Estimation 1
S9
Lara Tookey
o Final
Stage – convert net cost
estimate to a tender.
o Must
show full breakdown of costs for
management team.
o
Must highlight issues which are:
Cost significant;
o Special / unusual contract conditions / risks; &
o Alterations made to standard documents.
o
Estimators Report
o Report consolidates
all information
which has influenced the preparation
of the estimate.
o Undertaken
by estimator,
construction planner and senior
management.
o Decision
then made and final tender
summary completed.
Other issues to highlight
Time for which tender is to remain open for
acceptance;
 Conditions of contract;
o


Employer’s special conditions i.e. bonds /
insurances;
Escalation;
Current work load;
o Future prospects i.e. ‘follow-on’ work;
 Assessment of state of design & possible
financial consequences thereof;






Information regarding consultants that
Management should know about;
Details of other tenderers if known;
Pertinent information regarding market &
industrial conditions;
Estimator’s report & appraisal of risks;
Delays & site allowances;








Unresolved technical & contractual
problems;
Major assumptions made in preparation
of estimate;
Any qualification of the tender;
Capital required for project;
Cash flow-calculations;
Assessment of profitability of the project;
Terms of quotations received from SC;
Technical & managerial manpower
requirements.
NB:
o Information
relating to build-up of
rates, assumptions and underlying
decision must be available to final
review team, and if successful, to the
construction staff.
Bid adjudication meeting
– practice & procedures
Internal Issues
o Existing workload
o Bids ‘in the market place’
o
Resource issues
o
Finance considerations
o Strategic direction
of the company
External Issues
o The
general economy
o The ‘mood’ of the nation
Other things to keep in mind
o Deciding
o
o
on the margin
What is the basis for your margin
allocation?
How do you know what’s going on
around you?
o
Commercial Considerations
o Will this win the job?
o What else can be considered?
o What is your ‘commercial environment’?
Review of
estimators
workings
Decision on
what margin
to apply
Bid
submission
details
Submit your
Tender
Review of
estimators
workings
Check work!!!
o Pricing
checks:
o
Mathematical checks;
o
Rates must apply to unit of
measurement;
o
All items on each page have been
priced or included elsewhere;
o
Major items needing costly resources
should be reconciled with resource
summary sheets.
o
Tender programme to be completed so
the estimator can examine the
resources estimated in time on the
programme with those expressed in
cash terms in the estimate.
o Ie need to maintain excavator on site
during groundwork operations. Planner
allowed for 10 weeks but estimator only
allowed for 6 weeks!
Decision on
what margin
to apply
o If
tender appears to exceed the sum
which would win the contract, there are
two refinements which can be made:
o
o
Re-examine suppliers’ and subcontractors’ quotations for any evidence
that lower prices may be available; or
Consider different profit margin for direct
work and those for which subcontractors
will be responsible.
Pricing margins
(Overhead & Profit)
Tender
= gross bill
Mark Up (Profit)
Adjudication
Head Office Overheads
Preliminaries i.e. Site Overheads
PC & Provisional Cost + Own Subcontractors + Own Labour +
Materials + Plant
= net bill
Request for bids
Contract documents
Quantity take-off
Determination of
Equipment cost
Pricing of direct
labour & material
Determination of
Project overheads
(P&G)
Taxes, bonds &
insurance
Subcontractor
estimates
Determination of
Company overheads
Contingency
Addition of profit
Bid
Definition – Overhead Costs
o Costs
that support the production
process in a Project but are not
directly related to the production
process (do not occur on site).
o Relate
to off-site costs which must be
recovered to maintain the head
office & local office facilities.
Most certain & easiest to
estimate of all the costs…..
However, they causes more
problems than any other
cost!!!
o Contractors
often think that
overhead costs can be reduced by
reducing prices on jobs.
o Very dangerous – overhead costs
can only be reduced in the office.
o Reducing
the price bid for a job cuts
profit – not overheads.
o Price
cuts come off the top – out of
profits – while overheads go on
forever!!!
