What are the three types of cost estimates?
There are three types of cost estimates ?
1. Bench Marking for Feasibilities
Is a high-level cost per m2 based on historic data on similar projects. It is very similar to a cost plan but based on a footprint measurement called GFA or CFA (Prefered by builders). It is a good indication of price based on an approximate area as a concept stage.
If you wish to read more about Bench Marking – Click Here
2. Cost Planning at Design Stage
Is a preliminary estimate based on schematic Design drawings? Normally used as a design cost management tool to sanity check the design team and normally presented in 11 to 16 section pricing schedules based on building elements such as walls, floors, roof, etc. Can be very accurate but still a global approximation.
If you wish to read more about Cost Plan Formats – Click Here
3. Detailed Estimate at Tender &/or Construction
Detailed estimates – Are normally produced when the design sketches have been developed into fully coordinated documents suitable for building approval prior to the actual construction stage. The trade pricing is separated into a standardized pricing schedule (can be supplied by client) and a critical path construction program is normally produced so the builder can apply science to the duration of the project and capture all the onsite preliminaries costs. The level of detail will be a direct reflection of the risk the builder carries into construction and the margin and running costs are added. As a sanity check – the total contract price is can be extracted back to a cost per m2 based on the “Construction Floor Area” (CFA) for future benchmarking and the elemental pricing can be also used for Cost planning.
If you wish to read more about
BOQ Formats – Click Here
First & Second Principles – Click Here
CFA=FECA+UCA – Click Here
Preliminaries & OR Costs
DO YOU KNOW
WHAT PROFIT YOU MAKE?
When speaking to subcontractors and even smaller builders, I often get asked advice on the market profit margins? It is a touchy question as the answer is not a simple one-liner. The easy way out – is to state that every business is different and the answer always depends on “what the market is prepared to pay”. Obviously the market changes due to a number of factors however I get the feeling that bench marketing from previous projects often plays a major part in their strategy moving forward (especially with smaller players).
Now don’t get me wrong – Benchmarking has its place… BUT ONLY – IF you do the same service on the same type of job in the same area, in the same environment, with the same staff, same client, etc. – Benchmarking is a very easy way and a business that knows their market so well that Benchmarking is quite acceptable. But if any variable changes or something is missed, the risk to your bottom line skyrockets.
So estimators start working with a business’, their initial focus is just to cover off the risk on trade pricing. When closing out a tender, a conversation takes place regards to the strategy of how you are going to win the tender regards to risk & margins, etc. Now that mythical number is a bit unfair to be asked as it is a three-pronged answer that takes some time to understand – So at that point, you are relying on the client having a clear direction on margin and overheads and a track record of a winning margin on past projects.
Then you get a client that has won tenders in the past however have no idea if they are cheap or expensive, or even making a profit as they have used a trial and error approach winning tenders. (or another way of explaining it – they have used a benchmarking formula that is devoid of science and basically sailing on a wing and a prayer).
To have a chance of answering or give some type of science in answering the margin question – the estimator needs to know the recipe for running costs of managing their business to have a hope of mathematically working out the “Bottom Line”. This is where it gets a bit sticky… this information is really sensitive to the business and they might not like to let that information out of closed doors.
How do you price your Preliminary costs?
Do you know want your Overhead Costs are?
Where do you recoup your overhead cost?
What are your risks?
Granted, the answers to the above questions are very sensitive, but some quick sanity checks and a little reverse engineering math to understand the indirect costs can be the difference in making a profit or not. But these are the “Indirect Cost” headline you are working towards:
- Preliminaries (Time-related site costs)
- Business overhead/running costs (normally in the order of 5% TBC)
- Risk
- Actual margin (This number includes business tax)
On a need to know basis and estimator needs to capture items 1, 2 & 3. The owner (Client) needs to review 1, 2 & 3 and make then final decision on item 3 actual margin in relation to their business plan. The seasoned Estimators &/or Cost Planners will delve deeper into the financial management and so doing add value to the business as the risk elements can be quantified, correct reporting can be made, and business becomes more sustainable and competitive in the market. (No more Russian roulette).
Preliminary costs and Overhead Recoverable costs.
Preliminaries are normally all the time-related costs associated with managing projects in a safe, expedient manner.
ORs are the cost associated with the running of the business that is normally based on yearly turnover, Costs like insurance, office & office staffing and general administration, etc. From an accounting point of view – these costs can be recovered in a number of ways (including a business Tax return) but are one way or another they still need to be captured and paid.
PRELIMINARIES
COSTS
Preliminary costs are mostly time-related costs. As they are time-related – by definition, time has risk. The question is how we control time? The answer – well you cant, but good methodology planning with a critical path program is a start.
Clients have got smarter over the years and normally ask for a set pricing schedule and programs or duration to compare one builder to another. This is one way that clients compare builders and intern to manage their own risk. A client wants to know that they are talking to a building professional who can demonstrate that they understand the methodology and managing all the complexities of the project considering all stakeholders. Apples for Apple approach..
A program may or may not be required at tender but is almost always required, but in post-tender discussions prior to contract signing.
But a good construction program that has been reviewed by both an estimating and contracts department prior to tender being submission is always the best practice to reduce risk. (Plus it engages the Contracts department into the tender they may have to build). In my experience – who does the program mainly depends on workload, but the task normally falls on either the Senior Estimator, Contracts Manager, project manager or a programmer. The appearance/format of this program is normally the same every time but the client milestones are normally illustrated first at the top of the page.
