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Let’s Talk About The Book Defensive Estimating

JerraldHayes | Posted in Business on December 23, 2009 07:35am

A while back here I recommended very highly William Astal’s book Defensive Estimating: Protecting Your Profits. I thought times are tough and the building and remodeling markets typically slows down somewhat in the winter month (at least it does here in the northeast) so I thought in these coming weeks it would be an excellent book and topic to explore.

View ImageThe Table Of Contents:

  1. Understanding the Critical Number in an Estimate-Profit
  2. Establish the Company Profit Number Based on Your Income Needs
  3. Competencies for Building and Remodeling Success-Estimating
  4. Spreadsheet Estimating
  5. Seven Ways to Get the Numbers
  6. Using Retail Pricing at Every Line
  7. Minimizing the Workload
  8. Materials Costs and Tracking
  9. Estimating and Tracking Production
  10. Financial Analysis: Estimating the Cash Flow
  11. Defending the Profit Line in Your Building Estimate
  12. Defending the Profit Line in Your Remodeling Estimate

My copy of the book is heavily highlighted and full of post-it notes so I’ll start thing off with some of my highlights in The Preface .

From the very first paragraph in The Preface:

—highlighted text—————————

““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“

——————————————

That right there brought to mind for me the legendary management consultant and quality expert W. Edwards Deming who when asked by a colleague “Dr. Deming, how much did those shoes you’re wearing cost?” he replied “How could I know? I haven’t finished wearing them yet.” but Asdal didn’t really put that story in there to tell us something about estimating as much as he did to impart how we need to learn lessons from stories and this book would be a series of those little life lessons.

—highlighted text—————————

You should be looking inward at you estimate and trying to find latent risks. POnce you discover them, you need to defend against the risks to profit with clauses, terms conditions, and disclaimers….You should not look for magic estimating formulas because that are not here. (the emphasis is mine)

——————————————

I talk to and hear a lot of contractors talk about (here) what the SF cost to frame a house and I think that is exactly what Asdal is referring to when he talks about “magic estimating formulas.” What is the SF cost to frame a house? Well it depends, it depends upon a lot of things but there is no SP price a contractor can charge that will give him a consistent rate of return for each and every project he does. If you are lets say a framing contractor you have to do the work and figure out just what it will cost you to execute the different components and assemblies that make up a framing project and estimate them each independently and according to the quantities that they appear in a particular project.

Forget about the SF magic price.

“Consider not only the cubic foot, cubic yard, lineal foot, square foot, pound or ton but all of the complicating conditions encountered in putting the materials in place” — The Golden Rule of Construction Cost Estimating, as quoted from Richardson Engineering Services General Construction Estimating Standards by my friend Bob Kovacs.

I’ve got a lot more thoughts and comments for just the first chapter alone but perhaps someone else who has read the book wants to say something to continue the conversation?

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Replies

  1. rawood | Dec 28, 2009 12:32pm | #1

    I am frequently asked what I charge per square foot to build (general contract) a home. I try to use that question as an opportunity to educate the person about the complexity of the process and why I cannot answer their question. When the person is particularly pig headed, I ask them if they would visit their local car dealer and ask "How much do you charge per square foot for a car?"

    1. JerraldHayes | Dec 28, 2009 05:52pm | #3

      rawood -- " I am frequently
      rawood — " I am frequently asked what I charge per square foot to build (general contract) a home. I try to use that question as an opportunity to educate the person about the complexity of the process and why I cannot answer their question. When the person is particularly pig headed, I ask them if they would visit their local car dealer and ask "How much do you charge per square foot for a car?"

      ———————————————————————————————

      Rawood while that doesn't happen to us all to often anymore I understand your position, frustration, and annoyance with that kind of reasoning.

      When Square Foot Pricing does come up I have no problem explaining why it doesn't work or apply. Did you ever read my blog article The Hidden Dangers of Square Foot Estimating

    2. robert | Dec 30, 2009 04:05pm | #15

      Rawood,

      From a former framers perspective? I was often asked for NOTHING more than Square Foot price.

      In fact some builders didn;t want, or wouldn't look at an estimate. They wanted a SQ FT price that they could use to apply across the board.

      From my own experience I think FAR TOO MANY guys ALLOW themselves to be forced into the "Square Foot" price.

      It eliminates risk from the person hiring them and places it squarely on them.

  2. User avater
    bobl | Dec 28, 2009 01:17pm | #2

    You haven't stated one
    You haven't stated one important factor in starting this thread. It may be implied, but IMO you need to state it.

