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
If you wish to read more about
Tender Process – Click Here
