Estimating projects for any size and type of contractor can be a very detailed and cumbersome task. Nothing affects the end profit % more than the initial estimate so it is extremely important to be as accurate as possible when estimating costs for a project.
Defining the project scope should be the first step in your cost estimating process.
A scope statement typically found in a bid package documents your project’s scope and defines the specific tasks, key stakeholders, milestones, deadlines and other information that is required to make the project successful.
Clearly defining and documenting the scope of a project helps your team account for all of the work that needs to be completed so you can accurately estimate costs and set a well thought-out project plan. It also enables your team to guard against ‘scope creep’ throughout the project lifecycle, allowing you to deliver against what you’ve promised to clients but also get paid for work outside of your agreed scope.
Below I’ve outlined some tips to help you define and manage scope before you begin working on a new project.
1. Ask the right questions in order to understand the full scope of the project
The more you know up front, the better. Oftentimes, your client won’t know to provide you with all of the information you need to produce an accurate estimate.
If your company is working on a design-build project, lean on your expertise to drive the conversation and uncover exactly what the client is expecting from your services. Does the client also require new faucets, or additional landscaping? What are the technical specifications you need to deliver (electrical, security, audio/visual, etc.)? How will you measure success?
You should ask questions that will enable your team to understand the specific tasks that will need to be completed and when. It is also very important for you to establish all client stakeholders and decision makers, and identify potential risks that will impact project delivery.
The information you gather while defining the project scope will vary depending on your specific industry or project. However, it’s helpful to put together a standard list of questions that can guide your discovery sessions with clients. Use these general questions as a starting point when building out your list:
What is the overall goal for this project?
What type of project is this? Is it a special type of build, or more standard?
What is the project deadline?
Are there any key dates or milestones to be aware of?
Who are the key project stakeholders and decision makers?
What are the obstacles or risks that might impact project delivery?
Have you done this type of project before? If not, who can I speak with to learn about their experience(s)?
Who are the other bidders/competitors for this project?
The answers to these questions will reveal important background information on the project that will inform your company on how you plan your resources and help to prepare your cost estimate.
2. Outline what’s not included in the scope
Clearly communicating what is not included in the project scope is equally as important as outlining what is included. Different stakeholders will have different assumptions about the “standard” set of activities that will be included in any engagement.
For example, if your company is working on a built-in smart home automation project, your client may expect that training family members and offering ongoing support is part of your service offering. Your estimation, however, may only account for the service ending immediately following the installation of the system.
Specifically addressing what deliverables are outside of the project scope will help clear up any potentially misunderstandings that may cause unpleasant surprises down the road. Not only will this help you develop a more accurate estimate, but your clients will appreciate it too!
As you continue to work on similar projects, take note of the type of questions that your clients ask while setting project scope (such as, “Is ____ included in the package we’ve chosen?”, “Does your team also offer ____ service?”, “How much extra would it cost to include ____?”). When you’re beginning a new project, use this list to proactively clarify with your clients what won’t be included in the engagement.
Making sure that you and your clients are on the same page from the beginning will help you minimize scope creep and estimate project costs as accurately as possible.
3. Empower your project team to identify and manage scope creep
Once you’ve taken the appropriate steps to fully define and document project scope with your client and have also gone over all contract documents, it’s important that you involve your team to help your project stay on track and prevent scope creep. Scope creep can increase project labour costs and negatively impact your profit margin. If not caught early, this can lead to devastating losses that in many cases are irrecoverable.
A lot of write-offs occur when there isn’t a culture of putting your hand up when you notice work is falling outside of scope. Creating a culture where your team feels comfortable to raise their hand if work is falling outside of the agreed-upon scope, and flag if work needs to be re-priced, can have a massive impact on your ability to deliver a project close to or under the estimated value.
Prior to beginning work on a project, meet with your team to explain what work is to be delivered, the budget hours allotted for their work, their corresponding base rates, and how to inform management if/when scope creep takes place.
4. Understand and implement mechanisms to manage material pricing and fluctuations.
Material prices change, so it is essential to pay close attention to factors that can affect pricing when estimating costs. Based on the project duration, you may need to ask yourself the following questions to ensure all potential changes are accounted for.
Do you have specific delivery challenges?
Is the product or material a custom order?
Is demand high for a specific material or product?
Do you need the product or material faster than the manufacturer’s normal turnaround time? If so, what are the costs to expedite shipping?
Are there seasonal roadblocks that dictate logistics and adjustments to price?
It is also key to understand material availability and any potential scheduling delays that will have cost implications if you don't order the materials on time. If products will have a long lead time, consider this when bidding and know you'll need to plan accordingly during construction.
Similarly, are there products specified on the project you're not familiar with? Perhaps the architect has selected prefabricated components or modular products that you’ve never purchased before. Understanding how these products are installed and the labor needed (or not needed if certain components are prefabricated) could have major cost and schedule implications you'll need to factor into your estimate.
As much as project estimating can be a cumbersome process, it is very important to iron out all the specific details and ensure that you have the full scope of the project. If there are things you are missing within that scope or certain details that are not specific enough, your company can be losing out on profits. Creating an environment where workers are willing to call out scope creep is crucial to the success of any project. Finally, as material prices fluctuate, you should be aware and plan accordingly to account for anything that might change the scope of a project. All of these tips will ensure that you can always maximize profits on all your projects.
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