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Three Types of Construction Estimating Techniques

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(…Everyone Uses Whether They Know It or Not)

There are a gazillion types of software, programs, catalogs and/or other tools for estimating construction costs. But all of these price-delivery tools fall into one of three basic categories.

  • Analogous
  • Parametric
  • Bottom-Up

What do these mean? How are they used? Which one should you use?

Glad you asked.

Analogous Estimating

Analogous estimating (sometimes also called top-down estimating for reasons you’ll understand in a second) is a form of experienced, sophisticated guess-estimating.  It’s also the handiest and least detailed.

Analogous estimating relies on experience. Cost information is derived from historical information from previous, like-kind projects. The projects need to be similar only in broad categories such as size, project schedule, industry type, (manufacturing, distribution, bio-tech, lab, etc.) and the type of the constructed or installed improvements.

For example, let’s say you’re using the Analogous estimating technique for a life science lab. Start by drawing on cost information that you have archived from previous similar projects. This would include mechanical, electrical, lab equipment, benches, finishes and flooring etc.  Assuming the projects are similarly sized, an estimator could “analogize” the cost of the previous projects to the present example.

Architects and engineers are likely to select this type of estimating methodology.

This works well if the projects are similar in many broad dimensions. What the Analogous method lacks in specificity or detail it makes up for in speed and convenience.

Parametric Estimating

Parametric estimating introduces a bit more empiricism. While not detailed down to every nut and bolt, it does rely on algorithms and mathematical relationships to establish cost.

Parametric estimating relies on the mathematical relationship of cost per unit. The unit can be square footage or length of cable or number of outlets or linear footage of wall. The point is that manageable chunks of the work are assigned labor and material costs. These unit costs are then multiplied by the quantities in the particular project.

Parametric estimating provides a much more higher level of accuracy and sophistication. As long as the underlying data is up to date and accurate, one can get high quality estimates without the tedium of counting every single carpet fiber.

While not as solid as Bottom-Up estimating, Parametric estimating is a great way to get a semi-solid estimate of costs without the brain damage and time required for a complete Bottom-up estimate.

Bottom-Up Estimating

This is the methodology used by almost all general contractors. 

Bottom up estimating is a detailed quantity and labor take off. Materials and tasks are broken down into the smallest reasonable component.

Let’s take light fixtures for example. Imagine a matrix of every light fixture to be installed on the project. Naturally each light fixture would have an individual cost multiplied by quantity. Similarly each fixture would have a associated amount of time for installation. Multiply the number of fixtures by the time by the fully loaded cost of labor to install the fixtures and voila!, you’ve got a powerful, detailed component of the larger cost estimate.

Then basically rinse and repeat for every other element of the project.

This technique is embodied in a broad range of construction estimating software and books. But generally speaking, they’re all just automating or more efficiently executing the technique above.

This technique is essential, maybe even mandatory for competitive bid situations. On the other hand, if time is of the essence and the scope of the project is still a bit fluid, an Analogous or Parametric estimating technique may be more suitable.

Bottom Line (no pun intended)

It’s less important which of these methodologies you choose as long as you’re aware of what you’re getting.

A conceptual budget to provide a broad framework of the total cost of the project may be effectively accomplished with Analogous estimating. However in a competitive bid situation expert professionals, regardless of the software or tools, will perform some variation of Bottom-up estimating.

As long as the choice is informed and deliberate, each estimating technique has its place depending on the trade-off between speed and accuracy.

Either way there’s no substitute for experience. I’m reminded of the old saying, “Good judgment comes from experience and experience comes from bad judgment”.  Choose wisely my friend.

 

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Higher Total Costs from Low Bid

Think Low-Bid Delivers the Lowest Cost? Think Again.

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Think Low Bids Deliver the Lowest Cost? You’d be Wrong.

It never ceases to surprise me when a procurement executive insists on selecting professional engineers or contractors exclusively on the lowest bid. This often repeated process never saves money in the long run. In fact, it’s only correlated with a higher risk of defects, delays and overall total costs.

Based on case studies and my years of experience on literally hundreds of projects all over the U.S., there is no direct causal relationship between low cost and high performance. Let’s look at it more closely.