If you need a project planning service, check out Solid Support from Sydney. I have used their services on some pretty complicated tenders and found them very professional. They offer training in programming software and were fortunate to receive some solo training and secondary group training. They have always very informative & very professional. http://solidsupport.au/company-profile/
PRELIMINARIES
CHECK LIST
Below are some “Tabs” that illustrate the headline sections of a standard preliminary list in tendering. The tabs expand to reveal an additional layer of sub headings. For most of the heading I have also added some checks and reminders that may be helpful.
Builders need the total construction cost of all buildings and for record-keeping a constant method of measuring building areas. I would suggest that you use CFA= UCA + FECA
If you wish to read more about
GFA, NLA, CFA=UCA + FECA – Click Here
Complete Floor Area (CFA) This is different from GFA.
These three areas can be used to check pricing over a variety of trade and for the historic record for benchmarking on future projects.
Key durations include the following:
- Design & approvals
- Procurement lead times
- Nett construction time
- Wet Weather
- Maintenance period
- Staff & Hire Equipment durations
A critical path program sets a number of key durations from which the staffing and hire equipment can be calculated.
These are very site-specific and need to be checked every tender:
- Water design fee
- Sewer and water fees
- and Gas connections
- Power (Consumer Mains)
- Internet & Phone
You will find that most projects have a small number of connections and inspections fees. These can sometimes be included within the respective services subcontractors.
Things to Check:
- Consumer Mains & Transformers
- Services upgrade generally
- Note connection paid by end-user on power & Internet.
Again, very site-specific and need to be checked every tender:
- Building over sewer fees
- Operational works
- Footpath bonds
- Building zones
- Road closures
- Flesh water acts
- Miscellaneous Inspection fees
- Fire department inspection fees & sign off.
- Fire brigade call out risk
- Hydrant & FHR flow test
- Pressure tests
- Hazardous material design
- Road services design fees
- Dilapidation Reports
- Additional Reporting required.
If a DA approval is available you may have a DA Matrix that spells out builders’ responsibilities. If not the Estimator has to sift through all written documents and make a number of phone calls to capture the costs of these items.
It should be noted that sometimes a formal application must be submitted before an authority can quote the services. So either clarifications or allowance should be considered for such items.
Things to Check:
- Site-specific report inspection points & fees.
- Additional Reporting required.
NSW – Long Service Leave Levy is 0.35% of building GST inclusive price of the building component.
Paid by the owner / Client.
This is an industry contribution scheme for site workers only. This fee is normally paid by the client however may be included in the tender price.
The rate should be checked and confirm with your local state.
Within a boundary including surveying and drafting of the following:
- Adjoining property and Boundaries
- Setting out for grid lines and Reduced levels
- Masonry Pinning & structure
- Floor, Eaves and roof certificates
- Final survey
This is surveying not associated with subdivisions and easements.
This section is mainly to capture consultant costs associated to Design and construct tenders. However, QS & Estimating costs could also be captured as well. The list would include:
- Quantity Surveying & Estimating Services for tender and ongoing construction works.
- Architect, & Design manager
- Civil Engineer
- Structural Engineer
- Mechanical Engineer
- Other consultants
This could be an overhead recoverable or a direct cost.
Check:
- QS and Estimating cost may need to be considered outside normal ORs and captured in preliminaries especially if the may need a staff member 100% of the time.
- Design Manager
- Service Manager
- Construction Manager
- Project Manager
- Contracts Manager / Administrator / Cadet
- Project Engineers / Sfety Manager
- Reception
- Accounting
- Estimating
Construction Program durations applied to weekly rates.
Note:
The biggest mistake I find is in most businesses is that weekly rate is spread over 52 weeks in a year. This Science is obviously incorrect when you consider public holidays and 4 weeks holiday – so the actual time on site is less than 45.6 weeks in a year.
- Site Manager
- Head Foreman / Person
- Lead Foreman / Person
- Sub Forman / Person
- Labourers
- Traffic Control
- Staff Consumables
- Safety & PPE
Construction Program durations applied to weekly rates (phones and car allowances TBA)
Note
- Regional Rates and travel allowance may apply.
- The weekly rate should be adjusted to 45.6 weeks when pricing.
- LAFA – Living away from home allowances.
- Tolls
- Planes
- Hire Cars
- Accommodation
- Phones
Construction Program duration.
- Site fencing / Sade Clothe
- Hoardings/crash barriers
- Water Barriers
- Temporary Road crossing and Site Shed Base
- Shaker Grate
- Site Sheds (Meeting Office, Ste Office, Lunchroom, Ablution blocks)
- Site Shed Awning, access stairs, logbook desks.
- Storage Containers
Construction Program duration.
- Services Location
- Electrical Connection & Cap off
- Router set up
- Security camera set up
- Drone Photography
- Builders Boards
- Temporary lighting
- Generators & Consumables
- Service decommission
- Phones & Radio
- Printer Purchase & Printing
Construction Program duration.
- Scaffolding, Ladders, and steps
- Materials Hoist and Materials Platforms
- Suspension Cradles
- Cranes & Crane Base
- EWP, Knuckle booms & Scissor lifts
- Material handling (Telehandler / Forklifts etc)
- Water trucks
- Street cleaners
- Turn Table
- Associated Consumables
Construction Program duration as per Construction Methodology.
OVERHEAD RECOVERABLE
COSTS
For a business to be able to trade as a builder, you can imagine that they would need insurances, Licensing, accreditations, auditing, displays, admin office, banking, marketing, estimating, etc that need to be pay by someone. These operating costs are normally recovered as an Overhead Recoverable or ORs. In my experience builders recover these OR costs in three different ways including:
- Included in the Preliminaries section,
- At the procurement of trades if you win the project
- Or in the margin or washed over the trades as a percentage of the tender.
