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Compensating Your Estimator

One thing I have learned by talking to my friends around the
country is that there are a lot more ways to compensate estimators
then I ever thought of. The methods range from a basic
salary to an incentive-based system and all the way to a straight
commission method. And then, of course, there are individual
estimating companies that can be hired for a fee. Which way is
best? Well, that all depends on what you are looking for and
how your business is structured.

We don’t get paid to estimate projects; therefore, estimating is
only a necessary evil at best. With that premise, why not just set
up your estimating staff in their own business and pay them a
fee to estimate? If your company approached business this way,
it would know its estimating overhead in advance. That makes
sense, doesn’t it? Look at it from an owner’s perspective: no large
staff to manage, and fewer people problems. For the estimating
department, you wouldn’t have to worry about days off or all of
that employee documentation stuff we now have to do. Also,
you would not have to fund anything for estimating. Using an
agreed upon fee when work is needed, you would know in
advance how much to budget for the estimating process. Your
company wouldn’t have to worry about vehicles, insurances, taxes,
computers, software, etc. The subcontractor/estimator would
have to worry about those things. All told, not a bad setup.

If those are the positives, what are the negatives of this arrangement?
One problem I would have is that you no longer are in
control of your staff; someone else is. Then you would have to
make the correct assumption that this estimator is capable of
being in business.

Most businesses do not survive for any length of time, especially
those associated with construction. There are a lot of decisions
that must be made that will affect the life of the business. Who
will make them for the outside estimator? You can’t. What if the
estimator makes poor decisions and gets into trouble by not
paying taxes, or by not having proper insurance? What if he
cannot manage his time and throws together his bids? What
kind of impact will that have on your business!

Also, as time goes on, I can see the estimator who is now in his
own business and now must make a profit, adjusting his price.
Why shouldn’t he? If he is really an entrepreneur at heart and
is really capable of running his own business, then what will he
do to make his business more successful? Raise the price of each
bid? That almost seems to be a given. He can also begin to sell
the same bid quantities given to you to your competitors. From
what I understand, that is somewhat of a given practice that the
market allows. What happens when your competition has
access to the same estimate that you do? How will that affect
your ability to solicit and contract work?

Another major factor would be the impact that this system
would have on the company’s ability to sell itself to the general
contractor. Many of our company’s contracts are the result of
being the second or third lowest bidder, and our ability to negotiate
the contract. If we were to go to a system where we in
essence purchased our quantity takeoff from a free-lance estimator,
then we would have to have someone in our company
take those quantities and sell the project. Many times, in order
to make the sale, we have to value engineer. How could we do
that if we did not have the intimate knowledge of the project
that the estimator has?

As demonstrated above, there are many scenarios where this
form of compensation would be feasible and probably the best
method. If I were starting out in business, and I was a field-oriented
person, subcontracting my estimating would make sense.
I could keep overhead down and use my investment to fund
work and not the overhead. If I had faith in the estimator—
that he is competent and I could rely on him to give me accurate
quantities—this system makes sense. As my business grew,
I could see the need to leave this method and begin hiring my
own estimating staff. But how should I compensate them?

To be continued next month … .

Comments? Send your e-mails to [email protected], or fax to
(703) 534-8307.

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