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Estimating for Unfair Advantage

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Are you bidding more projects and winning less?

With an increasing amount of bidders out there bidding more and winning less, contractors need every trick in the book to find and win work. There is no honor in coming in second on a bid. It may feel better than being ranked number 7 out of 8, but the time and effort invested still didn’t win the job.

Estimating departments often run like a car in desperate need of an alignment. While the estimators are working hard, their efforts are continuously pulling the company into the “ditch” of missed bids, low hit rates and poor estimating efficiency. Pretending that low hit rates are an everyday reality could be a way of avoiding an alignment and dealing with the problem.

Part of that “alignment” would be not to waste time estimating every project that comes along — but focusing on winning the right projects.  If half of the estimating department’s time and effort is wasted on un-winnable estimates, it’s important to have the systems, information and support needed to get the right projects.

While the past few decades have seen a dramatic improvement in the professionalism of project management, estimating continues to remain more of an art than a science. In order to drive improved results, the same approach must be taken to estimating as with project management. Even incremental improvements in estimating and business development practices can help land more work that is profitable. Three improvements that can begin today are:
1. Knowing the facts behind “true” costs
2. Knowing much more than competitors
3. Making smart decisions on the work to pursue

Knowing the Facts Behind “True” Costs
Many firms are working with cost databases that are a year or more out of date. In contrast, the most successful firms are using real-time cost performance data. However, technology often comes at a cost. If the expense of real-time cost data is beyond a company’s current budget, conducting post-job reviews on every project can allow the updating of cost information with historical data to improve accuracy. Additionally, there is a wealth of data available in bid results for firms who operate in a public arena.

Many contractors are sitting on a gold mine of information. Bid files, completed cost data, bid tabulations — all of this is data that, through analysis, can be converted to knowledge. Leverage this knowledge to create bid strategies that are evidence-driven rather than mere guesswork.

Assuming that true costs have been identified, it’s even possible to analyze competitors’ mark-up strategy. Then estimators can apply game theory to identify optimum mark-ups, allowing them to win projects that result in fully maximized profits. The data can also be analyzed in other ways: For example, by identifying the types of projects that your competition is less confident about, you may get direction on opportunities to develop specialized capabilities.

Additionally, it’s important to know what it costs to win an average project. Hundreds of contracting companies have said that there are “no average projects.” However, think of the market segment where a company is successful, and then pretend that there is an average-sized project in that market segment. What would that size be? What does it cost to track, pursue and win that work?

Although most contractors would never estimate work without having a good idea of what it will cost to build the project, they will decide to estimate work without knowing what it will cost to win. That doesn’t make much sense. Most companies wouldn’t hand a check for $20,000 to a complete stranger just because he or she asked for it. So why do companies invest $2,000, $20,000, $200,000 or more estimating a project, just because a potential customer is inquiring on a bid?

It’s imperative to know what it costs to chase and win work. All key employees should be armed with this information in order to make better decisions on what work to pursue, which customers to invest in, and how to gain an unfair advantage on a project. To determine the real cost of winning work, don’t forget to include all of the business development and estimating costs associated with winning the project:

• Marketing costs to keep in touch with and “warm” a potential customer
• Face-to-face business development time
• Travel and entertainment costs
• Time of estimating and operations meetings with the customer; asking good questions and creating potential approaches
• Estimating time for take-off and pricing
• Cost of estimating software
• Printing and reproduction costs
• Cost of superintendent and project management time to provide estimating support
• Administrative costs to complete bid package, provide bid bond, track down insurance
• Senior management time —face-to-face and providing oversight
• Opportunity cost —what else could have been done to get or do work

Knowing Much More than Competitors
Everything a firm does in estimating should be oriented towards one goal — winning profitable work. To that end, the estimating function must work seamlessly to quickly identify and prioritize opportunities, develop an understanding of the true cost to build the project, and prepare a strategy to win the work that puts the company at a planned advantage.