One or another every business must pay for their operating cost, it is more the question where they hide it. This where the accountants get involved, most overheads are a taxable deduction in the Australia taxation system and the rate is currently operating at 30%. So you can write off a lot of expenses through the tax system but you still need to come up with the money to finance said costs. So most building companies need to juggle cash flow, against contract retentions, Client progress payments and a line of credit.
Even if you have got the recipe perfect – some amount of OR must be managed within a tender but the company owners would also have to manage this OR against wining projects. And that is an article for another day.
OR CHECK LISTS
Below are some “Tabs” that illustrate the headline sections of a standard Overhead recoverable list in tendering. The tabs expand to reveal an additional layer of sub headings. For most of the heading, I have also added some checks and reminders that may be helpful.
- Professional Indemnity Insurance
- Public Liability & all risk Insurance
- Workers Compensation
These costs are normally washed over the turn over builders turn over per year.
The general Milestones are as follows:
- Project commencement
- Practical Completion’
- Defect Liability Period
With most contracts a retention in the form of Bank Guarantees & Insurance Bonds.
These Costs are very important for a builder to trade and the financial outlay is a large expense that is normally based on the contract sum.
The general operating costs of a business can vary dramatically on your size, staffing numbers, and general efficiency. The accounts department would be the best way to isolate these costs and normally the overall recoverable would include the following:
- Office Rental and utilities.
- Office fit-out, Computers, phones, advertising.
- Stationery, Marketing, and websites
- Systems Management and accounting.
- Legal, Banking, and Finance
- Office staff, Wages & Payroll taxes.
- Director dividends and wages
- Training, transport, cars, and equipment.
- Software Licenses and Maintenance agreements
- Etc, Etc.
The bulk of the overhead recoverable is associated with the operating costs of the business. These costs are then washed over the project costs as a percentage in one form or another.
If you wish to read more about
Tender Process – Click Here
Welcome to All Things Estimating
I would like to introduce a new website that focuses on answering two questions –
Can it be built? How much is it going to cost?
My name is Scott Townsend – the founder of All Things Estimating,
I have recently relocated to Launceston for a new adventure for my family and have set up shop working remotely and offering building consultancy focusing on Estimating Services whilst developing this website into a resource bank and training & education to pass on knowledge for the young blood of the industry.
The basic premise is to explore processes within the design & building process capturing D&C trinity that exists with “Design Management, Tendering, and Procurement”. I have been in the industry for over thirty years. Firstly, as a designer then a builder, D&C estimator and most recently author/blogger .
The website gives me a platform to help empower others on a larger scale. I have high hopes for the site and it is also my hope to ring in some colleagues to give their specialist experiences as well. So please share it with your colleagues and I would be thankful for any blog ideas or industry insights.
All Things Estimating is open for Business.
Quantity Surveyors, Estimators & Cost Planners
Quantity Surveyor, Estimator & Cost Planner
To be able to build a project – you must first go through a process of developing a design requirement and then produce feasibility to set rough budgets for the client. This process is normally handled by a design manager and quantity surveyor.
The second stage is to get financial backing from banks and financiers. For this process, banks need to know what the actual market has to say. Most banks will ask for pricing from builders. Depending on the documents and the design development a builder could either provide a cost plan or a quotation.
Basically, the banks are requesting for the theory of a project to be changed to reality. The disciplines between a QS to Estimator and Cost planner are very simple. At one point a QS will work for a client and a builder and thus could potentially do all three disciplines. Estimators would be less likely to work directly for a client however will often be asked to produces BOQ and cost plans. A professional cost planner would need to get their experience in the trenches at some times of their career.
But if you do one discipline for a long duration of time, your skill would obviously become a little rusty, this is more nervous tension about not being current and not really a skill issue. It is obviously better that the three disciplines get experience in all areas, however, in the greater business world you can fall victim to perfecting one skill and becoming stale in the others.
The good news is that the skills never go away and guidance from a colleague is always helpful. Networking within other organizations, discussing industry trends and practices is the trick to being current.
Skill sets can also be skewed by the size of the company that you work with or for. The internal processes with a tier 3 company would obviously be quite different from a tier 1 company.
Role of a Quantity Surveyor?
A university qualified to build professional who has extensive knowledge of building and contracts and are mainly focused on the measurement of the elements for a building. They are trained in all aspects of managing the contractual and financial side of construction projects.
These professionals would normally work directly for the client as a consultant or for builders.
When working for the client – their roles normally are directed at a feasibility to estimate costs (cost planning) or producing “Bill of Quantities” (BOQ) that the client can then call tenders from builders based on said BOQ.
Quantity Surveyors (QS) are often employed as client-side superintendents to manage the process of tendering, selecting a builder and managing the contractual & financial aspects of the construction phase.
A QS working for a builder can either be a part of a team focusing on quantities and working with an estimator to produce a tender submission or can also work in the project management genre, assisting the contracts teams or even being a project manager.
Role of an Estimator?
Estimators normally work primarily for builders, or sometimes could be the actual builder. Their role can capture both a QS role by pro-paring a builders BOQ plus rating and costing the BOQ using various pricing techniques. (Refer to Methods of Pricing above).
In a very simplistic description – a QS measures and an Estimator focuses on the pricing. But the reality is both estimators are very similar with varying degrees of focus. You will find speaking the majority of quantity surveyors – they tend to more academic and the estimator (or QS working for builders) will be more detail based and the practical side of the building process and build-ability.
Again a very simplistic difference – a consultant QS is global pricing and an estimator is closer to the pointed end of the pricing.