Variable
Nature
Fixed
Mixed
Company
Overheads
Indirect
(Project)
Type
General
Nature of Overhead Costs
o Relatively
unaffected by outside
influences - caused internally.
o
o
o
Variable costs
Fixed costs
Mixed costs
Variable Costs
costs are those costs that
tend to vary with the volume of work
COST
o Variable
REVENUES
Fixed Costs
costs are those costs that tend
to be fixed over a specific range of
revenue.
COST
o Fixed
REVENUES
Mixed Costs
o Mixed
costs are costs that contain
both a variable component and a fixed
cost component.
o
For example, if the company paid its
estimators a base salary plus a bonus
based on the volume of work won.
Variable
Nature
Fixed
Mixed
Company
Overheads
Type
Indirect
(Project)
General
Indirect expenses (Project
Overheads)
o Vary
with & are caused directly by
individual jobs but are not directly
chargeable against specific phase of
work.
o
Welfare fund payments, apprentice
training, social security, workmen’s
compensation, unemployment taxes,
miscellaneous payroll-related expenses,
direct supervisions, building permits,
temporary buildings, sales taxes etc.
o Either
added as percentage of
estimated direct job costs
o
Suitable for contractors who perform
same type of work all time, with stable
work load.
o Detailed
o
o
o
separately in tender.
Cost identified and attributed directly to
certain job (ie component of unit rate)
Varying work loads, different type of
jobs.
% add-on simply adds another element
of uncertainty….
General Overheads
o Can’t
job.
o
be charged directly to single
Costs of maintaining office, rent, telephone,
property taxes, interest, insurance, marketing
material, office equipment; depreciation,
salaries & cost of employment of directors &
staff; Printing, stationery, postage & telephone;
cars & other vehicle costs for office staff;
advertising & entertainment; Finance costs &
professional fees etc.
o Normally
expressed as overhead
percentage of turnover.
o Company
policy to be clearly
understood!
o Affected
o
by market!!!
Bad market conditions – scarce work,
turnover drops
o
How do you reduce tender price to be competitive?
How do you allocate
General Overheads?
o Necessary
to distribute overheads
against each project currently
involved in, in an equitable manner.
o Generally
larger projects receive a
larger percentage of overheads.
o Once
annual overheads have been
recovered, you can reduce costs or
even omit from new projects.
Under recovery
o Actual
costs exceed budget costs
&/or turnover fails to reach expected
figure
o
Company could not continue for long
without serious consequences.
Over recovery
o Actual
costs fall short of budgeted
costs due to unexpected fall in
inflation &/or turnover higher than
anticipated.
o
Extra profits earned.
Question???
o Overheads
are expected to increase
from current level by 10% (297 250 to
326 975).
o
o
o
Can turnover be increase by
corresponding % in order to keep pace
or
Must overhead % be increased?
If neither feasible, must reduce
overheads.
o Business
slack, some overhead costs
may be reduced, other postponed
i.e.
o
Repayment of loans, defer maintenance,
advertising reduced, bank charges
could be less.
o Other
o
remain constant i.e.
Staff salaries, rates, power, auditor’s fees.
Method 1 - Turnover
o Estimated
o
Expenses for 2011
$ 297 250
o Anticipated
o
Income for 2011
$ 3 375 000
o Charges
evenly appropriated
between projects
o 297 250
/ 3 375 000 x 100% = 8.81%
o Assumes
allowance of 8,81% levied
against each project.
o Work
short supply – company unable
to compete if it must include such a
% in tender.
o Not
equitable – fraught with
uncertainties
o
Unstable market conditions
Method 2 – Duration of
Contract
o Determine
annual off-site overheads
(a).
o Determine number of site working
days (b).
o Divide a by b = cost per day.
o Distribute cost to each project
equitably
o
Identify ratios.
Base chart showing the daily overhead that has to be added
to each tender
No. Jobs per Est value Total value
year (NPY)
$m
($m)
1
4
16
$10
$4
$0.5
Turnover
$10
$16
$8
29.41%
47.06%
23.53%
$34
Office
overheads
Days
Wked
% cont'n to
o/heads
$ cont'n
Daliy $
$735,294
$1,176,471
$588,235
$3,253.51
$5,205.62
$2,602.81
$2,500,000
$2,500,000
226
Daily rate /
NPY
$3,253.51
$1,301.41
$162.68
Chart showing the result when you win more projects – you can lower the daily
rate OR if you have recovered your overheads for a period - you can tender
with NO overheads.
