Mark It Up!

What are the” appropriate” markups for overhead, profit and contingency when budgeting facilities construction projects?” I get this question a lot from my architect friends when helping them budget their projects through the design process. The answer can get messy considering all the factors that can impact the bottom line. There are many variables to consider. With this blog I will answer the “markup” question for an average facilities project and try and keep it simple but still useful. Pay close attention to the math and follow the logic and in the end we will arrive at a useful range of markups that can be used for facilities budgetary estimating. Enjoy!

Starting with a Bare Cost: At the core of all budgetary estimates are BARE direct costs.These are the sticks, bricks, labor and equipment that are necessary to build the project. Bare costs can get murky if you wade too deeply into the details. Just the bare labor component includes adders such as fringe benefits, unemployment insurances (federal and state), social security taxes, public liability costs, and builders risk insurance. Beyond this, the installing contractor’s overhead(s) and profit will need to be added. In this analysis we will assume that our starting bare cost will include all the subcontractors’ burdens and markups. The bare costs here will represent that which is “bare” to the general contractor. With general contractors subcontracting the bulk of their projects this is a reasonable place to start the marking up. Note that for budgetary estimating many unit price and assemblies cost data reference books start at this same “bare” point when making reference to “including overhead and profit.” This typically refers to the installing contractors overhead and profit or more likely, the subcontractor unit cost.
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Just Trust Me!!

This week I have chosen to change things up a little bit with an article I wrote back in 2004. For contractors and those of us working with contractors this discussion of TRUST is very relevant particularly in the current competitive market. As an example, Job Order Contracting has a strong partnering component that thrives when founded in TRUST. When the TRUST fades so does the contract! I realize that I promised a blog with topics on construction estimating and this is not exactly on topic but it is very much related and relevant. Enjoy!
Transitions: All American businesses are in transition. They now operate in an environment of global competition, rapidly changing technology, and more demanding consumers. In the scramble to be more competitive, businesses are re-engineering, reorganizing, downsizing and outsourcing. The question is: How are contractors impacted by these changes and what actions can they take to be more competitive and thrive (with some it is a matter of survive) in the current economy?
Low Bid; Best Bid: Historically facility managers have had their hands tied with acquisition regulations that required the award of projects to the lowest bidding contractor. This has typically been the case with publicly funded projects. Too often the low bid winner would prove to be the contractor that made the most mistakes in their bid. There are also the stories of the low bidder capitalizing on imperfect design documents with change orders as the project unfolds.
It is true; a selection process that ignores a contractor’s past performance and awards contracts only on the basis of low bid is flawed. Experienced contractors have seen the “after the fact” failings  of the low bidder and they would agree: low bid is not necessarily best bid!
Trends in Acquisition: Today contractors are being evaluated with a greater consideration of their past performance, records of quality, safety, integrity, on-time delivery and team resumes. These points are being critiqued and quantified for a fair evaluation. This is a good trend.
This being the case, the most valuable asset any contractor can have is its reputation of positive past performance and business practices. Building a TRUST relationship with customers through a proven track record is essential. The single best strategy a contractor can employ to improve business volume and profitability is to invest in the asset of TRUST.
Building Trust: So how do you go about building a high-trust business organization? You could just say that you are “trustworthy” and even profess it on the company letterhead….this has been tried. The fact is it is not enough to say it and read it; you have to be it and do it. Trust outside the company is the result of being internally trustworthy.
In low-trust organizations the operations bog down with bureaucratic rules and regulations, policies and procedures that are inefficient. An organization of high-trust reduces the social friction and encourages creativity, ideas and knowledge sharing. At the core of trust is the competence and character of the company and the people it is made up of. Investing in the competence and character of the individuals that make up an organization is an investment in trust. This is a simple premise that can have a powerful impact on the bottom line.
Investing in Competence: Investing in competence in an organization is a key component to building high-trust. Competence is an individuals level of qualifications, skill and ability to function at a task or job. A workforce lacking competence would not foster trust with peers, subordinates or with the customer. Put another way; would you allow an inexperienced steel worker to install critical structural pieces of an elementary school project? Certainly not; trust would be limited.
There is much to be said for in-house training programs that keep the communication open on the latest technologies, methods, systems and practices. Investing in education with the rank and file is an investment in the organization’s competence in the marketplace!
Likewise, investing in the human resource systems for screening and hiring construction folks is also an investment in competence. Hiring practices are important. Continuing to populate the workforce with marginally competent people will never nurture a high-trust culture. The competence of the workforce is an asset of the organization that should be maintained and upgraded.
Character”istics”: Character is equally important to building high-trust in organizations although it is more difficult to measure and quantify. An individuals character and the collective character of the organization are revealed with time and trials in the workplace. We have all experienced people and organizations with low-trust character “istics” such as impatience, duplicity, dishonesty and ingratitude. These are the opposites of the “istics” that should be nurtured and encouraged such as patience with the customer, honesty, integrity, perseverance and contribution.It is here along with a competent workforce that high-trust is built. The rank and file will follow if it is clear that these “istics” are not to be compromised at any level of the company. Eventually they will become an obvious part of the culture.
Just Trust Me: An organization’s workforce is its’ most valuable asset for its continued health and profitability. Trust strengthens the company, the workforce and its relationship with the customer. Social friction is the result of a culture with low-trust. High trust will minimize this friction and will improve the overall efficiency and effectiveness of systems and processes.
Contractors can see  marked improvements in work volume and profitability by investing in the competence and character of the company. Trust resulting from competence and character will lead to the building of a high-trust organization!
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The Estimating Process..Get it Right!