An estimators role primarily manages the bid process from a client RFT to hopefully winning the bid and then handing the bid over to the contracts team. Estimators can also be enlisted into the contracts process however the estimator will normally step away from a project at this handover.
The vast majority of estimators have building qualifications either certificate, diploma or degree level in the building, construction management, quantity surveying, or land economics as these tertiary qualification all have basic estimating training.
However, a building cadet will often start at an estimator before moving onto a contracts administrator role or site role. These cadets can also focus on estimating. Sometime a tradesperson could choose to come off the tools and train as an estimator providing they possess the computer and administration skills. Architects and design managers often make good estimators especially within the design & construct genre as they understand the built environment.
Estimating can be a very high pressured role and the individual needs to manage a number of processes, in a set deadline. Financially estimators, for this reason, get paid well, however, time management of a number of processes doesn’t mean anything unless you can capture the trade coverage and present a trade package that can win a bid. Building a subcontractor and supplier database and the development of a vast range of relationships within the industry is pivotal to longevity.
Estimators are judged by there win / loss ratio even though the final number is out of their power.
An estimator is mainly responsible for the priced criteria and sometimes the non-priced criteria can lose you a tender. The final preliminaries cost, overheads, and the margin is normally a management decision however the estimator lives and breathes by the win-loss ratio from a career perspective.
What is a Cost Planner?
A cost plan is a high-level estimate mainly based on like projects or industry rates based on square metres and benchmarking. A cost plan could be completed by either a QS or estimators.
A quotation to a more detailed price could be a team event between a QS or an estimator or just an estimator doing both the qualifying of materials and labour and then rating said quantities up to produce a price.
Within that process quantity surveyors, estimators & cost planners are involved at different times of the process.
Cost planning can be either a client side of the builder side process producing a high-level budget. Both estimators and QS can produce a cost plan, however, the really good cost planners have a “Dark Arts” skill set based on percentages and square metre rates. A cost planner is focused on the overall budget and doesn’t draw down into detail but rather historic cost analysis.
Quantity surveying is normally not particularly worried about the price but more as a consultant producing BOQ. and then delves into a cost plan to guide design. Their particular expertise is also having to deal and coordinate with the design consultants and draw down into the detail of the design. Then advise of budget tracking whilst also keeping the client happy.
An estimator works mainly for builders at the sharp end of pricing and it focuses on winning a bid. Their master is the builder and not focus on the client politics.
Now the amount of stress, type of stress and time in which a QS or estimator can work is then very different. To a point that within the industry the three disciplines are very similar however, they have been separated into three recruitment genres based on wage and ability.
If you wish to read more about
Tender Process – Click Here
Are you Pre Contracts Or Contracts?
This is where it gets a little complicated as quantity surveyors and estimators can also work out of a site office as a part of the contracts team during procurement and ongoing construction. These types of gigs normally come up with tier 1 & tier 2 builders.
Sometime in your career – you will need the services of a recruiter. Keeping employed may be the reason that you are pointed in one direction or another.
I am a Late 60’s vintage so I have family and kids – being out of work for any duration is simply not an option. Now the next background note – my vintage of building staff are normally have been around the block and are generally multi-skilled.
So this is the thing – I have found in busy times employers just wanted a body who could do a job. But when things slow down – having someone who can wear a lot of hats is always a benefit to anyone’s business.
Generally, you want to find work at the start of the upward cycle not the end of the busy cycle.
But if you happen to be on the market in busy times you can normally find work reasonably easy however if the work dries up or doesn’t go ahead – the building industry can be brutal.
You may find yourself in the position that you are sitting in from of a recruiter and they ask you the question – Do you see yourself in pre-contracts or contracts? Be careful as it may be the difference between them helping or telling you pretty lies.
I was asked that question about 20 years ago – are you pre-contracts or contracts? I scratched my head and said both. 20/20 – Not my greatest moment – I remember the face of the recruiter was baffled and she had no idea how to market me. Round peg / square hole kind thing. Basically, a total failure but a very good lesson though.
The second thing was - "To understand your clients client".
Just to paint you a picture – I was looking for work, married with kids and my wife was also finishing a teachers degree. I let you fill in the gaps but being out of work just wasn’t going to cut it. The building industry was in a pretty bad in my immediate vicinity so I was also looking far and a wide to follow the work. I had just flown interstate and pretty much tanked my first recruiter interview.
I had another meeting with a different recruiter the following day as a backup – Re-jigged my resume to suit what the market was looking for (dumb myself down a tad) and was employed the following week.
Now that was over twenty years ago – HR and recruitment have come a long way, But the industry has moved to more specialized, especially when you want a role in tier 1 & 2 building company. It is not a hard and fast rule but you need to have plenty of experience and a track record even to get a look into tier 1 & 2 genre builders. But it is nice when you get there.
Now if you want a little more flexibility – often in medium-sized tier 3 building companies (who often punch above their weight class) – you may get to swim in both sides of the fence and wear many hats.
I will always recommend that you try new genres and do different roles within your core training. In estimating you often get a cadet that spends some time in the estimating trenches and then moves onto contract administration and then goes onto project engineering or project management. Estimators are a rare breed and it has been an industry problem to replenish the estimating ranks. Estimator wages have steadily increased in the last decade to react to the staff shortage.
But my experience – those people who try it all, (estimating, CA, PM, Supervision, etc) end up being the solid long term players in the industry.
If you get the opportunity to explore the different genres from design to building etc
Do so. Its good fun and It is all experience.
If you wish to read more about
Tender Process – Click Here
Where do Tenders come from?
When I am getting to know people in an organization – I normally get around to asking this question- “Who do you think is the most important person in an organization?”. The answer varies from who you are talking to and what their job is within and organisation… .
