Executive Summary: Estimators know the construction work while the accountants know the financials. These two parties must work in harmony to benefit the company and their own livelihoods. This article recognizes the needs of both parties.
The dilemma and end goal. Most firms beyond the “Mom and Pop” stage, have separate groups of personnel who do the estimating and the accounting. Traditionally there’s a constant push and pull (or shove and jerk) between the two. It can lead to inefficiency or even errors in the estimating.
Successful construction companies need to find a compromise to win the work at the estimating stage while controlling job costs during the execution stage.
Here are some challenges and comments for discussion in your organization.
1 in 10? One ugly truth about the business is that most companies only win between 1 in 5 or 1 in 10 estimates they submit to their potential clients. So, it follows that perhaps 90% of the time (if you’re winning 1 of 10 bids, you’re losing 90%), the accountants don’t even see the estimate. So, why should the estimating team cater to the Accounting Department?
3 C’s, that’s why. As an answer to the preceding question, one of the 3 C’s of bonding requires this: controls. How a company controls their work is a variable in the capacity of a bonding program. If you estimate while thinking downstream of your Accounting Department’s needs, the surety will look more favorably upon increasing your credit limit knowing that each of your departments is working in harmony with the other to optimize profit.
Accountantese, Constructionese, & Engineeringese. Most professionals are not multilingual in these languages. Each has its own technical issues and associated vocabulary. One thing I do know is that all three of these languages can be broken down into layman words that practically a caveman can understand.
The lesson here is to explain concepts using words that the other party will understand. For example, accountants base their work on a cash or accrual basis. There’s nothing difficult about the concept if you explain that the former is based on cash in hand now, while accrual is based on anticipated expenses and collections. For engineers, they don’t have to talk about work being delayed by the elevated moisture content of soil when they could simply say the dirt’s too wet.
When talking cross-discipline, ask “did I explain that so that you understood me?”
Estimating using your cost code structure. Many companies have an existing cost code structure and maybe even a full-on Master Cost Code List they use to generate each job budget. It may be a handful of cost codes three digits long, or it may be pages and pages of eight-digit cost codes separated by dashes.
There’s no disagreement that if the estimator could produce an estimate using the cost code structure prior to bid, the process of generating a budget would be greatly streamlined. The huge problem is that often times the way work is estimated is not how it is budgeted.
So, to be given a set of 100 budget codes from Accounting and then produce an estimate using only these codes, is not how the sequence of work is done in the field. And forcing the estimator to mentally combine work in a fashion convenient to the accountants is potentially financially harmful.
As an example, when the estimator performs the volumetric calculation for concrete needed for purchase on the job, (s)he goes through every structure and calculates the cubic yardage. Although this volume is calculated on a pour-by-pour basis, the purchase of this volume may only be one line item. So, 10,000 cubic yards of concrete won’t be listed 1,000 times in the bid, but only once in a construction activity called “Purchase Concrete”. If the Accounting Department is insisting on having the concrete listed 1,000 times in the estimate, this creates 999 more data entries for the estimators.
Estimating and cost coding based on revenue patterns. If you’re fresh in the business or a veteran of it, know that cost and price are two completely different items. Cost is an expense, while price is the amount of money the client’s paying us for our service. I see it all the time where a construction company owner says that the Mobilization can’t exceed 5% of the bid, so estimators and project management immediately think their budget is that value. Wrong! That’s the maximum price!
Controllers are infamous for wanting to have one cost code for expense, and then one matching income (or revenue) account. The theory is simple: you expense everything to the cost code for Bid Item 5 – Construction Entrance and then you collect money from the owner for Bid Item 5 on that singular pay item. Then by the end of the first week of the job the accountant says that you spent $2,500 and will collect $3,000. “Hooray, we made money!”
The problem with this at the estimating phase is that this bid item required 65 tons of quarry spalls while the rest of the bid required 2,500 tons of the same rock across ten other bid items. Estimating the cost of the 65 tons of rock here at this bid item, and then cost coding the invoice for this rock in a cost code specific to this item, is very laborious for the estimator and project manager. Here, the convenience of one-click accounting for the Controller is good for him or her, but it’s a lot of work for the other two parties to organize “their” data in this fashion.
There’s still a logical way of figuring out profit or loss on this item which doesn’t require the extra man-hours for the construction team.
The blended labor and equipment rates. Labor rates are often times pretty dialed in. There’s a wage, a tax, and a fringe. Done. It can get a little hairy when Accounting gives you the labor rate with workers’ compensation and/or general liability and/or overtime mixed in with it. It may be that this is historically what the company has spent on labor per hour over the past five years, but perhaps your software has a way of taking the straight time labor and then factoring it correctly for each of these components on an activity-by-activity basis. Approaching your controller with the idea of estimating these factors more “intelligently” will usually scare the heck out of them. They either think you’re out of your league or wicked smart.
The same sort of discussion holds true on equipment. If a more “intelligent” approach based on utilization, fuel burn, and market rental costs can be discussed, it could be a win-win for all parties.
When labor and equipment rates are based solely on historical or “black box” values it gives no advantage to the estimator in scheming ways to get creatively competitive on the work. These rates should be a result of a collaborative approach.
My story. Unfortunately, and it pains me to say this, I understand why construction companies have financial professionals at the helm or making important decisions. It makes a lot of sense. So, either having a financial person with construction savvy at the top of the organizational chart or a construction/engineering professional with financial experience in that role is an excellent choice.
Now, back to my story, I was with a company years ago who told us to stop estimating to the level of detail where we calculated quantities and then estimated the labor, equipment, materials, and subcontractor costs of each activity. Instead, we were instructed to estimate the labor and apply a “multiplier” to account for much of this additional cost. Ridiculous. I left six months later.
I had another experience with a client where the individual labor and equipment rates were not published in-house (to the estimating team). Instead,there was just a cost per day of all labor for the project and a cost per day of all equipment on the job given to the Chief Estimator. When I was asked by the Chief how to determine the number of man-hours in the bid, I couldn’t answer except to say “see the man at the end of the hall who gave you these rates. I can’t help you.” These are not the controls the surety is looking for when evaluating credit limit.