Comparing Estimates: The Basics That Get You 80% of the Way There
Part Three of a Five-Part Series: Getting Estimates and Choosing a Contractor
Introduction
If you’re just joining us, we’re in the middle of a 5-part series covering how to get good estimates for your construction project. Everyone knows it’s important, but most people have no idea where to start, or how to determine whether the answers they’re getting are good, bad, or ugly.
So…I decided to do something new around here: a 5-part series covering this topic! As many of you know, I was a construction estimator and project manager at a general contractor before I became an architect, so I know firsthand how to read construction estimates - because I did them myself! These days, in my architectural practice or GCing my own projects for my real estate investments, I see that experience now through the eyes of an owner.
So what will we be covering?
Finding and Interviewing GCs [last week]
Comparing Estimates: The Basics That Get You 80% of the Way There [today’s topic]
Comparing Estimates: Creating a Bid Normalization Spreadsheet
Contract Structures: Fixed Price or Cost Plus?
This will be mostly geared towards residential projects, and small-medium multifamily/commercial projects. Larger projects have a language all their own, and while the concepts I’ll be discussing still apply, there are often special considerations.
As usual, be sure to discuss any of this with your project professionals and/or legal advisors – things can vary widely depending on what jurisdiction you’re in. This is meant to be an *overview,* not a comprehensive analysis. Believe it or not, there is *a lot* more to all these topics than I’m able to cover even in five newsletters. But this is a great start!
Ok, let’s dive in!
First, some resources
Downloadable PDFs – worksheets, templates and more – on my website!
My new podcast is in the top 25% of podcasts nationwide!! Check it out, wherever you get podcasts. It’s full of practical advice, some wild stories, and lots of hard-won wisdom from owners who’ve gone through it and lived to tell the tale: “Home: The Second Story,” [Apple, Spotify, YouTube, etc.]
Comparing Estimates: The Basics That Get You 80% of the Way There
It’s a big day…you’ve finally gotten the estimates back, and you’re all ready to see which contractor is offering you the best bang for your buck. Maybe you’re not even sure if you can do the project, you’re just crossing your fingers that the estimates are somewhere in your ballpark.
You open the first email, download the attachment, skip all the writing and the cover letter and the explanations, and scroll right down to the bottom to the number. That’s the most important thing, right? Let’s just cut to the chase! The number? $252,625. More than you wanted to spend. A lot more.
You open the second email…$275,678. Ugh, going the wrong way!!
You open the third email…$215,000. Ok, that’s a lot better. Phew!
So we’re going with the $215k guy, right?!
Since you’re reading this newsletter, you probably already know that’s not the answer…at least, not by just looking at that single number.
Also, tidbit: I never trust a perfectly round number! That often indicates someone throwing a number out there without carefully counting things up. Not a hard and fast rule/law or anything, just something to keep in mind…
Let’s start with the foundational principle of reading an estimate: this number isn’t *necessarily* what the project costs. It’s what the contractor is going to charge you for what they understand the project to include, and for what they think you’ll pay.
What do I mean by that?
Since you have been following along in this series [and if you haven’t, be sure to check out the previous installments, Creating a Bid Package That Gets You Solid Estimates, and Finding and Interviewing GCs], you understand the importance of providing good information to your GC. If your bid package is lacking, or unclear, or of poor quality, then the numbers you get back will also be lacking, unclear, and/or of poor quality.
So the first question you should ask: Did the contractor read and understand the bid materials?
If they didn’t, the number is not accurate.
You want the estimate to say “per plans and specs, titled XXX and dated XXX” – and that should match up with what you provided them. That means that the numbers they’re giving are based solely on those materials. If the estimate restates the whole project, or summarizes it, or gives detailed description of the project, rather than just referring to the drawings/specs, that’s not helpful, and may even be detrimental.
You want them to estimate what *you* gave them, not have *them* pick and choose what they’re including, and you want their estimate tied to the specific drawing/spec package you provided.
Next question: Did they present the information in the way you asked? Over the years, I’ve asked for the same basic outline for how I need to see numbers presented [16 divisions, list add/subtract alts, show allowances and overhead and profit], and about half the time, they completely ignore that request. I’ve gotten estimates for million dollar renovations on little better than legal pad paper…or just in whatever format *their* software spits it out.