- Management will answer – its a team event and everyone is important, sing some type of praise starts singing Kumbaya some high management motivation? But they probably think of themselves or the boss.
- PMs will think that they are the captain but will choose someone else to be politically correct.
- The supervisor will say – Site staff as if the product is not built properly you cant get return business and a reputation?
- Etc. Etc. I think you get the picture…
“The most import person – is the person who brings the business through the doors, maintains relationships and closes the deals. So the tender team, procurement, and the construction teams all maintain the reputation of the business – the salesperson gives everyone the opportunity to have a job. Now the boss maybe that salesperson role. So everyone else’s job within the team is to make the salesperson’s job easier. But if a business can get every employee to take on some type of sales responsibility as a united front – obviously that is the goal. Sales and network marketing is an ever-changing world – there is no recipe over the last decade that hasn’t had to adapt.
MARKETING & PIPELINE.
On all the TV shows the client is always struggling to find a good builder. Now that may be correct in some areas and mainly in the residential market however, in the commercial market, it is all out war. You are competing just to get on a tender list most the time, unless you are in a niche market – you have to go out and find the work.
Some tenders just drop into your lap, however, the vast majority (especially in a competitive market), just getting a tender to land at your desktop is an achievement within its self.
As mentioned the tender process doesn’t necessarily start with the Request For Tender (RFT). It actually starts with months or even years of project tracking of Development Applications at Council, specialist organizations such as BCI Australia, Cordell, etc. Trade & network functions, talking to architects, engineering and prospective clients. Letters of expressions to key organizations, countless meet, and greets, tendering on other projects which may not be not your key focus, just to establish legitimacy and a relationship with a client.
Lots of time and money and sometimes plain and simple luck take place. Hopefully, you have a good marketing team who has a pipeline of tenders, to keep the estimating departments ticking over.
THE EQUATION
TO KEEP THE DOORS OPEN?
There is a basic math equation that every General Manager / Owner or the like understand too well. The basic concept is – “how much work do we need to win to be able to keep the doors open and then make a profit?” This number is different in every business but that number is then directly related to the tender win/loss hit rate.
I will talk more about this in estimating record keeping but this is a classic example of why estimating record keeping is so important.
If you wish to read more about estimating records – Click Here
If you have a hit rate of 1 in 5 tenders and you need a turn over greater than $20M, the tender team then needs to bid on approximately $100M of work. Now if you traditionally tender on tenders in the ranging from $1m to $30M – that would equate to not 5 tenders, it may be as many as 30 tenders. So the sales and marketing need to be out there pounding the pavement.
Lots of things can frustrate the pipeline. Whilst looking for the work to tender on – a lot of prospective projects just don’t proceed or simply may be postponed. Sometimes a cost plan doesn’t proceed into an actual project, or there may be a redesign. Keeping a strong pipeline is fundamental to any business plan.
If you are working for a smaller company (normally in the tier 3 category) – the salesperson could be a number of key people including the head estimator. But as an estimator – you want to know the direction of your company. Take an interest in the pipeline. On the other side of the coin – There will be those down times normally around January and February.
But don’t get too disturbed about a small lack of work as there is always price lists and relationship with subbies you can develop. Estimating can be a hard gig however your job security is pretty good. If a company hasn’t got an estimator, the appearance is they have pretty much given up the game. So in these slower times get some good health/work routines going, get to the gym as much as you can. Because when the work starts coming down the pipeline is literally doesn’t rain – it pours.
If you wish to read more about
Tender Process – Click Here
Tender Pre-Qualification
Finding a Builder?
Finding a builder for the job is harder than it sounds. Most builders have a certain genre, that their experience, staffing and skill set gravitates toward. You also have residential, commercial, industrial, medical and hospital builders, and fit-out builders. Then you have high rise residential and office buildings, shopping centres. infrastructure building, civil building etc.
Builders also have a business model that also evolves around reducing risk. So basically not every builder will build every type of project.
Unless you have a lot of time on your hands, how do you find the right builder for the project and you don’t know where to start?
The answer is to do a lot of research, ask consultants for referrals, advertise, etc. Now, these clients have not got any relationships with these builders and the clients want some type of assurance that they first talk the talk and then back it up by walking the walk.
(Yes – I grew up watching John Wayne OK)
Now if you send out tenders into the world you want to know a little bit about the builder who is building for you. What is their business culture? To be selective in the many types of builders, one way is a pre-qualification process.
What is Tender Pre-Qualification?
The single biggest issue you have in any business is the expectation that the product you are selling is going to meet the client’s expectations. “Communication of a dream”.
Moving forward, clients are not experts in drawings, building codes, Councils, etc and they hire consultants to place their concept, their dream and expectations onto paper. Huge leap of faith for many clients.
And when the project is finally built after all the stakeholders get involved – will they be happy with the result? Questions for many clients could almost be impossible to answer.
The selection of a design team was hard – now that has to choose a builder and can that builder meet that expectation or dream?
Most clients are not experts in design or the building industry, they have an overall concept but who do they choose for their design and building team. These decisions could be one of the most important financial decisions of the client’s life. At the outset, there is a mountain of potential for risk. So how do you reduce the risk?
One way is is to send out an audition process called a pre-qualification to tender. This is a way to check the builder qualifications and select a select few to tender on the pricing. So the pre-qualification process allows the client time to focus on the builder’s character, staffing, ability to complete the project, insurances, etc. It also gives the client time to address one thing at a time. It would also give the builders interested to have a glance at the drawings and ask queries about the documents that may help the design team improve the tender documents from a build-ability direction.