Just as project postmortems can be used to learn valuable operational lessons, bid postmortems can provide insights into opportunities to improve estimating. Asking the customer about a submitted project not only demonstrates interest, but also delivers the insights needed to help win work. Here are some important questions to include:

1. What was the overall impression of the estimate/proposal/presentation?
• What was done well?
• What can be improved?
• What was the most enjoyable part?

2. Was focus and interest in the project shown?
• Were any “hot buttons” hit?
• Was the approach unique?

3. What else can be done to serve you better moving forward? (intentionally vague)

4. Add project-specific questions, if there is anything unique.

In addition, what is known about your competition will also directly affect hit rates and backlog:

1. What services are provided by your competition?
2. Who are their Top-10 customers (those they will protect aggressively)?
3. What are their strategic initiatives for the year?
4. Who are their top managers and what are their backgrounds?
5. Why do customers work with them a second time?
6. What do they do to get positioned before the projects?
7. What guarantees or assurances do they make during the get-work process?
8. What are their new-market growth strategies?
9. How are their people developed to support their brand and market positioning?
10. What are their true costs on average-sized work?
11. What is being done to drive field and office efficiency?
12. What types of projects do they price more competitively?
13. What is their “sweet spot” in terms of project size?
14. Who are their key subcontractor partners?

These questions may not be easy to answer definitively. However, with a little effort by the business development and estimating teams, an analysis of what the competition bids on and what they win can give a strong indication of answers to many of the questions, including strategic initiatives and growth.

Making Smart Decisions on the Work to Pursue
To maximize your investment in get-work efforts, link estimating with operations and business development. Have these departments work as a team to create an unfair advantage on a project. This is more than just a resource issue; it’s surviving and thriving in the current and coming market. Every company has a limited number of estimators. Therefore, an estimator’s highest and best use of time should not include estimating every project; it should be about winning the right ones. The business development team can play an essential role in gathering data, as well as identifying best-fit projects.

Just like evaluating the competition, contractors should take a look at their own company. This means eliminating the bias of the “we want to” and “we should be” and honestly answer the same set of 14 questions. If it’s hard to answer some of the questions, take the time to clearly develop an efficient strategy for the firm. This will go a long way in helping make the right decisions on what work is best to pursue.

It will take time to create an unfair advantage on any project opportunity. Focus your company efforts around the opportunities and the customers where an unfair advantage can be created. If estimators are busy pushing out more and more estimates, they will not have the capacity to get and create a cost advantage. Estimating teams should dedicate their efforts to finding ways to include more of what a customer “wants and expects”, at reasonable costs. This is the start of developing a winning strategy.

Applying a winning strategy can change the competitive landscape. Customers are the ultimate decision makers. They determine who wins and who loses. It seems obvious: Win strategies marry the customer’s hot buttons and requirements with your company’s capabilities, approach and pricing to create an unfair advantage for your company. This gives the customer something in addition to price when evaluating contractors and bids.

Applying all three steps will  lower the cost of winning work, increase cost certainty, and drive up hit rates. This includes linking business development, marketing and operations with the estimating department to make sure that the right work is being targeted, hit rates are increasing, and the company is being positioned as the best and smartest option. Figure out how to build on the company’s core competencies and use the “real costs” to deliver a project proposal that sets you apart from the competition. This is a winning strategy. Can it be done on every job? Probably not. But what if the process helps win 5 or 10% more of the right projects?

Mike Clancy is a senior consultant at FMI Corporation and works with companies across the country to help them leverage their unique organizational resources and capabilities to build a competitive advantage. Clancy's key focus areas are developing corporate strategies and improving the work acquisition results of his contractor clients. He may be reached at 919.785.9299 or via email at mclancy@fminet.com.

Cynthia Paul is a managing director at FMI. As FMI's practice leader for business development, Paul works with industry organizations to position them to capture market share and grow profitably by discovering their differentiated platform. She may be reached at 303.398.7206 or via email at cpaul@fminet.com.

Tags: Costs, Estimating Construction



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