This is a two-pronged issue. First, having information that’s easily comparable is vital for you to make a decision among contractors. And second, a contractor who just ignores what you’re asking for, and/or ignores industry standards? Not good. Knowing that right away is great – you don’t want to waste time with guys like that.
The next question: Did they give you an anticipated duration? This is helpful to compare estimates, as well. If two guys say the project will take 3-4 months, and the other one says 6 weeks…well…something’s up. Remember: you don’t want the guy who tells you tales, you want the guy who tells you the truth.
Anticipated duration also tells you a lot about a contractor’s approach to a project. Ask follow up questions like “what does your schedule look like for the major chunks of work?” “When do you anticipate I can move back in?” “How do you stay on top of inspections and other approvals?” [Those can be real time sucks, and good contractors will have a strategy for dealing with that.] “What hurdles or challenges do you see with maintaining the schedule, and what can I do to help keep things moving on my end?”
Alright, next question – this one comes right from my days of being an estimator. Did they break out their overhead and profit as a separate line item, or did they spread it all through the numbers? I prefer to see it done the first way, so you can clearly see what each thing costs, without the markup. Then, the markup for the whole job is a line item at the end.
Some contractors don’t like to do that, because owners often have sticker shock when they see a number at the end that’s just a lump sum profit number. I get that, but if all the contractors do it that way, it makes it a level playing field and easy to compare.
Also, if you have one guy who breaks it out and one guy who doesn’t, you’ve got to do a bunch of additional math. For example, Guy 1 says HVAC will cost $15,000, but Guy 2 says it will cost $18,000, but Guy 1 is *not* including his 20% markup on each line item [because he’s done it at as a line item at the end, as I personally prefer] and Guy 2 is, then the numbers are actually equal.
Bonus: they should not be marking up their own in-house labor!! Make sure that’s not happening.
And last but not least: Did they base their estimate on a clear contract structure [cost plus vs fixed price], and did they give you clear payment terms for deposit and progress invoices? A contractor should have a clear stance on what kind of contract structure they usually use, what would be appropriate for the project, and how it works. We won’t go into the various types here, but never fear – that’s installment five of this series, so stay tuned!
For the deposit and payment structure, your main goal as the owner is to not let the contractor get ahead of you. Meaning, you should be paying for work that has been completed, not work that is anticipated. You are not the bank, and you are not here to finance the contractor’s operation. That said, it’s perfectly reasonable for a contractor to ask for payment to put deposits down on long lead time items like windows, cabinets, etc – just be sure you’re getting proof that item has been ordered!
If you’re using cash to pay for your project, this is a much bigger deal. If you’re using bank financing, the bank will only release payment to the contractor based on its own inspection of the work – the bank will actually send an inspector to the site to verify the work, and only then will it release payment.
What we’re trying to avoid here is you getting to the last 20% of the project, but you’ve already paid for the whole project – you have no leverage, if the contractor starts to underperform, or worse, skips out on your project. You always want to stay ahead. Now, don’t abuse this – pay quickly for work that has been done – it goes a long way towards goodwill on the jobsite!
So there you have it – the big questions you should ask when reviewing multiple estimates from contractors.
To summarize:
Did the contractor read and understand the bid materials?
Did they present the information in the way you asked?
Did they give an anticipated duration?
Did they break out their overhead and profit, or did they spread it through all the numbers?
Did they base their estimate on a clear contract structure [cost plus vs fixed price], and did they give you clear payment terms for deposit and progress invoices?
In the next installment, we’ll delve deeper into the numbers themselves, and discuss how to create a “bid normalization.”
Meanwhile, one last thing - don’t forget that as you’re asking these questions, listen to your gut. *How* a contractor answers these questions is just as important as what they’re actually saying, and for lack of a better phrase…vibes matter. If you’re not getting a good feeling, don’t force it.
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Thank you, as always! Please consider supporting my work by sharing this newsletter with someone who will find it valuable. And go listen to my podcast! :)