Article - November 2001
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Successful Contracting: Beyond the Technical Issues

The best scenario is that the job gets done right, gets done just once, and everybody involved makes a profit margin according to their plan. 

Al De Wachter

Al De Wachter has worked in the Building Automation industry for over 30 years. He has held senior positions with Honeywell, Landis/Siemens and TransAlta Energy. He is the president of Independent Control Specialists Inc, where he has directed the development of advanced productivity software for Building Automation Contractors since 1990.

Every month, the pages of "" are filled with innovative new ideas, events and resources. Many of them deal with technical issues, reflecting the importance of addressing cutting edge opportunities of the Building Automation industry. The purpose of this article is to invite the reader to take a step in a different direction, one that is equally important to his success: running a business to make a reasonable profit year after year. This may seem like a statement that should not require repeating: we all know that in the absence of making a profit, a contractor can't last long under the weight of cash flows and business risks. However, while everyone may agree that profits are important, many hurdles can get in the way of that essential goal. 

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Stated in its most simple form, payments to a Building Automation Contractor cover two basic elements: the system delivery cost and the contractor's profit. It's that simple, and that complicated. Contractors face a daunting task to achieve that profit: with a fixed price contract, any increase in costs beyond what was estimated reduces the planned profit. That erodes his ability to fund the business, overloads his resources, and can lead to financial losses and business failure.

Successful contractors know these basic truths: they do not personally get bogged down in the minute details of every technical aspect of their contracts; instead they have learned to train and delegate to others. They manage their business at a financial level as a first priority, particularly cash-flow. They eradicate waste and unwarranted risk, and pursue quality and productivity standards that set them apart from their peers. And they go to great lengths to form trusting relationships with customers that result in long term mutual benefits.

In the following, we address one aspect of those success-engendering standards: preparing a cost estimate upon which solid project pricing decisions are founded.

[an error occurred while processing this directive]We all know the basic process: an owner decides to build or upgrade a facility. His building requires modern automation systems to extract the optimum usage. Architects, consultants and other specialists prepare contract documents that hopefully result in the desired facility. A budget is arrived at and funding is allocated. A competitive bid process may be used to arrive at a contract price; in some cases more innovative contractual relationships are forged to get the Building Automation systems designed and installed.

And "designed" is the correct word: in virtually every instance, the Building Automation contractor designs his own systems after he interprets plans and specifications, operational descriptions, and more or less vague documents and schematics to arrive at "HIS" solution to what the contract documents call for. If contract documents are prepared to obtain competitive bids, of course they cannot be so specific as to nail down every little product detail, hence vendor interpretation is a natural part of the process.

Risks follow from this situation: every contractor has his own interpretation, and history shows that there is much room for widely differing interpretations of the same set of documents. Often the degree (or lack) of detail in the documents leaves interpretations wide open. Once a certain interpretation is chosen, a contractor's cost estimate follows from that, hence the interpretation (and the quality of the contract documents) can result in unrealistically high or low cost estimates. Too high an estimate (pessimistic interpretation?) is likely to result in an award to a competitor. With a contract awarded based on too low an estimate (optimistic interpretation?) on the other hand, the beleaguered contractor may eventually wish that a competitor had been awarded the contract. The quality of the cost estimate is mission-critical. And the owner's own interpretation when applied, revisited or revealed after the award, may differ from the successful contractor's interpretation - with all the associated friction and struggles.

But a contractor's risks do not end here: as a building automation subcontractor, much of his work comes near the end of the construction cycle, and he is subject to expensive delays caused by every major trade. His designers, programmers, technicians and installation crews are typically highly trained, at significant expense. Owing to their specialized skill sets, these employees are not readily replaced, and additional qualified personnel is not readily obtained or redeployed on short notice when workloads fluctuate beyond the contractor's control. If there are any comfort, safety or performance issues, he will be among the first to be called to attend to problems that may have nothing to do with his contractual responsibilities. His designs and installation may be perfectly workable, but the owner's different albeit "reasonable" (read: "more expensive") interpretation of the same documents may be cause for strife and expensive disagreement, driving up costs and eroding the profit margin. Risks are associated with uncertainty, and there is typically plenty of that to go around, particularly when documents are vague.

Clearly, without the benefit of an accurate estimate, the risks are even more insidious. And preparing a good estimate takes time. Let's assume that on an average competitive bid, there are four contractors preparing a proposal. That means that three out of four, or 75%, will have worked for nothing. Put another way, there is an average 25% chance that the contractor's bid will result in an order. Of course where a higher success probability is anticipated, more time is invested. However extra work is not really "guaranteed" to pay off, and a subsequent non-award results in a loss of even more invested time. If a lower success probability is likely, that project takes a back seat to other potential work; it may even result in a 'no-bid' decision. This project may present increased risk as well: because less estimating time is spent, estimate quality may be weak and may result in an award at an inadequate price level. The quality of the contract documents has an effect: if details are lacking, the estimate takes more time, and may also carry hidden risks. Experience teaches us that vague and poorly prepared contract documents end up in higher costs, lower profits and more lawsuits, and many savvy contractors have learned to avoid them.

Who benefits from a better project cost estimate? The contractor is the obvious beneficiary. However consider he following: if a contractor is awarded a contract based on a poor estimate, he will at some point realize his mistake, and try to recover. If that somehow results in cutting corners by delivering less, he is likely to get caught red handed, and forced to re-do the work at even greater expense. However this implies that the owner, his representatives and other contractors also enter into a cycle of unanticipated disputes, delays, meetings and costs. If the contractor experiences financial setbacks, even his product suppliers may not get paid. The best scenario is that the job gets done right, gets done just once, and everybody involved makes a profit margin according to their plan. Therefore all involved parties benefit from better estimates: owners, consultants, contractors, and suppliers.

Regardless of the effect on the probability of receiving an order, it is clear that a contractor requires the most accurate cost estimate he can get to protect his profit margin. Ideally, he should be able to get an accurate estimate (so he can make informed decisions on pricing) and a fast estimate (so his estimating time investment is not excessive, and he can handle more estimates with a given staffing level). These two factors tend to conflict: more accurate estimates imply more time invested; fast estimates imply lack of detail and hence increased risk.

But in addition to accuracy and speed there are other aspects to cost estimating. A credible estimating system should:

Systems with these features, and more, are now available for high-tech Building Automation Contractors. In next month's follow-up article, we will explore this in more practical detail.

For more reading Successful Contracting: BAS Cost Estimating Issues   Al De Wachter, Independent Control Specialists Inc

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