In our industry, underestimating is far more prevalent than
overestimating. This is due in part to human nature — the
"hope springs eternal" phenomenon. But it's a serious problem:
Not covering your costs because of a low estimate jeopardizes
your ability to do a good job on behalf of your client.
Ironically enough, undercharging causes more damage to our
industry's reputation than overcharging. Ninety percent of the
struggling contractors I talk to are struggling not because
they're bad builders or have no work, but because they're
hemorrhaging cash and thus lack sufficient resources to get out
of the hole they're in. They blame their crews, they blame
their competition, they blame the weather, their subs, whatever
— they blame everything but their estimates. But all too
often, that's where their troubles began.
I wish there were a more flattering root to the problem, but
the three main reasons contractors underestimate project costs
are laziness, ignorance, and fear.
Let's face it: For most people, estimating is boring —
especially if you're the business owner and have a lot of
distractions and conflicting priorities. It's amazing how many
other urgent, useful things I can find to do around the office
when I'm supposed to be estimating. No matter how slick and
powerful your estimating system, you still have to do takeoffs
and enter data. And in order to obtain some of the data, you
have to set up job-site visits with subs and suppliers and then
hunt down their proposals afterward. It can take a huge amount
of time out of a contractor's day.
Furthermore, since most contractors still bid competitively,
they find themselves providing estimates of several times more
projects than they could possibly hope to build. This just adds
insult to injury.
To save time when doing an estimate, it's really tempting to
take the easy way out and "guesstimate" some line items or be
so cavalier with the data it's as if you were fabricating
numbers: "I think this plumbing should cost $5,000." Or, "Let's
see — that's probably about $4,000 worth of siding
there." And so on. It's quick and easy, but so is stepping off
The real problem with fabricated numbers, however, is that
they're almost certain to be lower than real numbers.
Another consequence of laziness is that we don't think the
project through thoroughly. We get the subcontractor quotes,
but we don't analyze them in sufficient detail to know what
they actually do and, more important, do not include. We
happily plug the number into the spreadsheet, thrilled that at
least that line item is dealt with, oblivious to the fact that
it represents only half the required work. And we treat
material quotes just as casually: We don't discover until
delivery that the windows have no factory-applied casing,
thereby losing ten hours of lead carpenter labor via ten
seconds of inattention.
So how can you keep estimating laziness from doing terminal
damage to your business? Choose from among the following
• Hire an estimator. This position can be self-funding.
If your slippage (difference between actual costs and estimated
costs) is $60,000 a year (not a stretch for a $1 million
company), an estimator who costs you $45,000 a year but gets
that $60,000 slippage down to $5,000 is making you $10,000 a
year — not a bad return on investment. When you factor in
the time you've saved, the payback is even more
• Work exclusively on a time-and-materials basis. With
this strategy, you just need to make sure once a year or so
that your labor rates and margins are adequate. Time and
materials can be a hard sell with a client, but it's much safer
for you: You may lose some jobs, but you're probably better off
• Increase your gross margin. Say your estimated margin
is 33% (via a 50% markup), but estimating problems consistently
cause that margin to slip to 25% by the end of the year. Go
ahead and maintain your current estimating "system," but
increase your markup to 70%, to yield a theoretical 41% gross
margin. If that 41% margin slips by 8% or so, you'll still be
left with a 33% margin. This is a crude but generally effective
method. And it buys you time to make more rigorous,
professional changes to your estimating procedures.
An estimate is an attempt to predict the future. Prospective
stock investors are typically warned that past performance is
no guarantee of future performance. In job-cost estimating,
however, past performance is just about all you have to go on.
The better your historic cost data — and the better your
understanding of it — the better your predictions will be
about how your next jobs will go.
But we're too often utterly ignorant of our past cost data. We
either don't track job-cost data, or we track it but don't
analyze it. Because we don't compare budgeted costs to actual
costs, we're oblivious to the fact that we're consistently
estimating framing labor and materials about 15% low, or that
we consistently need to add three days of our labor to the demo
sub's quote to cover our actual demo costs, or that flooring
installation costs have snuck up $2 a foot.
If you have no idea how you're underestimating projects, you
have only a random chance of correcting the errors. To learn
where they are, you need to do job-cost accounting. You need to
have a clear and thorough estimate going into a job, and at the
end of the job (eventually, during the job), you need to
compare your actual costs with your estimated costs. There's no
way around it. The longer you avoid making this a standard,
disciplined, ongoing business practice, the longer you will
lack an accurate idea of what it costs to produce your projects
and the longer you'll run the risk of underestimating those
Here are some ways to overcome ignorance-induced
• Have vendors do as much of your estimating as you can.
Sub out more components of a job (so presumably more
experienced, better-informed subcontractors are generating your
estimates), and keep good track of what those subcontract
prices are. Have lumberyards do your material takeoffs, and pay
close attention to the data they generate. Ask if someone there
can help you track how close their estimated materials were to
the actual materials you ordered for a given project. This may
benefit the lumberyard as much as it benefits you.