I am running tight on time this week so I am posting an article that my son Matthew and I co-authored for an architect/ builders magazine. The article outlines the process of construction estimating….yes it is a process! It has been summarized here. In future articles I will expand on these topics. If you are interested in an expanded discussion on the most crucial step in the estimating process then go back and read my blog on “Scope, Scope, Scope!” Enjoy!

The estimating process begins with a thorough understanding (and visualization) of the project’s scope of work. Architects and engineers define scope in plans and specifications but for construction estimating this scope is incomplete. Successful “hard bid” contractors know very well that scoping construction goes well beyond the AE scope and must include field specific scope. The realities of the site such as weather, on-going operations, soils conditions, access/ egress, security, safety, site lay-out, environment protections and other context scope must be considered as well as the means and methods that the work will be executed. These all impact the overall cost of the project.

A big part of the estimating process is mentally building the project multiple times before the project even breaks ground. Scoping construction requires a knowledge of the construction processes, thinking like a contractor and building the project before the project is built. Some of the best estimators I know are those that come from the field and understand that estimating is NOT just about unit costing but more about the impact that AE, context and execution scope have on each unit cost.

Quantifying the project is the next step in the estimating process. The “take-off” is just another opportunity to go wrong….many have! Converting scope to quantities requires a solid understanding of math, drawing scales, swell and waste factors, plan reading, common construction practices, and conversion factors. Indeed, an accurate quantity take-off representing the complete scope of work is then the solid foundation to which unit prices are applied.

The third step in the estimating process is the application of unit costs to the quantified scope of work. Competitive bidding contractors will get their unit costs from subcontractors, vendors, suppliers, and their own cost records. These are excellent resources for pricing but typically they are not readily available to budgetary estimators such as architects and engineers. Budgetary estimators get their unit costs from some of the above sources but also from published national average cost data. Just “knowing” a construction cost database does NOT an estimator make. Pricing a project goes well beyond cost data books. In pricing a project the aggregate project total is more than just the summation of unit material, labor and equipment but must also include labor burden requirements such as social security contributions by the contractor, unemployment taxes, insurances, subcontractor costs (including their overhead and profit), sales taxes, bonds, and finally the general contractor’s overhead and profit. Typically the published unit costs do not include all the above. Each reference construction cost database handles these components differently. Pricing must be comprehensive and include all the direct and indirect costs associated with the project AND the cost of being in business as a contractor.

The final step in the cost estimating process is to double check the results. It is good practice to set the cost estimate up against historical project costs, another estimator’s review or comparable costs per unit floor area or assemblies costs. It is very easy to go through a project scoping, quantifying and pricing and still miss a costly component. In a rush to meet a deadline once I missed the landscaping in the back parking area and did not catch this until a final review of the estimate…ooops!. Even this engineer periodically gets lost in the details and has missed pieces of scope before; please keep this between the two of us.

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