How many times have you heard someone say “I don’t understand
how XYZ Company can keep taking jobs so cheap! Well,
it looks like they are only putting 5 percent on their bid. How
can they make any money at those prices?” The comment is based
on one very big assumption, and that is the costs included in the
estimators bid are the same costs included in the bid for the XYZ
Company Every estimator must understand that he is rarely dealing
with the same costs that his competition deals with. There are
always differences. And only in those rare instances when costs
are comparable would the difference in percent of markup determine
the winning bidder.
There are many variables that affect costs for companies. These
are as follows:
- The competition has a lower material price from the supplier. Depending on the ratio of material to labor, this might affect
price significantly or it might not affect it at all.
- The competition has a lower labor cost because his crews are
more productive (assuming that both companies use hourly
workers that are paid at about the same hourly rate). - The competition has a lower labor cost because his average
wage is less (assuming that the workers for both companies
achieve about the same productivity). - The competition has a lower labor burden due to lower insurance
costs. - The competition has a lower overhead.
- The competition has lower costs for equipment, probably due
to owning their own in lieu of renting. - One competitor is using a pencil, paper, scale and calculator
to produce estimates while another has found out how to produce
a more accurate estimate-an estimate that allows them
more analysis and tweaking of their bid. The result is a more finely
tuned estimate.
Don’t make the mistake of letting your competition establish your
price. They don’t know your costs, just as you don’t know theirs.
If you find that you are reducing your bid price to take a job away
from the competition, you are just looking for trouble—unless
you have found a way to actually justify the reduction by reducing
the associated costs. If you reduce the bid price by actually
reducing the bottom line of your bid, you have just allowed your
competition to establish your price.
Look at the seven variables listed above. Is there something that
you can do to reduce costs in these areas? - Don’t let your supplier get too comfortable with your business.
Sometimes you will find that you are not getting the benefit
of the best price if you are not spreading your business around. - On work you are currently performing, set budget production
rates and then keep accurate records to check achieved productivity
- Check around to see what the competition is paying
their mechanics. Is your hourly rate higher? If so, then
production rates must be higher to keep unit costs competitive.
What about your crew makeup? On this project,
can you utilize more individuals at a lesser rate of pay that
will drive costs down? - Pay close attention to your job safety. This is now a
“big ticket” item. The lower you can keep your modification
factor, the lower the costs are. - Analyze your overhead. Could you get by with fewer
salaried personnel in the office? Obviously, the fewer people,
the less the associated costs, therefore, the lower the
bid price must be for the project to be as profitable. - What kind of savings can you identify for equipment?
Would it be less expensive to purchase the equipment?
what about leasing? Maybe some combination of both? - The estimating department must look at itself for
cost reductions as well. In this high-tech age, with all of
the information and software that is available to us, are
you still behind the times and cranking
out your estimates the old-fashioned
way? Then you might as well be using a
water level and a plumb-bob in the field
instead of a laser. If you could reduce
your cost of producing an estimate by
more than 50 percent, why wouldn’t
you? What about project management
software? Can you utilize that to speed
up project management, or maybe to
make fewer errors and therefore increase
profitability?
When you identify methods to reduce
your company’s costs, whether they are
in the production department or in the
office, the result is the ability to take a
project for a lower price—one that you
set, and not one that your competition
dictates.
Comments? Send your e-mails to [email protected], or fax to (703) 534-
8307.
