Defensive Estimating: Protecting Your Profits

Missouri

Preface

Who pays more for his shoes: a rich man or a poor man? my mother asked me early in grade school. I fell for the simple answer that the rich man paid more, but she enlightened me. The rich man pays less because his shoes last far longer, and therefore, his annual cost is less than the poor man’s. Indeed the poor man pays more over time. So the lesson was taught—but maybe only crystallized later—that life-cycle cost is far more important than first cost. Others followed this lesson by teaching me through examples of hard work, watching for dangerous risks, and always keeping a few safe paths out of nearly any situation. A long string of values and strategies were imparted to me, such as each of us might glean from caring parents.

This book is about such a lesson. A lesson in looking at your goals and creating a company that helps you fulfill them. It is about creating profits that cannot be endangered by carelessness or short vision so that each year is profitable. It teaches you to defend each estimate line item so that your planned profits are consistent and bankable. This book is directed to the creation of a defensive state of mind, so that it may become a system for generating and protecting profits.

You should be looking inward at your estimates and trying to find latent risks. Once you discover them, you need to defend against the risks to profit with clauses, terms, conditions, and disclaimers. We will review some of these risk-mitigating strategies in this text. You should not look for magic estimating formulas because they are not here.

As a society, we often read media coverage abhorring the profits of business. Excess profits are deemed a bad thing for society: the oil companies make too much money or corporate leadership makes too much salary. I suggest that this negative spin is wrong and that solid profits are a healthy way to keep a business and industry vibrant. Whether the stock holders benefit through dividends or a small owner-operator has a good year and banks some savings, the pursuit and achievement of profit is the reason to be in business. In defending the quest for profits through estimating, we secure our companies to face another day. A fellow builder shared with me the words of his immigrant grandfather, who entered the building business in America 90 years ago. He passed along the wisdom to know every dirty trick in the book. Not that you should use them, but to be sure they are not used against you in the building business. This company is now in its fourth generation.

My goal is for readers to rethink their quest for profits managed by industry standards and instead to tie their quests to their own needs in terms of financial security and personal growth. We each have a tolerance for risk in business, and you each need proportionate defenses to mitigate the risks you can’t tolerate.

Our society speaks little about risk management for small businesses or individuals. Likewise, we give little effort to teaching decision making, financial management, personal skills development, process control, and a number of common sense topics. This book is a small step toward defensive thinking that may carry your business forward and just maybe protect some profits. The skills of defensive estimating readily transfer to other applications in life and other businesses. Given the potential volatility of our industry, some defensive thinking may be overdue.

CHAPTER 1

Understanding the Critical Number in an Estimate—Profit

Although every business has some commonalities—a registered name, a checking account, contracts, and deposit slips—the likenesses fade with the personalities and skill sets of the owners. Each small business reflects the skills and personalities of the owner. Some of these business-focused entities will flourish and generate a lifetime of income for their owners and employees. Other business owners will toil job to job for decades never quite knowing why they are not doing better. What is the difference between the two outcomes? Some owners run a business and have or buy technical knowledge for field work. Others have deep and perfected technical knowledge and find fulfillment in the production of work. A blend of both business and technical skills is likely to provide a productive balance that leads to stable companies.

Defensive Estimating directs its content to both groups. The first group will renew their vigilance in improving their bottom lines, and the second group will be reminded that a company is constructed of business systems, not simply a series of jobs. Builders, remodelers, and trade contractors already directing a successful and profitable business will find value in this book as they recommit to keeping a profit-centered outlook.

Throughout the book, the terms builder, remodeler, or trade contractor are generally interchangeable. Business success in general depends on planning for profit and defending its creation. To that end, any business organization could use the concepts in this book by substituting their attributes for the general concepts promoted here. The local retailer, grocer, restaurateur, or newspaper publisher—any of these people could refocus their firms away from gross sales as a measurement of success to the production and defense of net profits.

Defensive Estimating provides a profit-centered way to think about estimating. It presents a series of techniques that will sharpen your defensive skills in the quest to protect profits. These techniques will help you assemble pricing and develop personal skills in a way that defends your projections of profit. This book is not an estimating database with prices for thousands of items. It is not a software program into which you punch a few numbers and generate a plentiful array of proposal language and a magically created bottom line figure to present to a customer.

When your estimates are not focused on a contribution to the annual budget (through protection of profit), by default, the estimate becomes a step in the quest to acquire work. Work alone is not a satisfactory goal for a company. Work can be unprofitable, cyclical, and risky. Profit on the other hand is bankable and, if managed conservatively, secure.

The planning process for the creation of profits should reflect the companies’ need to generate income. Chapter 3, Establishing the Profit Number, will cover this topic in depth. Some companies are profitable because of the intellectual strength of the management team, and in others profit results from the hard work of the field team. Consistent profits should result from a solid plan that is well-executed at every level (Figure 1.1). Profit should be the reward for good planning and tireless management. Profits can vaporize with a contract error, an estimating mistake, or an unforeseen (and unprotected) action of a third party.

