The essence of estimating is counting things, applying prices to those things and putting “a number in the box.” What could be so hard about that? Plenty, it turns out. Using this simple terminology, here are a few common problems encountered in cost estimating and best practices to avoid them.

COUNTING THINGS

1. Problem: There is no way to count things or there are no “things” to count at all.
This category can create most onerous contract terms. Owners don’t know how many days their architect is likely to delay the contractor, so they insert no-damages-for-delay clauses. Owners also don’t know how much unsuitable soil there is under the ground, so they want the contractor to buy an unclassified site. Whatever the example, it is a bad idea to give a hard number if there aren’t ‘things to count,’ but companies do it often.

Solution: Only accept manageable risk. Work from a risk model in which risk acceptance depends on the ability to manage it, delegate it, insure it and/or get paid for it. If a mix of these strategies doesn’t work, then no risk—including this estimating risk—is worth taking.

2. Problem: Someone else counted the things.
For construction managers, estimating practices vary widely but they don’t all completely take off the scopes bid by subcontractors. Absent a collaborative bid environment, the construction manager doesn’t know whether all the things got counted or whether the subcontractor thought someone else was counting ‘those things.’ There are also bid errors, where the things get counted but the count was documented incorrectly.

Solution: Demand transparency. The more a company outsources estimating work to subcontractors, the more they have to demand transparency. Bend on some terms that are negotiated anyway (payment, indemnity, delay) to learn how the subcontractor counted.

APPLYING PRICES

3. Problem: The ‘thing count’ is right, but the price isn’t.
Prices can be hard to trust at the high and low ends of the spectrum, but the extremely low price tempts contractors into buying subcontractors who can’t perform. Market knowledge drives due diligence here.

Solution: Work harder to trust the price. If there is a small subcontractor pool for one or two trades in the area, ramp up the effort to get competitive bids. Go the extra mile to get quotes to put more options on the board for a decision.

4. Problem: Things were counted correctly, but the price changed.
In today’s hot market, price escalation is ubiquitous. Who bears the risk? If the contractor doesn’t specifically allocate the risk, someone else will.

Solution: Allocate escalation risk. Match any subcontractor bid conditions in the qualifications and assumptions of the project to avoid gaps in escalation responsibility.

5. Problem: Prices changed after the deal was final.
If prices change after all the papers are signed, talk to a lawyer. Tariffs and changes in law are two common examples of price-changing after the fact, but owners commonly shift this risk to contractors in their form contracts.

Solution: Beware and have a lawyer review contracts for this issue.

NEGOTIATING

Understanding these issues is fruitless if the contractor doesn’t know how to negotiate them correctly.

6. If there is a problem with counting things, ask: “How can I put a number in the box for that?” Most often, if the contractor doesn’t know how to estimate a quantity, neither does the other party. By putting the uncertainty up front, parties can admit that they are allocating risk and reach a more honest decision about how best to share it.

7. If there is a problem applying prices to things counted, ask for transparency. Prices are time-bound snapshots of markets. Allocating the inherent risks of price movement requires effective communication. It might be boring and require bending on other negotiated issues, but due diligence lies at the root of good estimates.

The terminology is simple, but that doesn’t mean the concepts are simple as well. Counting things, applying prices and putting a number in the box will remain challenging professional tasks. The strategies suggested here (and perhaps even the simplified terminology) should help surmount some of these challenges.