Now, this only works if the builders selected in the process can actually commit to the tender request at the time when the tender documents are available.
A week in building terms is a long time indeed, so a lot can happen between the first expression of interest (EOI) or pre-qualification.
So the pre-qualification is often a list of questions in the form of schedules so the client can compare builders like for like (apples for Apples). These questions are basically nothing to do with price, more capability. Now if these questions went are with a standard tender request – these schedules would be called “Non-Priced Criteria”.
In a standard RFT, there are two sides of any tender – non-priced criteria & priced criteria.
A pre-qualification question is very similar to non-priced criteria. Questions at this pre-tender stage would include:
- Introduction of the future tender documents
- Site Restrictions & site-specific challenges.
- Quality standard and other accreditation
- Past Performance & Relevant Experience
- References and testimonials
- Key Personnel
- Current commitment & resourcing
- Insurance details
- Local subcontractors and suppliers
- Aboriginal Participation Policy
- Drug & Alcohol policy.
These documents are basically documentary evidence and references that can prove that a builder can actual walk the walk.
Now assuming you have a list of builders that you are happy with and have met all the client’s criteria – the process can continue onto the tender documents strictly based on price. This process is greatly dependent on timing plus there is another issue with this approach.
What if the builder has fantastic pre-qualification documents and they are crap at tendering?
I think in theory the pre-qualification process has benefits for the client and builder however may limit the fishing pool for the best builder for the job if they, unfortunately, were unable to submit an EOI in the time frame or just wasn’t aware of the potential project to tender.
Within the non-priced criteria, the builder would delve into how they would actually manage the project and over and above the list above the builder may also submit additional items such as:
- Construction Management Plan
- Task Appreciation & Methodology
- Staging plan and Site establishment
- Others.
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Tender Process – Click Here
Principles Of Estimating
BASIC ESTIMATING TERMINOLOGY
Most people in every walk of life use estimating in one form or another and they probably don’t even realize it. Let’s say you need to bake a cake for 8 people arriving in two days’ time. Ok what are the ingredients to feed 8 people, how long will it take bake and then cool for decorating in time before everyone arrives, and then what is the cost of the ingredients and have you got all the baking pans and equipment to be able to bake. Sometimes it may just be easier to walk up to the local shop and buy a ready-made cake.
So the basic concept of estimating is to break down a project (building, road, bridge) into industry-standard trade packages. When you consider there may be between 50 to 100 trades on most building projects and then each trade may have hundreds or thousands of components. You need to find the subcontractors to price the trades, compare quotes, understand and price complex methodologies & programming whilst also considering business running and operating costs to make a profit. Basically buying and selling off risk.
So to place a context to what a professional estimator does – imagine estimating the ingredients of 100 different cakes with varying ingredients purchase from all over the world. This would take months, Now imagine doing that same bulk of work in days and weeks.
These terms are the cornerstones of any conversation discussing the “The Dark Arts of Estimating”.
- Tender schedules
- Non-Price Criteria & Priced Criteria
- Direct Pricing & Indirect Pricing
- Estimating (rating) methods including First Principles, Second Principles & Bench Marking.
- Cost Planning
TENDER SCHEDULES
Clients are normally experts at business and not building. The more sophisticated client will use an internal project manager, architect, or even a quantity surveyor to help manage the tender process. To manage the client’s risk – the client may select a builder on price their ability illustrate they have the capability to manage the client’s expectations, having the desired experience, track record, and financial security.
These schedules are the information that allows a transparent comparison between competing builders. and these schedules are separated into two criteria: Non-priced & Priced-criteria.
NON-PRICED & PRICED-CRITERIA
Below are examples of what you would expect in the two groups of schedules:
Non-Priced Criteria
- Condition of tender
- Contract
- Business details including organisation chart
- Referees
- Previous experience
- Staffing and resumes
- Subcontractor list
- Safety & management systems
- Policies
- program
- Methodology
- Clarifications
- Other supporting documentation
Priced Criteria
- Tender Trade break up
- Services trades schedules
- Cash flow projects
- Labour rates
In a commercial office, the estimator would focus on the Priced criteria however would also be involved with the program, clarifications, and methodology.
The non priced criteria are mainly compiled by a bid manager, admin staff, or even the estimator in smaller officers. In residential projects, the list would be quite small, the list gets progressively larger into commercial projects and government sector projects the NPC can be a small novel. If you miss a tenders schedule you can be marked down or even disqualified from the pricing so these schedules are very important to get right.
INDIRECT & DIRECT COSTS
I have talked about Priced-criteria and the tender breakup format to present the client trades pricing for comparison with other builders. This tender breakup can be further broken into two categories of costs which are Indirect & Direct cost. I have used a standard cost plan format to illustrate the differences,
Indirect Costs
Imagine costs like design consultants, fees and bonds, Site sheds, scaffolding, insurance and licensing, office costs etc are all cost that has to be paid however you cant see once the building has been constructed. These costs would fit into Indirect costs normally within the headings below.
- Design Consultants
- Authority fees
- Preliminaries
- Overheads & Margin
Direct Costs
The complete opposite is direct costs, which are and costs associated with trades and services that are easy to see once the building is completed. (walls, floor, etc).
- Civil Works
- Substructures (skeleton)
- External walls
- Internal Walls
- Roof
- Services trades
- Finishing Trades
- External Works
Record keeping is the life blood of any business and the building industry is no different. Once a tender is in final review these records can be pulled out to test estimate and market pricing.
Percentages and square metre rates can be quickly used to compare like for like pricing. This is a form of bench marking. Assuming you know who you are tendering against – this information can also paint a picture of your success rate against another competitor which may have some relevance of profit margin rate to come in below your competitors and win the project.