    I assume you are basing this on Fixed price contracts with no contingencies, allowances, etc.

    1. JerraldHayes | Dec 28, 2009 05:53pm | #4

      bobl - "You haven't stated
      bobl - "You haven't stated one important factor in starting this thread. It may be implied, but IMO you need to state it.

      I assume you are basing this on Fixed price contracts with no contingencies, allowances, etc."

      Well I thought I was pretty clear in stating I was starting this thread to talk about the book Defensive Estimating: Protecting Your Profits. I'm guessing you don't own or haven't read the book.

      While Asdal doesn't go into any depth in discussing "contingeny" planning as far a cost buffers are concerned he does discuss using allowances as a method to protect the estimate but that doesn't come till about halfway through the book.

      1. User avater
        bobl | Dec 28, 2009 10:46pm | #5

        you're correct, I didn't read
        you're correct, I didn't read the book, but that doesn't mean I won't have opinions about the topics.

        but if you want to limit who responds in this thread to those who read the book you might find it a rather sparse thread.

        if contract type is something to be addressed later

        1. JerraldHayes | Dec 29, 2009 12:43am | #6

          Bobl I have no problem at all with you expressing your opinions on the topic of estimating but you climbed you own self constructed ladder of inference and assumed I was talking about "Fixed price contracts with no contingencies, allowances, etc."

          Here's one of the opinions I have on estimating and fixed price contracts,... if you don't plan for contingency and allow yourself the use allowances in fixed price contracts you're a fool.

          So I don't know what in heaven name makes YOU think I was going to talk or limit what ever I had to say to "Fixed price contracts with no contingencies, allowances, etc."

          1. User avater
            bobl | Dec 29, 2009 07:54am | #7

            OK, I'll get off of fixed
            OK, I'll get off of fixed price contracts.

            and watch where the book goes in this thread.

          2. JohnCujie | Dec 29, 2009 10:04am | #9

            Why are allowances in a fixed price contract foolish?

            John

          3. JerraldHayes | Dec 29, 2009 10:23am | #10

            JohnCujie -- "Why are
            JohnCujie — "Why are allowances in a fixed price contract foolish?"

            They're not foolish.

            Bobl made the assumption that I was talking about "Fixed price contracts with no contingencies, allowances, etc." and I wrote in response to that that is was my opinion that....

            '...if you don't plan for contingency and allow yourself the use allowances in fixed price contracts you're a fool. "

  3. davidmeiland | Dec 29, 2009 08:40am | #8

    I bought the book a couple of years ago and haven't even sat down to read it. DUH!!!

  4. JerraldHayes | Dec 29, 2009 10:48am | #11

    The name of Asdal's book is

    The name of Asdal's book is Defensive Estimating: PROTECTING YOUR PROFITS and my own general overall view of the book it is not so much (if at all) about the mechanics of the estimating process as it is about a general philosophy (point of view) and attitude that contractors need to adopt while estimating and writing contracts. (Applying contingency and using allowances are just a few of the thinking tools and behaviors he mentions)

    From Chapter 1 Understanding the Critical Number in an Estimate-Profit

    —highlighted text—————

    "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. "

    ——————————————

    How often do we see that? Many neophyte and/or struggling contractors in their haste to get the job without doing the homework (or without building the good foundation of a solid robust estimating system) often see their profits and sometimes even worse evaporate from oversight and error.

    I think it nuts how many trades people go into the business of contracting because they are excellent craftspeople but when it comes time to pursue and compete with other contractors in the market place for projects they are building their estimating system on the fly as they go. They are creating and inventing their estimating process as they go along. They end up taking or inventing short cuts that cost them in the end.

    —highlighted text—————

    "A clear workflow 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 "

    ——————————————

    That sounds like a logical and effective process flow but just how many contractors are there that actually follow that whole pattern?

    You get the "contractors" (an I use that term loosely) who can't be bothered by the data collection and come here and ask questions like "what should I charge for a 10' x 16' elevated deck?"

    I always wonder what makes them think that if they haven't broken down their project into a Work Breakdown Structure just what makes them think they can ever really evaluate the accuracy of their "estimate." How will they know where they went right or wrong on the project? Did they not allow enough cash for the footing/pier materials or did them not plan and allow for the time it would take to assemble and install the railing? How do you know if you never did the data collection (the cost of the materials and the labor hours for tasks)?