• Make it a key part of your bookkeeper's job
description to generate profit-and-loss statements for each
project, regardless of the quality of the estimate you
generated going into the job. If your crew's not trained to do
time sheet and invoice coding, for now have your bookkeeper
track only the three categories that should be easy to break
out: subcontractors, materials, and labor. Over time, ask for
more sophisticated information (from your field crew as well as
your bookkeeper). Perhaps, to get things rolling, have your
bookkeeper call the job site at the end of each day to poll the
crew on how they spent their time, and then track those actual
hours versus the estimated hours. If this extra task runs you a
few thousand a year in additional bookkeeping costs, so be it:
It's an investment that will pay off many times in the
• When estimating a new job, pull the file on a past
project that most resembles it (expecting that the file will
contain all the accumulated invoices and yard tickets for that
job). Try to put together a retroactive job-cost accounting for
the past project. Make changes to that report as needed to
adjust for the circumstances of the new job, and use the
revised report as a basis for the new estimate. For example,
say you have a bathroom job coming up and a year ago, you did a
nearly identical bathroom. Pull the file for the previous
bathroom, reconstruct its job costs, and use it as a basis for
the new bathroom estimate.
Fear-based underestimating is the trickiest ailment to remedy.
I have a friend in the industry who chronically underestimated
his jobs. Some colleagues and I finally convinced him to raise
his estimated margin from 20% to 25% — not enough, but
still a move in the right direction. He was so afraid of
overcharging, though, that to compensate for the extra margin,
he started to routinely reduce his estimated job costs by 5% by
finding that much in imaginary "savings."
Fear stems in part from ignorance. If you know your numbers
cold, you're less likely to convince yourself that they're too
high and pare something off the estimate. But if you're not
really sure why you're charging what you're charging, you'll be
more inclined to wonder if your price is indeed too high.
Fear-based underestimating comes primarily from those chronic
weaknesses so many of us contractors suffer from: need for
approval, empathy for the client, doubts about self-worth, fear
of rejection, lack of confidence that you can replace this job
if you lose it to a lower bidder, and so on — the whole
litany of woes. We don't charge enough because we're afraid to
Because of how deep-seated it can be, fear-based
underestimating often corrects itself only in dramatic ways.
One of those is bankruptcy. Another is getting totally fed up,
burned out, and going into another line of work altogether. A
third is to struggle and struggle and finally see the light.
Peer-review groups like Business Networks (800/525-1009,
www.businessnetworks.com) can help
contractors see that light: Once you learn what some of your
colleagues in the industry are earning, you tend to grow less
timid and fearful about what you're charging.
Short of joining a peer-review group, there are other
strategies for overcoming fear-based underestimating:
• If you use a spreadsheet to do your estimates, play a
trick on yourself. Typically, a spreadsheet estimate will have
a cell that uses a simple sum function to subtotal all project
costs. That subtotal is then multiplied by a markup percent to
yield a gross profit amount, which is then added to the project
cost subtotal to yield the sales price. Let's say you're stuck
on a 20% gross profit model — that's the most you feel
comfortable with. In this example, you'd have a cell that adds
all the project costs to generate a subtotal of hard costs.
You'd then have a cell that multiplies that subtotal of hard
costs by .25 to calculate the 20% gross profit. Finally, you'd
have a cell that adds those two cells (the subtotal of hard
costs plus the gross profit) to generate the sales price.
Here's the trick: In the subtotal cell, instead of entering a
simple sum function, enter a function that both sums the line
items and multiplies that sum by 1.25 (see chart below).
Nothing else changes: Keep the cell that adds the 20% gross
margin on top of that. The net result is that you're showing
yourself a 20% gross margin, which plays to your emotional
needs, but in fact you're calculating what works out to a 36%
gross margin, which plays to your financial needs.
(1) Formula: Total
(2) Formula: Subtotal x 1.20
(3) Formula: Total
Items x 1.25 (cell password-protected)
(4) Formula: Subtotal x 1.20
"Trick" yourself into providing an
adequate estimate by integrating a "locked cell" margin formula
into a spreadsheet's subtotal cost. This "enhanced" job-cost
estimate is then multiplied by a standard markup percentage to
give a profitable price for the job.
One more step here: Password-protect the subtotal cell, the
gross margin cell, and the sales price cell. Make the password
you need to change the cell formulas something like "Risking
the financial security of my family by changing the contents of
these cells" or, if there's no room for that, make it
"Cheatmykids," or whatever hits closest to home.
• Know your numbers. Have an operating budget and a
personal compensation goal and use them to work backwards to
what your gross margin needs to be. Understand that any
reduction in your gross margin is, in essence, a reduction in
your personal compensation. Nothing boosts my confidence more
when presenting job-cost information than having a good handle
on my numbers.
• Get a trusted stakeholder involved: your wife, your
bookkeeper, a business coach, anyone who compassionately
understands your weakness and wants to help you overcome it.
Show that person all your estimates and go through them step by
step. Explain what you hope to earn from the job and how. Even
if your helper has no way of knowing whether the estimate is
accurate, the act of being honest and forthcoming with another
person may force you to be more honest with yourself. Set some
gross profit goals with your stakeholder, and then report back
at the end of each job.
If you recognize yourself as a chronic underestimator, try
some of these steps. If you're unwilling or afraid to try any
of them, good luck to you — you'll need it.Paul Eldrenkampowns Byggmeister, a design-build
remodeling firm in Newton, Mass.