Cost Estimating - Performance Measures

Ramani Sundaram
As quoted by Peter Drucker, “What gets measured gets managed.” Paying attention to the estimating method and approach and measuring the performance either quantitatively or qualitatively, facilitates better management of the estimating effort.

By benchmarking performance against set targets, assessing performance and evaluating success becomes easy. It also helps to close the gaps and plan improvements. Effective performance management involves developing measures and indicators, evaluating existing methods and procedures, improving quality and implementing changes. Results found through different measures provide inputs to manage performance and lead to continuous improvement and better estimating. Better estimating makes it possible to win more bids for a contractor and more estimating work for a consulting firm.

Estimate vs. Bid Results

For a contractor, the number of winning bids is a quantitative measure of success. If the percentage of wins exceeds the company’s targeted percentage, it might be considered as good performance by the estimating team.

Similarly, a consulting firm can measure the performance of its estimating group by comparing the construction documents (CD) stage estimate with the winning bid. If the estimating team prepares an estimate that is not lower than 5 to 10 percent of the winning bid or not higher than 5 to 10 percent of the average of the bids, it may be considered a successful performance. In a year, if this happens for more than 60 to 75 percent of the time, it is a sure sign that the estimating team’s efforts are paying off.

Bid Analysis

Just the comparison of numbers or ranges might not be a true performance metric. There may be other factors beyond the quantitative measures. If there is a variance, only a detailed bid analysis can reveal why the variance is above or below the targeted range. By doing the analysis, the blame game that usually occurs at this stage can be avoided. In addition to checking the estimating basics like scope, unit price, errors and so forth, other factors like market conditions, number of bidders, risk contingency included in the estimate, etc. should also be evaluated. Factors like restrictive bid requirements, material specifications, sole source requirements and mandatory usage of prequalified subcontractors, etc. may also influence the bid value. If the reasons justify the variance, then the estimating team can take it as a good performance. Create a record describing the reasons and lessons learned.

Better Estimates During Design Development

Unlike a contractor, besides the CD estimate, a consultant prepares estimates during the different stages of design development for owners, architects, engineers and construction managers. During these stages, the only number available for comparison is the owner’s budget unless there is another check estimate being prepared by the owner or a different estimator.

As the design may still be evolving, performance measures at the conceptual, schematic and design development stage have to be quantitative as well as qualitative. The quality-centric measures may apply to all stages of the estimate. In addition to metrics of profit margin, market share, productivity, etc., it is necessary to develop metrics for other factors like quality, accuracy, timely delivery, client satisfaction and effectiveness. Compare the estimate with the industry or the company’s own best practices. Develop a scorecard for quality-centric factors and track if the performance is above or below the baseline. Some of the quality-centric measures described in this article are applicable to both consulting as well as contracting firms. 

Do Estimates Meet Quality?

If the company already has a QA/QC policy, perform QA/QC checks before issuing the estimate. Develop list of items as a checklist, identify missing items and gaps and implement corrective measures. For instance, the checklist may have items as given below. Estimate includes cost for the following:

  • Overtime
  • Phasing
  • Access restrictions
  • Sustainability
  • Rock excavation
  • Dewatering

If the firm does not have one, it is better to develop a QA/QC policy for the firm which follows standardized estimating procedures to oversee accuracy and quality. The estimate should make the scope clear and explain what is behind the numbers. It is necessary to always issue the estimate with a Basis of Estimate (BOE) that outlines the exclusions, assumptions and other qualifications. We then need to take a hard look at the unit prices, double-check take-offs, correct estimating errors or omissions. When the design is not complete, capturing the right scope and making the right allowances and contingencies is important. Reconcile with the previous stage estimates to indentify and understand the deltas. Analyze the cost drivers, identify scope changes, detect if there is any scope creep.

Having a QA/QC policy will demonstrate to the client that the estimator is committed to continuous improvement. We need to ask “is the estimate delivered on time?” Check if estimates are delivered on time and if there are reasons for any slippage. If the estimate is not able to be delivered on time and if reasonable, request extension of time, but this may not be made as a regular practice.

Having a QA/QC policy will demonstrate to the client that the estimator is committed to continuous improvement.

Cost estimators should take measures to improve productivity by leveraging on technology like on screen take-off and Building Information Model (BIM) for speeding up take-offs. Architectural firms can output take-off quantities to excel spreadsheet and make it available to the estimator by taking advantage of the BIM model.

Timeliness helps to meet productivity targets bringing in the anticipated profit. It also increases client’s confidence and paves way to win more business. Cost estimators also need to ask “do estimates meet client’s requirements?” We can do this through checking to see how well the estimate has been received by the client. We need to oversee that the estimate is done in the required estimating formats, grouping costs under the right work breakdown structure. If there is no specified format set by the client, it is better to send blank templates to see if the client needs any modifications.

We also need to try to get feedback and see how the numbers met the client’s cost expectations and helped the owner and architect to make budgetary decisions. For contract procurement types like the construction manager’s guaranteed maximum price or design build, etc., the award is based on qualification rather than price. In such types of contracts, there is only one number to compare and if working for the owner, apply both the quantitative and qualitative checks. Estimating the right number will help the owner to negotiate a fair price, especially if it is a guaranteed maximum price contract.

Performance management helps firms to review their approach, improve methods and increase productivity...

If there are value engineered items available, we should know how the estimates made it possible for the owner to cut costs and add value. Paying attention to any lack in meeting the client’s expectations and requirements, and improving estimating methods as required, will facilitate client retention and more referrals for future business.

Getting new work and at the same time making profits with existing jobs by delivering quality products is a challenge to any consulting service. By following standardized practices, the firm will be able to measure, monitor and manage its performance. Scorecards will definitely help to measure the qualitative objectives that in turn lead to accuracy and client’s confidence in the numbers. Performance management helps firms to review their approach, improve methods and increase productivity while gaining an edge over competitors.