    And how do you know if you never did the after action review, the project forensics? (review estimate versus actual costs, and update your pricing database)

    Geez I think it is pathetic just how many contractors actually have a pricing database they keep and maintain.

    —highlighted text—————

    "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 to build a job. "

    ——————————————

    Another classic point of failure. On many jobs most of the time involved in getting the job done has little or no relation at all to the count of "sticks and bricks" and is ignored and all to often never even considered. Mobilization, set-ups, take-downs, material handling, and many more processes are never even considered.

    1. MikeSmith | Dec 29, 2009 05:43pm | #12

      Jerrald

      <<<>>>

      My estimating program is really a template with 25 categories

      the neat thing about the template is it allows the flexibility to estimate anyway i want.. and what i want is to build the project in my head and then see the projections on the template

      it's really pretty cool.. but my secret is to estimate like a pessimist .. you can always plug in teh tried and true numbers that you have developed

      some production numbers are petty consistant.. others are much more variable

      but if you break an item down and you know what your crew numbers are .. and you generate a lot of numbers it will often work out that you are over in some areas and under in others

      so.. more categories and more breakdowns tends to smooth the curve and iron out the wrinkles

      some things are also important... knowing if your subs numbers are reliable.. can they actually produce their part for the bid amount they give you ?

      did you define their task so they understand what is required of them ?

      are the Allowances realistic for the given customer ?

      are they a tile installed at $10 / sf

      or are they a $25 / sf customer.... one way or another you are going to find out.. better sooner than later

      1. JerraldHayes | Dec 29, 2009 11:28pm | #13

        Mike Smith -- "so.. more
        Mike Smith — "so.. more categories and more breakdowns tends to smooth the curve and iron out the wrinkles,"

        While to the best of my recollection Asdal never mentions it in his book but I think just how granular we get or don't get with our estimates is an important consideration. The coarser you are the more likely an estimating error will be magnified. While the more granular an estimate is the more time it takes to put together.

        I've been researching and analyzing trying to find out a rule of thumb that we can use to determine just how far broken down we need to go with our Work Breakdown Structures. Right now what I am leaning towards is what they call in project management circles the 8/80 Estimating Threshold Rule. If you have a project that takes roughly 50,000 hours of Effort any work you have broken down into more than 80 hours of effort you would breakdown into smaller pieces and if you have a task in your WBS at 8 hours of Effort then that is small enough and you shouldn't waste your estimating time breaking it down any further. Hence they call it the 8/80 Rule.

        But most of our projects aren't anywhere near 50,000 hours of Effort so I translated that 8/80 rule into the 16/2 Rule. 80 is 16% of 50,000 and 8 is 2%. So if we have a 200 hour project were looking at 32 hours being the high threshold and 4 hours or half a day being the lower threshold.

        A 25 hour project would be 4 hours for the high threshold and .5 (half a hour) for the lower.

        What do you think?

        There are of course exception to that rule (aren't there for just about every rule) but I think as a general guideline about how specific or how rough we can be with out estimates I think that works.

  5. Hiker | Dec 30, 2009 09:47am | #14

    Jerrald and Mike,

    I have found that the more I break it down, the better the estimate. The WBS I utilize has 25 main catagories with as many as 10 sub catagories (sometimes even more). Most of the subcatagories are work done on a room by room basis. I utilize this WBS in a time loaded schedule as well. This allows me to also develop a cash flow analysis for the project.

    I have not heard of the 8/80 rule. I have found that the 0.5 hour tasks and $50 items are the ones that add up very quickly on any project, particularly remodel projects.

    Keeping up on those smaller items is what drives me to use the in depth WBS. It also allows the develop of lists that the client needs to answer in terms of what they want or items that I give them allowances for.

    When I get lazy on smaller projects, I always realize that I left something out when developing the cost on a notepad.

    Bruce

    1. MikeSmith | Dec 30, 2009 05:42pm | #16

      well... you arrived at about the same thing i did

      if you can define it .. it will take a minimum of a half a man-day ( 4 hours )

      so as i'm cruising.. and i think of something that will have to be done.. i put an item in for a minimum of half a day

      we know it won't be zero... and we know that there are some things that will NOT be accounted for... so put it in

      and the mobilize... setup... staging .. material selection and delivery... production... un-staging... clean up.... demobilize... all of those are subsets of the PRODUCTION

      and none of the production can occur unless the other things get done too

      then there are the Wizard of Oz things... like in a market where commodity prices are moving fast ( and always up.. seldom down )

      my material suppliers and i have to communicate

      and my subs have to know their materials too

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