do this if you itemize your job estimates.
Q: How detailed do you need to make your job estimates?
A: How detailed do you want to be able to track your costs?
The level of detail you need in your job estimate depends on the level of detail you need in tracking your job costs. For example, if you’re a general contractor, and you subcontract construction of the foundation, you will be OK estimating a lump sum for the whole thing based on your subcontractor’s estimate. Your subcontractor’s bill will be for a lump sum, so you’re not going to be able to track your cost for the foundation at any lower level of detail.
On the other hand, if you’re a foundation subcontractor, and a GC asks for a bid on a foundation, you could say (like a lot of people do), “I know what it costs to put up that foundation”, and give the GC a lump sum estimate based on what you know it costs for x number of lineal feet of foundation.
The problem with that approach is, what do you do after the job is done and you have less in the bank than when the job started? Just add something to your next estimate? OK, then what do you do when your competitor turns in a lower bid on the next estimate?
There was a time not so long ago when you could get away with that approach, because there was more work to go around than there were people to do it. But those days are over, my friend, so it’s time to sharpen our pencils.
This means you need to come up with a detailed estimate. Again, how detailed? The answer is, your estimate needs to broken down to the same level of detail as your materials or subcontract purchasing and costs. And, if you have employees, your labor estimates needs to be broken down to the number of hours it will take for each type of work that has a different labor cost associated with it.
“Why do I need to create estimates with that level of detail? What good will it do?”
The reason is so that when you record your construction costs, you are able to compare the construction costs to your estimate. That is the only way you will be able to know exactly where you are making or loosing money on an individual job, or as a trend on all of your jobs.
“What about using construction a cost database like RSMeans cost data, or National Estimator?”
You can create estimates based on costs from construction cost databases like RSMeans cost data, or National Estimator, and good construction estimating software will allow you to either integrate with construction cost databases, or import costs from them. That’s a good place to start, but what many construction contractors find is that the costs in off-the-shelf construction cost databases are not very accurate. You can start there, but be warned that you may end up double checking all of the costs. Many construction contractors find that, in the long run, construction cost databases are not worth the expense.
“But how could I possibly take the time to create estimates with that level of detail? That would take forever!”
Yes, it would take forever, if you had to create an estimate with that level of detail from scratch every time. But that’s not how construction estimating software works. Good construction estimating software allows you to create job estimate templates and assemblies that you will use again and again.
Construction estimating software is designed based on the idea that there are a lot of similarities in the work that you do from one job to another. You may build completely different types of projects, use different materials, purchase from different vendors, use different subcontractors, and you may even use different employees. But even with that much variability, there is a lot of detail that is common from one job to the next. And the more specialized the type of construction you do, the more overlap there is from one job to the next.
All you need to do is get started estimating your first job. Yes, the first estimate may take a bit of a time investment. But once you have that estimate, there will be parts of it that you can use in your next job, by just changing the unit costs and counts. Each job you do results in another template that you can use on another job. After running a job, if you find that part of the estimate was not detailed enough, the next time you do similar work you will know to break that part down to a lower level of detail. But once you do that for one job, that assembly will be available as a template for other jobs with similar elements.
And, in addition to being able to copy estimate templates or assemblies from previous jobs to create new estimates, using construction software that integrates estimating with construction cost accounting gives you a huge bonus: you can use actual unit costs from previous jobs as your new estimated costs.
“What? You mean I can create new job estimates based on the actual costs from previous jobs?”
That’s right. Good construction software integrates your estimate data with your construction cost data. The result is that every job you do is adding to and updating your own job cost database. You can’t get construction cost estimates more accurate than that.
I know estimating construction costs on that level of detail seems like a lot of work just so you can have accurate cost accounting and guaranteed profitability. And it would be, if accurate cost accounting and guaranteed profitability was all that you got out of detailed estimating. But as you’ll see, there are so many more benefits to using detailed job cost estimates that by the time you realize them all, you will agree that it doesn’t make sense to operate any other way. Especially when you use integrated construction management software that allows you to reuse your estimate data for other important construction business functions, such as when you:
• create construction proposals, bids, and contracts
• create construction schedules
• request construction materials price quotes
• request construction subcontract RFP’s or bids
• create construction materials purchase orders
• create subcontractor contracts
• track construction costs
• create construction invoices and AIA payment applications
I’ll be talking about how you can use construction software to do each of these things in future posts.