First, let me define what I mean by the low bid only procurement process. For purposes of this article I’m talking about the purchase of services involved in the real estate improvement supply chain—that means architects, engineers, general contractor or specialty subcontractors—regardless of the industry.

A low-bid-only procurement process is one in which the sole controlling determinant of which vendor is awarded the work is the one with the lowest price. Sometimes this is also called lowest responsible bid. The net of it is, if price is the sole reason for the selection, it doesn’t matter what you call it.

Low bid criteria sets up a whole series of circumstances, none of them good. For example:

Low Profit Margins. If profits aren’t high enough, contractors, subcontractors and designers risk going out of business. As a result, they don’t assign their principals, vice presidents or other senior level team members to your project. Those personnel are just too expensive. Margins in the construction and architectural industries/professions are normally under 2%. Slice those margins even further, and you get junior personnel assigned to your team. That means low-bid, low profit vendors are a serious risk.

Smaller Margins for Error. Every project has errors in it. You can plan meticulously, but inevitably a problem will crop up. The issue is how does one ensure that the errors are minimized or transferred? If there’s little profit for the vendors hired for the project, there’s less elbow room for fixes—and guess who those costs then come back to? That’s right, they come to you.

Unless you hit the expert-professional-lottery and get an exceptionally competent, experienced pro who just also happens to provide the lowest bid, then you’re setting your project up (and yourself) for more change orders. Additionally, motivation to perform will be low and/or (in extreme cases) your vendor may just make a business decision that continuing with the project is more costly than abandoning it. Or worse.  Consider just the problems connected to bankruptcy from this excerpt from Greg Daily and Amelia Valz, of XL Group, as reported in Engineering New-Record, February 2014.

“What can happen when contractors’ subs file for bankruptcy? For one, contractors can be left in a holding pattern as various bankruptcy rules may govern how a contractor can terminate and replace a subcontractor. There are also risks of additional project liens by previously paid second-tier suppliers and subcontractors.

When a subcontractor files for bankruptcy, all lower-tier payments made by the subcontractor within 90 days of the bankruptcy filing can be deemed a preference. Any payment that is considered a preference will have to be paid back to the bankruptcy court as an asset of the subcontractor. Preferences can lead to a second-tier supplier or subcontractor reimbursing the court for payments it has received from the subcontractor. In turn, the reimbursements will likely lead to second-tier supplier or subcontractor looking to the contractor for payment.”

Lower Performance Results. The statistics speak for themselves. One recent industry study looked at the impact of low bids upon outcomes and found that  only 56% of projects awarded on a low bid basis were completed on time. Only 41% were on budget, and there were claims and/or litigation on 13% of the projects. I would love to ask those execs who made the decision to go with low bid if they thought it was worth the delays, expense and headaches.

When you remove the reasonable expectation of a fair profit from a project, you also remove the incentive to do a better or even outstanding job.

“In the price based environment, price is the only recognizable and dominant factor…It is a confusing environment that depends on a relationship between the client expecting the highest performance and the contractor offering the lowest possible performance because of the price based award and pressure on profit.”[1]

An Eroding Workforce. Additional statistics show that more people are leaving the construction workforce than are entering it. Check these stats:

“By 2012, the number of workers ages 35 to 44 will decrease, causing a market-wide shortage of middle managers. The market for craft laborers will tighten due to the decline of individuals entering the workforce between the ages of 16 and 24. Finally, the availability of workers age 45 to 52 will shrink, creating a shortage of seasoned senior managers. About 2.5 million workers are needed between 2002 and 2012 to build tomorrow’s America, given one million new jobs added for workers in the construction industry coupled with those leaving due to retirement or to enter other careers (Jackson 2005).”

Contractors are having a hard time finding high level staff to keep pace with the increasing work volume. As a result, especially in low bid projects, less experienced staff are replacing the higher priced experts. A 2005 study showed that three out of four contractors are experiencing a labor shortage, and that on many crews, apprentices make up the majority of the team.

And that’s just part of the story. Check out our other post for even more details.

Then consider whether going with the lowest bidder will save you…or hurt you.

Tom Conzelman is President of Apex Project Consulting, Inc., a one-of-a-kind,  full spectrum project design, engineering and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, and a California RE Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors at the college level. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™

[1] Northern Arizona University, Flagstaff, AZ: 2007. CD 6:10. Kashiwagi D, Kashawagi J, Savicky J.  Industry Structure: Misunderstood by Industry and Researchers. NED University Journal of Research, Vol. VI No. 2 2009.