No. Jobs per Est value Total value % cont'n to
year (NPY)
$m
($m)
o/heads
1
6
20
Turnover
$10
$4
$0.5
Office
overheads
Days
Worked
$10
$24
$10
$44
22.73%
54.55%
22.73%
$2,500,000
226
$ cont'n
$568,182
$1,363,636
$568,182
$2,500,000
Daily $
$2,514.08
$6,033.79
$2,514.08
Daily rate /
NPY
$2,514.08
$1,005.63
$125.70
A situation where you are falling short in your job winning
– need to increase daily overhead costs.
No. Jobs per Est value Total value
year (NPY)
$m
($m)
1
$10
$10
2
$4
$8
12
$0.5
$6
Turnover
$24
Office
overheads
Days
Worked
$2,500,000
226
% cont'n to
o/heads
41.67%
33.33%
25.00%
$ cont'n
$1,041,667
$833,333
$625,000
$2,500,000
Daily rate /
NPY
$4,609.14
$4,609.14
$3,687.32
$1,843.66
$2,765.49
$230.46
Daily $
What other issues should be
considered before a tender
can be completed?
o Desire
o
to win contract!
Contract simply to increase current
turnover or the first in a number of similar
contracts?
o Knowledge
consultants.
o
of the client &
Attitude & competence can have
positive or negative impact on running of
the project.
o Local
o
market conditions.
Consider the strength of competition for
type of construction in area (often most
important criterion when choosing
winning profit margin).
o Evaluation
of previous bidding
performance.
o
Knowledge gained of profit margins by
examining results.
o Contractor
concerns:
o
o
o
o
o
o
o
may have other
weather & its effects;
work force;
cash flow;
future work & the flow of work;
industrial relations;
the public;
paperwork, etc, etc.
Pricing margins
Profit
o Seeking
too low a price is not in the
client’s best interest.
oA
contractor put in such a position is
likely to spend much of its effort
trying to increase the price or
decrease costs.
o Either
way is likely to be to the
detriment of quality!!
o Contracting
o The
is not a bed of roses.
contractor places its skill,
knowledge & ability against an
unknown but calculated risk in an
attempt to make a fair profit.
What is profit?
o Simply
o
o
o
o It
stated, it is payment for -
Risks taken (contingencies)
Capital invested
Liability exposure
is your right and responsibility to
generate a net profit for your business.
Why must profit be earned?
o Shareholders
investment;
need return on
o Company
may wish to expand,
increase turnover, diversify, take on
extra staff;
o Profits
cushion effects of recession;
o Profits
maintain confidence levels;
o External
capital attracted to success.
Remember
o Cost
of building ‘fixed’ according to
plans & specifications, but amount
for profit is not!!
o rofit may represent difference
between winning or loosing a
contract.
o
o
Too high a bid – will not secure project,
abortive costs in preparing bid proposal.
Too low a bid – may win a project, but
increases risk of losing money.
o Undertaken
directors.
o More
by senior management /
a hunch (gut feeling) than
actual calculation.
o Remember
o
Small profit margins require efficient use
of resources & therefore efficient use of
space on site, thus construction
operations plan must be well developed!
How do you allocate
Profit (or margins)?
Absorption Costing
o Apply
pre-determined percentage
for overheads & profit respectively.
o
Ie Method 1 – Turnover calculations used
in establishing % for Overheads
Marginal Costing
o Distinction
between overheads &
profit blurred. Point is to identify
maximum bid that project likely to
sustain.
o Consider number of competitors,
experience in type of work, level of
costs, how desperate are they to win
the contract.
o Must
question whether to take on
work if mark-up insufficient to cover
overheads let alone any profits.
o Does project preempt another
contract?
Take on project but only if marginal revenue
(contract sum) exceeds marginal costs
(estimated project costs).
o Even if overheads not fully covered, project
does contribute to future relationship.
o
o When
discussing your fees with
Clients, Realtors and Lenders...
Don’t call it Profit & Overhead
But rather call it “Builder’s Margin”
o Profit
is not an accident, it is planned
o Customers buy perceived value, not
cost
o Margin is not a One Size Fits All
proposition
o Carefully controlling costs will
enhance profitability