Using the Information
By now, you've done the hard part, from a data-tracking and paperwork point of view. But next comes the really important work: figuring out how to use that actual-vs.-estimated variance information to make your next estimates (including those you're working on right now) more accurate.
If all you have been able to do is to track the job as a whole (treating all job-related expenses the same, rather than breaking them down into line items such as flooring and painting), you will be more limited in what sort of analysis you can do. But you can still make some crude improvements that might save your company from disaster. If you learn, for instance, that your actual costs for the project were 25 percent higher than you had estimated, you can still use the same method you used before to estimate the new job, but this time just add 25 percent to the estimated job costs. It may be crude, but it's an important step in the right direction: It may buy you the time you need to get more sophisticated.
Make Obvious Corrections First
As you develop your job-cost accounting beyond the most basic level, you'll find that some major components of an estimate are easy to tighten up and others aren't.
Subcontractor quotes are among the easy ones — or should be. Comparing your estimated costs with your actual costs for electrical, for instance, should be fairly straightforward. All you have to do is compare the electrician's original quote with what he or she actually billed you.
If there's a big discrepancy, you need to find out why. Did the electrician quote from incomplete documents? If so, start to insist on more thorough plans and specs, or tighten up your change-order procedures. Were there omissions in the electrical quote that didn't make it into your specifications, so that you had to eat the costs the electrician didn't account for? In that case, have someone in your organization compare your contract exclusions with all the exclusions in your subs' quotes before contract signing.
What if you find you plugged into the estimate what you thought the electrical should cost, but didn't bother getting an actual quote from the electrician? Not much you can do about that. But next time, get the quote.
Look at the Big-Ticket Items
Another significant cost factor that should be a snap to get right is large special orders like cabinets, countertops, windows, and doors. Again, this should be a simple comparison of the originally quoted costs with the actual costs, and you should be able to track down the source of estimating errors in these categories pretty easily.
If you add up sub costs and special-order items — all of which are easy to estimate accurately — you may find they represent half to two-thirds of the project cost. That's a solid base to work from: With a little time and energy and a lot of self-discipline, more than half your job costs can be estimated with something very close to rock-solid reliability.
That leaves the biggest challenge — calculating realistic labor budgets. There are lots of ways to do this. One is by unit rate — so many hours per window installation, per door opening, per square of clapboard, and so on. Another is by day rate — the first floor will take so many days to frame, the roof that many more. A third — which can happen only after you have several successfully job-costed projects — is through comparison with similar past projects.
I won't recommend a method; it needs to be your method. I will say, however, that whatever approach you take, the process of improving the accuracy of your labor estimates is one of accepting rather than glossing over the realities of the job site. As discrepancies between estimated and actual costs appear, look first to the estimate to pin down the problems.
If you're off by 100 percent in labor costs for the trim installation, it's more likely that the trim labor budget was way too low than that your crew was only half as productive as it should have been. Placing the blame on the field crew for a big disconnect between actual and estimated costs is pointless — your estimates need to reflect the facts in the field, not the dreams in the office.
Once they do start to better reflect those facts, and you start generating a more predictable revenue stream, you can move on to the next step, which is analyzing where and how to increase field efficiencies. (Keep in mind, though, that those field efficiencies are most effectively generated by properly setting up the job before the field crew ever appears on the site, not by exhorting your crew to work harder or smarter.)
Once you lock in job costs up-front with hard quotes from subs and suppliers, and once you tighten up your labor budgets by using well-documented past experience, the accuracy of your estimates will improve dramatically. At my company, our goal
is for actual costs to be within 2 percent of estimated costs (including change orders). We are hitting that target more and more reliably, so we are increasingly able to closely predict and control how much we make on a project.
For example, we are now able to measure the accuracy of our estimates as the job progresses, using percent-completion accounting. This allows us to predict where a job is headed far enough in advance that we can correct any problems. More important, we're also able to apply these job-cost accounting principles to the entire company, fine-tuning our overhead budgets and getting a clearer picture of how the company as a whole — not just an individual project — is doing financially.
This sort of control should be your ultimate goal. And it is attainable, no matter how difficult and distant it may seem. But remember: It all starts with a good estimate.
Paul Eldrenkampis owner of Byggmeister Inc. in Newton, Mass.