Part 4: Comparing Estimates: Creating a Bid Normalization Spreadsheet
Part of a Five-Part Series: Getting Estimates and Choosing a Contractor
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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.
Please see previous parts for more of an introduction – and as always, proceed with caution - 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 to Part 4!
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: Creating a Bid Normalization Spreadsheet
Seems like an easy enough task: create a spreadsheet to compare bids. Especially since [hopefully] your builders have followed the format you requested [as discussed in last week’s installment], and since the categories of construction are basically the same…right? Should be easy…?
Since you’re reading this, you know already – it’s a lot more complicated than it seems on the surface. You need to make sure you’re comparing the bid categories “apples to apples,” or your comparison is pretty much worthless.
In last week’s newsletter, I explained how you must understand whether a contractor is spreading their overhead and profit [OH+P] across all categories, or whether they’re breaking it out as a separate line item. If one contractor does it one way, and the other does it the other way, then each line item will not be comparable “apples to apples.” One contractor’s HVAC number may look higher, for example, but that’s just because they’re including 20% markup, while the other guy lists it at the end. One number may look higher at first glance, but may actually be lower when you account for where markup is carried.
That is just *one* example of the many, many ways numbers can lead you astray, if you’re not experienced at reading a construction estimate. I often say that construction estimating is more art than science – and that’s why you need to learn to interpret, to read between the lines, to see the unspoken story, to look beyond initial impressions.
I don’t think I’m exaggerating when I say that having someone on your team who is deeply experienced at reading estimates is one of the greatest advantages there is – and conversely, if you don’t, it’s a huge liability.
For homeowners or less experienced folks, this means hiring professionals who can do this for you!
So let’s dive in – because for all my talk about “art,” we can still tackle this comparison!
12 steps to creating your own bid normalization spreadsheet
Create the template. This isn’t a very complicated spreadsheet, but its power lies in its simplicity. No fancy formulas, you still have to do a lot of thinking – but what I find useful is how it documents that thinking. When you’re deep in analysis mode, you still need to record your assumptions, questions, discoveries, etc – otherwise, when you go to pick it back up a week later, you’ll forget stuff. “Did I include XYZ when I was adding those categories?” “Builder X sent me an email saying he excluded XYZ, but builder Y sent me an email saying he included X but not YZ.”
Start with one estimate [choose the one that seems most thorough, and has the best/cleanest breakdown], and enter the dollar amounts for each line item. I usually use the 16 divisions as my starting point, with some divisions having more breakdown [especially divisions 6 and 9].
If the estimate includes OH+P/markup spread among all line items, break that out manually from each line item. Note that your line items will now no longer match the estimate – but you’re now able to compare numbers across estimates cleanly.
Create a separate line item at the bottom for OH+P/markup – if the builder broke it out, use their number. If they didn’t, use your math from 2a above to create this number
Now start entering the next estimate.
If you come across something in the estimate that isn’t in the spreadsheet already:
Create a new line item for it
Go back to estimate #1, and determine if that item was forgotten, or if it was included in another category
If it was forgotten, enter the same number from estimate #2, and highlight it to remind yourself that builder #1 forgot that line item
If it was included in another category, add “incl” in the corresponding cell in estimate #1, to remind yourself you’ve already accounted for this particular discrepancy
If estimate #1 has something that estimate #2 doesn’t have, repeat the process in 3a, but in reverse
Repeat for estimate #3
Make sure all allowances are what you gave – these should all be the same across all estimates – if they aren’t correct in the estimates, it skews the results – correct them here in the spreadsheet
Create lines for add/subtract alts, below the line.
Pay special attention to supervisory categories – the project manager, superintendent, project admin, etc. This is where contractors with a “top heavy” model will have much higher numbers, and you need to understand *how* the contractor will run the project.
Note: these in-house labor numbers should NOT have OH+P/markup on them. You’re paying the contractor for the labor, they don’t get to double dip and markup their own labor!
The other category to watch out for: general conditions. This is another area where contractors love to hide things – “small tool budget,” “safety training,” “admin fee,” “technology fee,” etc are all legit line items, but they need to be reasonable, not sneaky ways for the contractor to pad their numbers.
The contractor should never hold your contingency, and they certainly shouldn’t be marking it up! You should hold your own contingency – and be prepared to prove to the contractor that you have a proper amount set aside.
Review all your notes, discrepancies, missing items, etc, and email a bullet point list to each builder, asking for clarity, more information, and/or a number they forgot
Note: builders won’t be mad at you for asking for clarity. Let them know you’re just trying to get the estimates to line up as cleanly as possible, to level the playing field. A good builder will be very happy to hear you’re doing that – as long as they trust you’ve got someone experienced helping you do that!
Revise spreadsheet once you get emails back from contractors
Let the spreadsheet settle. Give it a day or two, then come back with fresh eyes. You’ll think of a few more things, after you’ve had time to digest!
When I do this process, I’m still always amazed at how often the low guys end up no longer the lowest, and sometimes even become the most expensive. There’s a whole school of thought in the contracting world that pushes contractors to low ball the initial estimate to get in the door, then jack up the project costs later with change orders. Don’t fall for it.
A project is going to cost what it costs, and it’s best to know that on day one, rather than in the middle of things when you’ve got a lot less power to make real course corrections.
A note about AI
When I post about this topic on X/Twitter, I inevitably get a lot of “AI can do this!” and “sounds like a perfect job for ChatGPT!” In a word, no. Those tools are amazing, but they are only as good as the information they have – and they don’t know much about your specific project.
Sure, ChatGPT might help you understand the basics – that in a renovation of an old house, you might have to do some structural repairs, and that the direction of structural members can impact other systems in the house. But it won’t know that the joists in your house go east to west, which is against the grain of how you’re going to run need the toilet waste line and the HVAC trunkline – and you need to be sure the estimates account for that. One builder’s HVAC, plumbing, framing, and drywall numbers might account for that, while the other’s doesn’t – and if you don’t think it through, and have experienced eyes looking at stuff, you’re going to misunderstand why one number is higher than the other.
AI tools don’t possess the *specifics* you need to evaluate estimates:
Your project, including the hyper-specific and deeply impactful aspects of your existing building – which AI knows nothing about
Your site [including site access, lay down area, delivery logistics, etc]
How subs work in your market – in some regions, the electrician installs the bath fans; in others, it’s the HVAC guy. This can vary regionally or even city to city, and is specific to a local construction culture
Specific regulations – code, construction regs, historic district stuff – this is highly variable and open to interpretation by local officials
Construction culture – this also varies by region
Politics – prevailing wage/union considerations
These are all things rattling around in the mind of an industry pro, and all things that interrelate to each other in different ways depending on many factors that AI just simply doesn’t know. I’m looking forward to continuing to use AI in our work, and my guess is, it’ll continue to get better and better! But for now, especially in residential custom or renovation one-off work, old fashioned methods are still advantageous.
Thanks for making it this far! If you’re enjoying this series, won’t you share with someone who you think will also get value from it?
And don’t forget to tune in next week for our final installment, “Contract Structures: Fixed Price or Cost Plus?”