It’s difficult to recover from a low estimate in construction. Owners don’t want to pay more than they have to, and scope creep is a credibility killer.
That’s why successful companies understand the value of an experienced estimator and solid estimating systems. They also train project managers to deliver updated estimated costs at completion throughout the project. Add a reliable accounting team to conduct and analyze gain/fade, and you have reliable data to improve your bid process and profitability.
The goal? Stay within that sweet spot of less than 5% fade on jobs from project start through completion.
While some contractors like to be conservative on their estimates and build in a higher contingency, others will push to win low bid and pad their backlog. Neither business approach is wrong in the short-term if it aligns with the business plan. A gain/fade analysis offers timely data to help firms improve future estimating and their profits. With more profitability, firms can be more selective on projects and still have a healthy backlog.
It starts with having the right team in place, and then the right systems for easily communicating estimated costs at completion—at least quarterly.
WHAT IS THE GROWTH GOAL?
Before focusing too much on accounting, let’s back up a bit. What are the goals of the company? For a start-up, the sales team may be less concerned with project fit and more concerned with wins. However, bids should still be reasonable and competitive to mitigate risks and avoid bankruptcy.
More experienced teams must also address the what-ifs of a project. Is it a newer niche or market? Does the team have capacity? How does bonding and subcontractor estimating tie into the bid? What are the site challenges or other unknowns?
Good estimators know how to assess risk; the best estimators gain insights from past jobs and timely analytics. For example, if utilities costs are often going over, is it the subcontractor estimate or is it project management? This requires a conversation and adjustments to avoid the same problem in the next job.
WHERE IS MONEY BEING LOST?
Knowledgeable estimators who have good systems are one part of the profit equation. Project management is another big part.
By updating and providing estimated costs at completion—at least quarterly, if not monthly—to the accounting team, the project manager contributes to the profitability of the company. This also leads to job security for the team.
A one- or two-percentage point change in profit margin per quarter makes a difference at project close. For example, if the last update showed estimated gross profit at completion of 5% but it’s now at 8%, what has changed? The project manager can support timely decisions to keep costs in check before delivery.
It’s also important for the financial team to conduct a gain/fade analysis at project close. By doing so, contractors can identify best practices, which could cover many different areas: better estimating, better margins by job type or industry and/or improved project manager performance. It’s not personal. It’s data that can help firms pursue growth in a profitable market, enhance training, focus resources or recreate successful practices on other projects.
TAKE THE LEAD ON GAIN/FADE
Firm leaders should emphasize the importance of analytics and accounting to their estimating project management teams. It is a whole company effort to control costs and improve profits.
If accounting is only considered at the end of a project, a lot of data is lost that could impact future best practices. To maximize profits, a gain/fade analysis should ideally be conducted monthly on every job. An accounting team knowledgeable about construction will ask the right questions to identify risk factors and resolve them, which avoids financial surprises at the end of the project.
As mentioned, an overall job gain/fade that exceeds 5% annually is a wake-up call that there is room to improve job management. Information is power to competitively bid and enjoy the profits that good teams and systems can deliver. Company leaders and sales teams can also rest in the knowledge that their estimates are fair to clients, even if they don’t win them all.
SEE ALSO: GET DIRECT ABOUT INDIRECT COSTS IN CONSTRUCTION
