Being able to accurately forecast profit is largely based on the ability to develop accurate estimates and adopt a disciplined approach to the project. There is a common misconception that when profits are lost, the loss occurs after the project has started and is due to circumstances beyond the business’s control. The reality is that when contractors lose money, the loss is most often a result of mistakes in the cost-estimation process.
Here are some of the most common estimating mistakes that might be putting your business at risk, and what you can do about them.
1. Lack of transparency
Your estimates should include as much information as possible. This way both you and your client are fully aware of what is included in the estimate, removing grounds for dispute.
Details also help all stakeholders understand the process for determining cost, regardless of their levels of experience. This is particularly relevant for field services businesses where there is often a separation between the person estimating the project, and the people doing the work. Transparency also invites collaboration and the sharing of best practices throughout the company.
2. Underestimating labour costs
Labour is one of the most difficult costs to estimate because it’s not as simple as applying an hourly rate per employee. You may also wish to consider other factors, such as experience and whether subcontractors will be needed.
As you’re putting together your cost estimate, be sure to include as much detailed labour information as possible. The added benefit is that, down the track, you will have documentation of deviations to the original plan and how they affect the project.
Another tip for estimating labour: look at similar projects and compare the cost per square metre (or other relative measure) using key figures from past jobs. Can you spot trends or ways to improve?
3. Pursuing too many projects
It’s tempting to pursue every opportunity to keep your team busy. However, being busy on loss-making projects doesn’t make much sense. This isn’t to say you should only bid on projects perfectly aligned with your business – just that you should know the real costs of each project before you begin, so there are no surprises later.
4. Not learning from past mistakes
To determine risks and minimise uncertainty, analyse what has gone wrong on previous projects. For example, it may not be the materials or the crew that drove up the cost. It could just as easily be the fact that the project didn’t consider a street had only one lane for traffic, making construction challenging. Analyse mistakes and learn from them.