A good estimate is repeatable
Contract estimating is often seen as a matter of experience: a good estimator can price a job, a poor one cannot. Experience helps, but it explains only part of the difference. Two equally experienced estimators reach different figures if one has a structured way of working and the other does not. The same estimator reaches different figures on different days if nothing makes them go through the same points.
This article covers how to build the estimate: how to break a contract down, what your own hourly cost is made of, how to derive unit prices from your own history, how big a risk allowance is justified, and how the estimate becomes the project budget. Quote wording, price estimates and validity are covered in the article on accuracy and speed in quoting.
Break the contract down to the level hours are recorded at
The first decision is not what the work costs but how it is broken down. The breakdown decides what you can learn from the estimate afterwards. A contract priced as one sum only tells you in post-calculation whether the job was profitable. One priced by work phase tells you which phase was misjudged, and that improves every estimate after it.
The rule of thumb is to break the estimate down to the level at which hours are recorded. If hours are recorded against five work phases, there is no point in twenty rows in the estimate, because they cannot be compared with anything. On larger jobs it pays to follow an established classification, such as the Finnish Talo 2000 system, so estimates are comparable with each other and with the client's.
For a bathroom renovation, a breakdown that works is, for example:
- protection and demolition
- plumbing (subcontract)
- electrical (subcontract)
- building work: falls, levelling, waterproofing and tiling
- fitting fixtures and finishing.
Five rows are enough when hours are recorded against the same five.
Quantities are where most errors happen
Most estimating errors are quantity errors, not pricing errors. The unit price can be right and the result still a third out if the area is wrong. Quantity errors have three common sources.
A measurement is misread. The wrong scale, an old revision, or units that change partway through a drawing.
An item is left out. The most common and most expensive error. The estimate looks complete, so checking it does not reveal what is missing. You only notice by comparing with something: a previous similar job, or a checklist that is the same every time.
The same item is counted twice. Less common, but usual when the estimate has been built in several sittings.
Measuring quantities directly from the drawing, so that the source of every quantity is visible, removes the first error and reduces the third. Against the second, standard assemblies help, with the usual parts of a work phase already included rather than left to memory.
Your own hourly cost: where 40 euros comes from
Many small contractors price labour at their charge-out rate without knowing exactly what a worked hour costs them. The hourly cost has three parts.
Wage. For example 23.50 euros an hour.
Employer costs and paid absences. Pension and social security contributions, insurance, holiday pay, holiday bonus, public holidays and sick pay. Spread over hours actually worked, these typically raise the wage by a factor of about 1.6 to 1.8 in Finnish construction. With a factor of 1.7, a worked hour costs about 40 euros. The exact factor is worth working out once with your accountant from last year's figures.
Overheads. Van, tools, insurance, office, phones and software. They are usually added as a percentage on top of direct costs, typically 5–10 percent in construction. Your own percentage comes from comparing the year's overheads with the direct costs of your projects.
With labour at 40 euros an hour and overheads at 8 percent, the cost price of an hour is about 43 euros. If the charge-out rate is 55 euros, labour leaves a margin of about 12 euros an hour, about 21 percent of the selling price. The figure is sensitive: if the real employer cost factor is 1.8 and overheads 10 percent, the margin drops to about 15 percent. That is why the factor and the overhead percentage are worth working out once from your own figures rather than estimating them.
Unit prices from your own history
General unit prices are an average across companies whose equipment, crew and methods differ from yours. They are a good starting point when you have no data of your own, and a poor one when you do.
To build your own unit price, it is enough to know the hours and quantities from three completed similar work phases. Three observations are not a statistically convincing sample, but they are far better than none, and they describe your own crew.
Look at the spread as well as the average. If the building work in three bathrooms took 55, 60 and 72 hours, the average of 62 does not tell the whole story. The interesting question is what made the third one different. The answer is usually in the conditions: an old building, a sloping floor, cramped space or poor access. That calls for a factor for difficult sites, not a new average.
A risk allowance is the price of uncertainty
The risk allowance is often dropped when the price needs to be competitive. But the allowance is the price of uncertainty. If something turns up under the structures of an old building, someone pays for it, and without an allowance that someone is the contractor.
Scale the allowance to what is known about the site. A reasonable starting point:
- New build, familiar structures, good drawings: 0–3 percent.
- Renovation, structures partly known: 5–10 percent.
- Demolition or unopened structures: 10–15 percent, or a unit-price contract instead of a fixed price.
Adjust the percentages according to your own post-calculations. More important than the size is that the allowance is a visible row where the uncertainty lies, for example on the demolition row. An allowance hidden in unit prices disappears in post-calculation, and you no longer know whether the job was profitable or whether the allowance ate the result.