METHODS OF PRICING?
The Builders Bill or BOQ is normally put together the same way in the same format every time. We are creatures of habit for a reason. This format is an abbreviate version of the Australian Method of Measurement and often adapted to suit trade & industry pricing systems.
Generally we measure and item and then we price that item. The way we price can vary from three main techniques. Generally an estimator will use a combination of all three of these technique to acquire the best science to advise their team of pricing. Again it is the best method to manage the risk.
First Principles
Which is rating up the materials, plant , machinery and labour using a a summation method. These factor rates are based on years of experience and very accurate historic records.
Second Principles
Is packaging the documents into trade packages and contacting a number of subcontractors and request a r quotations. The idea result would be to get three or more prices that are relatively close together (A "cluster" of prices).
Bench marking
Price that has been formulated from actual historic record from construction. You use these rates to price "like" buildings.
What is “First Principles”?
After you have received the builders bill – first principles is the rating of that item by rating up the materials, plant and labour using a method called summation.
Often an estimator would price up a trade package using a combination of method to take a stand on the overall trade cost. In the back ground the trade package may be priced by the market place in using second principles methods.
When the trade pricing comes in you can review both first principles rating against industry pricing.
Now if you have plenty of trade pricing the first principles could be used as a guide to possible procurement of the potential profit or losses within a trade comparison.
What is “Second Principles”?
This where you have completed a measure internally (you may send out a BOQ however the trade package is priced by the market and you basically choose the most compliant price. Now that could then be brought back to a unit rate for future use or comparison with other like jobs.
Receiving a quote based off a SOW. Generally most service trades would be priced this way.
Sometime you may be under the pump for time and second principle may be the only method of pricing using a number of market pricing to establish what the market believes the package is worth.
But is should be noted this has risk associated to this method of pricing. You need to get the scope of works communicated correctly and compare the other pricing in the exact same manner.
However I will always maintain the combination of both the first and second principles methods will always be the best science to price a project.
What is “Bench Marking”?
This is the term when you have recently procured an actual project of similar shape and size etc and these actual costs are used to interpolate a price.
You may also have a few agreed rates on certain trades which is also a form of bench marking.
When an estimator uses bench marking – it is wise to break down the costs to selected elements where possible. Generally bench marking worries me as site specific, environmental and industrial changes associated to location can bite into profits quickly if you get it wrong.
Used in moderation but I wouldn’t base a business plan on an estimator bench marking 24/7. But if a business does the same thing every day the same way etc. It is a perfectly good method to price a building if historic records are kept and your financial records and cost codes are set in stone.
Cost planners often use bench marking when producing quick and high level pricing, however nothing beats the science of first and second principles methods to reduce your overall risk.
COST PLANNING
Feasibilities pricing is using large building sample areas from benchmarked projects to give designers a guide to the potential cost. This is very quick and can be very inaccurate if the sample data is not applied correctly.
The next layer of quick pricing is cost planning. You as an estimator measure building elements like walls floors roof and services etc using square meter rates extrapolated from previous projects but on their building elements only. The detail that you draw down to is going to make the price closer.
But cost planning uses building elements cost planning partially extrapolated from benchmarking data and then would fill in any grey areas using measure and first principles estimating techniques.
Any grey areas can be nominated as a variable cost or you could even seek help with trade advice.
Many first and second-tier building companies produce cost plans in the initial stages of design development and then slowly transition into a formal hard dollar format. Cost planning is commonly used in Design and construct tenders or contract management contracts.
Cost Plan & BOQ Formats – Click Here
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Tender Process – Click Here
Why Do We Need a Contract?
Why do we need a Contract?
When you are employed as a builder – there is a perception of what the client is contacting you to build. Clients pay architects and have spoken to consultants and think they are getting something however the documents illustrate something that is not their dream. The client has a vision and expectation that might not be realistic or the builder could have underperformed. But that expectation is extremely important to manage and deliver.
How a client employs a builder depends largely on the size of the project, complexity, and risk. My experience in executing and tendering is mainly with projects from the tens of thousands to less than $50M in various contract forms in both commercial and residential sectors.
In Australia, all of these contracts MUST be based on an Australian Standard however the issue you get is with “amended contracts” that lawyers have omitted or re-written a base contract to within an inch of its former existence (a designer contract).
A contract is basically a written document outlining a mutually agreeable outcome for both parties, commonly known as a “Terms of Agreement”. My experience with contracts has been good however I have heard some horror stories from both client and builders.
My experience is if you communicate with clients through the project, you sign a contract at the start of a project just to keep everyone honest for the “just in case moment”. Then a contract gets placed in a draw and only comes out when you need to remember when you can place in a progress payment.
Everyone has bad days and sometimes due to no one’s fault things can just go bad. So if you have a dispute under the contract, You have three ways to go:
- Be an adult and be fair and work things out;
- Go to arbitration;
- Go to Civil Court (and if you are really keen and you haven’t gone bankrupt there is also the Supreme Court of Australia;
The expression about civil action “Only the Lawyer Win” comes to mind.
So if a dispute does happen and a basic contract/terms of the agreement is not in-place – it gets very messy.
The basic premise of our legal system will always lean to the entity that seems to be the victim. So if there is an expectation of final finish or outcome and the client is unhappy – then a dispute can escalate quickly into a very costly experience for all.
Now – you are a small building company with a contract with “Ma & Pa Kettle”, Our legal system reverse a simple term “King of your own Castle” – What this means, if you are seen as an expert and trading to a client the “Kettles,” our legal system protects the little guy (in theory). So if there are a dispute and logic hasn’t succeeded, the builder always wants to go to arbitration and not to civil court.
