January 2007
  
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BAS Controls: How important is a cost estimate anyway?

Increase your chances of winning ‘good projects’ and avoiding ‘bad projects’.

 

Al De Wachter, President
ICS Inc

Experienced contractors would be suspicious of anyone telling them that a ‘perfect’ estimate will surely result in an order for that project. We think they’re wise to do so. Does that mean a quality estimate is pointless? Hardly! It’s extremely important, but it’s just not the only thing that matters. Here’s why.

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Before the order…

The estimate is only one source of information about deciding on a price for a project. An experienced salesperson does a lot of homework before an estimate is even contemplated. The company’s resources and knowledge base are compared against the project’s needs: is this perhaps a poor fit for your company? The client may have unrealistic expectations in terms of budget, technology or delivery schedule: no point in flogging a dead horse. A competitor may have an advantage that would cause you to waste your time: let someone else provide a checkprice. Only when the effort is judged to be worthwhile, should an estimate be assembled.

A ‘bad’ estimate supports bad decisions: either a high price is set and the project is lost; or just as bad, a low price is set and the project is won… only to become a cash drain for the next 2 years. In the absence of a ‘good’ estimate, management is missing an important piece of information required to make a decision on sell price. For instance, just because somebody has set an unrealistically low budget for the project, does not mean that your company can perform the specified work within that number. Without factual cost information, bad decisions are more likely to be made. If a sell price is based on a poor estimate, it’s often impossible to recover financially regardless of the Herculean efforts of the installation team.

A ‘good’ estimate can provide a basis for a management decision to set a proper sell price so that the project, if awarded, returns fair compensation for the assumed risk and invested resources.

Those that got away...

Of course you’d like to get every job, but… you can’t. Of the ones you did not get, there are two types:

( A ) The one that you could have had, but got away. A good estimate will help you avoid making poor decisions to overprice the project, and lose a project that you could have been successful on. Of course there are other factors than price, and sometimes they can cause you to walk away from a job; seldom will they cause you to knowingly accept an order at a loss.

( B ) The one that you never had a chance at. A good estimate can also help you determine where to draw the line price-wise when bidding a job: if you have a reliable estimate and a competitor’s price is substantially lower, you have the option to step away from the project and let the circling vultures finish each other off.

Those you did get…

Again, you’d like to get every job, but… you can’t. Of the ones that you did get, there are also two types:

( C ) The one that turned out well probably had a lot of things going for it. Your salesperson analyzed the client’s needs and matched it to your capabilities. A good estimate was put together, valid bid decisions were made, and the job was won. The operations team was handed a project that had ‘potential’, they designed the project, planned the work, and they executed well. Success.

( D ) The one that you got, but that turned into a nightmare might have suffered from one or more of the typical sins. The salesperson may have misidentified the project as a good opportunity, while your solution or capabilities did not fit very well. It happens. The operations team may have botched the mission and turned an opportunity into a disaster. Bad luck (circumstances beyond your control or inability to do something about it) hurts your case. A good estimate cannot ‘fix’ these issues but can help identify them; a bad estimate will certainly make them worse.

Reliable Controls The consequences….

When a project does start to go bad, defense mechanisms kick in. Valiant attempts are made to ‘save’ the job. Corners are cut, and quality may suffer under a ‘we gotta save this’ banner. Of course the client finds out, and the job needs to be done… again. The best technicians are put on the job in an effort to minimize the losses, which destroys office morale, and robs other projects of the services of your best people. As a result, a bad situation turns worse. These types of jobs are often remembered for years… but not fondly.

A Recap…

Of the project types as categorized above:

A good estimate helps you improve all 4 scenarios.

Accurate cost estimates based on proven and field-tested values offer the best reference for making fact-based decisions.

And here’s a guarantee: a poor estimate will help you lose the ‘good project’, and will help you win the ‘bad project’. And that’s not the kind of guarantee you want to collect on.


About the Author

Al De Wachter has been active in the Building Automation industry for over 38 years.  He has held senior positions with leading companies in the field and is currently the president of ICS (Independent Control Specialists Inc).  ICS develops advanced productivity software for Facility Automation Integrators and consults on related productivity issues. www.ics-controls.com

 

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