Work Flow

A clear work flow in estimating is repetitive and logical. The basic steps shown in the diagram in Figure 1.2 are data collection, assembly and estimate, customer approval, data handoff to production, review estimate versus actual costs, and update your pricing database.

FIGURE 1.1 Title Page of Business Plan

FIGURE 1.2 Work Flow in Estimating

Being able to look at estimating as a process is a fundamental step in mastering the skill of estimating. Getting the numbers of sticks and bricks only can be devastating to profits because it is neither a process nor inclusive of all the activities required to build a job. The estimating work flow in Figure 1.2 is a process that repeats for every job. If the builder or remodeler estimated the costs and missed the activity of data collection from a site visit, the omissions could be devastating. Some builders and remodelers may try to put numbers to paper without collecting all the specifications. This practice may be fine for an early budget discussion, but it will hardly suffice for an outline of a profitable job. Systems thinking is the format that can take any business to a heightened awareness of processes. If you identify the repetitive steps while you constantly improve the process, the likelihood of consistent results in business goes up.

Plenty of jobs are sold without fully defining the scope of work. Unless a change order covers the difference, the builder or remodeler later has to pay with the profit line item for a customer’s delayed clarification of what the customer thought he or she wanted. A defenseless line item puts profits in danger. This workflow starts with a prequalified customer. Chapter 7, Minimizing the Workload, explores how to do fewer estimates and still remain fully engaged and profitable.

In my view, estimating is not a math puzzle with a correct answer.

Everyone doing estimates has a process. Once you outline the steps in your process, you will probably

improve the workflow by eliminating redundant steps

reassign portions of the information-gathering to others

use the freshest technology to gather data and put it in place

You can now professionally assemble the estimate. Steps in the process are clear, the methodology logical, and the outcomes well defined.

Estimating is a game of business activity. Profit is the king of the board, and you must protect it. The contents of this entire book focus on the creation and defense of profits. The concepts should help you rethink how you approach estimating. The strategies should shape your customer and supplier relationships. Chapters 8–10 cover materials tracking, production tracking, and financial analysis as they relate to estimating. A number of contract strategies in Chapter 11 defend the estimated profit from the signed contract throughout the rest of the job. Finally, the profitable results of a logical and well-executed estimate for a building or remodeling job can change your life because a continuum of positive cash flow can come your way (Figure 1.3).

Defining a Professional

A professional is someone who works on his or her business, not just in it. Many tradespeople embark upon getting their own work and having their names on their trucks. Yes, they each own a company, but they may not own a business. A company is merely a legal entity, and ownership can be as simple as registering a trade name and paying a small registration fee. However, a business implies a series of processes leading to the creation of profits. A business needs customers, marketing to find those customers, sales, and a product or services. It strives to improve systems, minimize costs, and maximize profits. Management of these processes is the key to making a company into a business. An owner must work on the business or hire someone who will. Having a lifetime of work without working on the business is like having a job without a boss. Would you really want to work for a company

that has nobody working on business processes?

in which nobody is working on evaluation or measurement of activities?

in which nobody is working on getting the most out of the company?

with no boss?

FIGURE 1.3 A Profitable Day Building to Net Worth

A business should support the needs and lifestyles of those who make it successful.

No one should, but many do.

Establishing the Overview

Where is your business taking you?

A solid business should enable the owner and employees to achieve any number of life’s goals (Figure 1.4). A more common perspective makes the end goal the act of business ownership alone. Infomercials often harp on this idea: Own your own business! This common perspective can surely limit your experiences in life and lead to a fixation on the business without personal growth. To the extent possible, you should form a business to help you achieve your hopes and dreams for your life (Figure 1.5). The benefit of building a company to support a lifestyle is that you can specify the degree of each that you can manage. A lifestyle and business can be mutually supportive. In order for them to do so, however, you need to connect the dots of your goals and how your daily activities support achieving your goals. You will see the estimating connection shortly in Chapter 2, Establishing the Profit Number.

FIGURE 1.4 Strategic Planning Cycle

FIGURE 1.5 The Reason to Be in Business

If a company’s role is to support a lifestyle, you must define this lifestyle and how much you will need to pay for it (Figure 1.6). A company may be a stand-alone legal entity, but its burden is to return income to its owner or shareholders as profits.

Building a company that fulfills your life’s expectations is indeed empowering. Your company must rely on the production of profits to fund a personal budget and lifestyle.

FIGURE 1.6 A Remodeling Company Supports a Change in Lifestyle

CHAPTER 2

Establish the Company Profit Number Based on Your Income Needs

The company profit number should not be a vaporous goal of I want to make all I can! This goal is not attainable because it includes no number. You would simply never get there. The number you set out to earn should be indexed to what it costs you to live. Surely you need to earn that amount for sustenance and 50% more for savings, growth, market fluctuations, and other contingencies.

Establish Your Income Needs: Set a Personal Budget

When a speaker asks seminar attendees, How many of you have a personal budget? the response is regularly less than 10%. The number of attendees who confirm the existence of a company budget is only slightly higher. Creating and managing your personal finances is a significant personal step. If you can’t quantify, manage, and be accountable for yourself financially, you are unlikely to do so for a vaporous entity such as your company.