In arbitration, you deal with an expert in a particular field and the best chance to plead a case in a reasonable environment. Now if arbitration does not work and you as a builder go to civil court, you are now guilty until proven innocent. The chance of business winning in civil court against he “Kettles” is small.
Then if you are a business contracting to another business – company law kicks in and again arbitration would normally be the desired outcome. However, when you are in this situation with ABN against ABN (say a builder and a developer) the law is a little evener. Sadly – who is right and fare doesn’t matter, who has the best lawyer does.
In short – In an ABN against ABN – who has the most money normally wins.
Communication and honesty will normally keep you out of court but if you do go to the court – if you haven’t got an Ironclad “Terms of Agreement” and the person on the other side has got dollars in there pocket with the intent to use it – you’re screwed.
As I mentioned most Australian Standard contracts are pretty fare for both client and builder. The building industry organizations such as MBA and HIA have also got general contracts that are basically the Australian standard however push the parties into an arbitration situation before a civil court.
You will then have a large organization that has a designer contract produced by a legal team. This type of organization has its contracts stacked in the clients favour and basically the builder signs it or they will find another builder who will.
This is what the industry calls a designer contract and has sent many building companies to the wall. To avoid this type of client and don’t sign any designer contract without doing a full legal review first.
But as a rule – Stay away from designer contracts – always lean to Industry contracts.
If the two Party don’t have good communication prior to a contract signing,
It’s probably a good idea not to enter into a contract.
When entering into a contract – I would suggest the use of standard industry and mutually acceptable contract, make sure that both parties understand what they are signing and once the contract is signed ensure that excellent communication follows and don’t promise anything you can’t deliver.
The best contract is one you sign to keep everyone honest and place it in a draw once signed and then only bring it out of the draw when you need to get paid or you execute the completion of said contract.
What Contract Should I Use?
The quick answer is either an Industry-standard contract or and Australian stand contract, however, there are also different types of Terms of Agreement to address the size of the project and if the project has been fully designed or need a design component included.
The majority of contracts start from an Australian standard and can also be amended to suit the author. If you do come across an amended contract – it is always good to request a review of the original contract before it was amended. But when you can see a contract has been amended by a lawyer – make sure you get expert advice before entering into any such documents. Amended contracts should be treated with the same caution as a designer contract. Be aware.
When entering into an agreement to supply services a basic “terms of the agreement” should be agreed. If you get into a dispute and you do find yourself in front of a magistrate – a “terms of agreement” is the first this he or she will request. If you are considered an expert in a said field – a signed term of the agreement is the only thing that may say you in a civil suit.
So on many small services trades or suppliers – you can sometimes see an attached Terms of agreement on the back of Purchase order. After that, you have small medium-sized contracts to address multiple types of projects. There are also contract that are spilt into two types of contract or offer incentives.
The main contracts used in building can be grouped into the following:
Purchase Order –
Larger than a tax invoice however has a basic term of agreement. Normally used for smaller services or purchases.
Minor Works Contract –
Low complexity contract for a particular scope of works & no design over the short term.
Lump Sum or Hard Dollar
Mainly for a fully documented project. Normally design costs not included over a longer term or negotiated tender. Any variable prices addressed as provisional sums or PC Items.
Design & Construct Contract –
Complex contract with a design scope and a performance scope agreed normally from an approved development scope. A D&C contract would traditionally take documentation from DA to CC and then into occupation (OC).
Hard Dollar / Lump Sum Contracts
Hard dollar contracts/tenders are in theory fully documented and when a builder tender these types of building with all the docs presented – it becomes a race to the lowest price. But the documents are never fully documented and a builder will have clarifications and exclusions. So if the documents are not ever perfect, often items that have not been designed. Builders start to start using words like allocations, allowances or provisional amounts to address these unknowns. Generally speaking, the client has paid for a set of drawings that have normally acquired a construction certificate. But these CC drawings are not actual Construction Coordinated documents. So if there is any item not coordinated or not detailed correctly this opens the door for a Contracts Manager to issue variation under the contract.
So the client takes on the full design risk. Some builder makes a career of winning projects at very low margins with the knowledge that there are opportunities for variations during the construction phase. These types of builders tend not to have a lot of return business from there clients however this is a strategy widespread through the industry. This type of practice is not good for the industry.
Sometimes you will find a client may say there are only 3-4 builders tendering – then you find out during a tender that is 3 times the original number of tenders. For a builder, hard dollar tenders are normally a race to the cheapest price. So if you find out that the client hasn’t been upfront, I think I wouldn’t be too hard on the builder using a variation strategy.
Design & Construct (D&C) Contracts
As noted above – D&C Builder can price from a number of locations within the design phase but normally from after the DA has been approved, however, this can vary with clients, especially so if you have a pre-existing business relationship or you are building to a Formula or Clients briefing document.
On the other hand – a hard dollar contract would normally be engaged after the CC has been issued or even better a stamped set of drawings with the notation “ISSUED FOR CONSTRUCTION”. The better the coordination and detailing of the documents – in theory, the client has less risk.
A D&C contract could be based on a Client Brief and the documents could be nonexistent or very schematic, the builder could be contracted to manage and mitigate the full design and developed in a collaborative environment.
The big difference between a hard dollar tender is this:
- With a hard dollar tender – you only price what is on the drawings and don’t wear any risk associated with items missing on drawings and any buildability issues. (Anything missed will a variation later).
- A D&C builder will then take those same drawings and prices in all the build-ability issues and generally, everything missed off the documents and wears all the risk everything not excluding or clarified.
If you wish to read more about
Tender Process – Click Here