A job’s expected profitability can change significantly between estimate and invoice date. Removing this variability and delivering consistent profits should be the goal of every business owner.
A common misconception is that when profits are lost, the loss occurs after the project has started and is due to circumstances beyond the business’ control.
The reality is that when contractors lose money, the loss is most often a result of mistakes in the cost-estimation process.
Here are some of the most common estimating mistakes that might be putting your business at risk, and what you can do about them.
1. Lack of transparency
Your estimates should include as much information as possible. This way, both you and your client are fully aware of what’s included in the estimate, giving no reason for a dispute.
Details also help all stakeholders understand the process for determining cost, regardless of their levels of experience. This is particularly relevant for trade businesses where the person estimating the project can differ from the tradespeople doing the work.
2. Underestimating labour costs
Labour is one of the most difficult costs to estimate because it’s not as simple as applying an hourly rate per employee. You may wish to consider other factors, such as experience and whether subcontractors will be needed.
As you’re putting together your cost estimate, be sure to include as much detailed labour information as possible. The added benefit is that further down the line, you’ll have a record of any changes to the original plan and their impact on the project.
Another tip is to look at similar projects and compare the cost per square metre using key figures from past jobs. Can you spot trends or ways to improve?
3. Pursuing too many projects
It’s tempting to pursue every opportunity to keep your team busy. However, being busy on loss-making projects doesn’t make much sense.
This isn’t to say you should only bid on projects perfectly aligned with your business – just that you should know the real costs of each project before you begin, so there are no surprises later on.
4. Not learning from past mistakes
To determine risks and minimise uncertainty, analyse what went wrong on previous projects.
For example, it may not have been the materials or the crew that drove up the cost – it could have been that the project didn’t account for there being only one lane for traffic in the street, making construction challenging and more time-consuming than expected.
If you analyse your mistakes, you can learn from them.