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Project management and contracts

What Your Project Manager Should Know (But May Not Tell You) About Your Contract

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Businesses and property owners rarely begin projects with plans to fail. The fact is however that many projects do fail and many owners end up confused, looking around trying to figure out what happened and why. While there are many reasons for such failures most of these can be traced to a single problem: A lack of understanding of the contracts and contract drafting required to lock-in success.

Unfortunately this problem occurs not only with owners and contractors but with most Project Managers as well and this lack of understanding can lead to disastrous consequences.

Where the Problems Begin

There are two potential problems with poorly drafted project contracts and scopes:

• The contract is legally sufficient, but ignores critical performance criteria or specifications outside of the legal terms and conditions, or,

• The client took a ready-fire-aim approach. That is, the contract, and particularly the scope, was settled upon before an expert could make dramatic cost saving and risk prevention contributions.

A well crafted contract is, and should be, a very versatile tool. The details of the contract not should not only protect the legal interests of stakeholders but also contain expectations of performance of the service and/or the quality of the finished product. Without proper protections, the agreement might as well be written on the back of a napkin. Strong contracts the necessary scope and protections for the project’s and client’s success. Doing this right can mean hundreds of thousands of dollars; saved or lost.

Creating a Properly Crafted Contract

When a project begins, especially before the contracting phase, successful users, client and tenants should expect their project lead to protect them from what they-don’t-know-they- don’t know. Most users of real property are in a field or industry for which architectural and engineering administration is not a required or institutionalized skill set. It is especially important to have a professional PM review contracts before signing to ascertain that owners are properly protected. A good example of this is when there are unexpected and unpreventable delays in one or more phases of the project. Delays lead to costly change orders and, in the end, the user typically will have to shoulder the loss. Consider excerpts from this example.

The plaintiff commenced an action to recover damages for delays in the construction of a college library, which involved the renovation of two existing buildings and construction of an addition. The defendant…as agent for the owner, entered into a contract with the general contractor, whereby the general contractor agreed to act as construction manager, “[e]xpedite and coordinate the work of all Contractors,” and prepare a schedule for the project.

Pursuant to the “General Requirements” of the contract, the owner’s agent, was required to provide a “Critical Path Method” (hereinafter CPM) schedule, but plaintiff was obligated to cooperate with the contractor in the development, implementation, and updating of the CPM schedule.

The “General Conditions” section contained a no-damages-for-delay clause which stated: “No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner’s discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.” Further, “Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.” Provisions were made in the contract for changes and extra work.

Delays in the project were attributed to a number of causes.

The primary witness at the trial acknowledged that the schedule was updated four or five times but, in his opinion, the schedule was useless. He also acknowledged that there were weekly meetings of the prime contractors, the architect, and other representatives.

Updating the CPM schedule was abandoned in favor of two-week schedules, referred to as “look-a-heads,” because the updates were always behind what was actually happening as a result of deadlines not being met.

Among other things, the court held that the no-damages-for-delay clause exonerates the defendant for delays caused by inept administration or poor planning [poor project management].

How Properly Constructed Contracts Prevent Future Problems

A well crafted project contract should cover all aspects of the contract, including fine details like micro schedules for individual subcontractors, and most importantly outline expectations of each entity and the firms under their direct supervision.

A well drafted contract gives the PM powerful tool to keep the project running smoothly. Each of the terms of the contract, down to the smallest detail, can (and should) be expertly negotiated. An expert project leader should be expected to bring a broad set of skills to the effort and be able to foresee possible future problems and plan for them before they happen.

Fixing the Problem

The problem is that so few project management practitioners have the necessary credentials to carry this off and many in the community have basically decided that this type of involvement is simply not part of the job of a PM. They fail to recognize the very real fact that critical aspects of the project, such as contract details, are left out of the general structure it undermines the likelihood of meeting time and budget targets.

An expert project manager should have considerable design, engineering and construction experience to successfully complete the project. They should also possess sufficient contract drafting experience to handle and anticipate problems. Otherwise, without this potent combination of talents, users, tenants, purchasers and other occupiers and improvers of real property are just doing what they have always done, with the same unfortunate results.

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