Common Errors in Estimating

Profits are not necessarily lost on the wrap-up of a project. If your job is not properly estimated, you could be starting in the hole without even realizing you are behind. Encouraging collaboration on a bid ensures there are several levels of review taking place that will mitigate the risk of errors such as incorrect formulas or missing line items. The estimate should be a high-level overview of the project and as detailed as possible for internal use in order to have the most accurate bid.

Labor is one of the crucial components of an estimate. Underestimating the amount of labor required to execute a contract could have irreparable damage in the long-run for profits. Labor is also one of the more difficult areas to estimate because generally it is not as simple as applying an hourly rate per employee. Things to consider in your labor rate include differences in pay rate due to experience, employee benefits, insurance, taxes, apportionment of overhead, and profit.

Finally, consider your approach for calculating margin on jobs. In most cases, a simple flat-rate approach to calculating margin is not going to result in an accurate profit margin on a job. Break the project into segments, calculate margin based on the estimated costs for labor, supplies, materials, subcontractors, etc., and assess the contract value based on profit required for each component.  Review historical jobs completed with similar scope to gauge the targeted profitability.

Invest the time at inception to guarantee the cost estimate is aligned with your profitability goals, and profitability on completed contracts should follow. Creating procedures for estimating that are reliable serves as a platform that combines experience with dependable data across every facet of the project.

Amanda Montgomery can help with any questions you might have about estimates.  She can be reached at amandam@gmpcpa.com

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