Reward Accurate Job Estimates

Steven Cesare, Ph.D.

A business executive from California called me the other day to discuss cost containment initiatives in his company. Apparently, as part of his company’s semi-annual financial review, the year-to-date results showed a loss of $800,000, on an annual projected revenue of $9,000,000. Just to spell that out for you, the company had already lost $800,000, on six months of billed revenue (i.e., $4,500,000).

I’m thinking of a number that rhymes with 9-1-1.

The serious nature of the phone call cannot be overstated. Having been in business for over 20 years, the Company has had solid financials for multiple preceding years, an excellent customer service reputation, and a stable management team. With such an adequate framework in place, the diagnostic process began.

Rather than reflexively examining the low-hanging fruit of Administrative expenses, I suggested a top-down approach reviewing Revenue first, followed by Direct Expenses, and then Indirect Expenses. Mother lode!

While the number of jobs serviced by the Company in the first six months of the fiscal year was above expectation, the revenue per job and related gross margins were disastrously low.

I’m talking Mariana Trench.

Almost every job was severely under-estimated. It appears the jobs were not previewed thoroughly, old materials costs sheets were used in place of current suppliers’ offerings, and referenced labor rates did not resemble anything close to actual hourly average wages for 2022. That’s a bad combination when developing a job proposal. Who knows? Maybe the field estimating team got a little complacent during the COVID years? Maybe working from home led them to lose their edge? Maybe that PPP money shielded accountability more than it should have? Something certainly happened.

Further analysis of the Indirect expenses and Administrative expenses did not yield any noteworthy outlier insight to the process, which comforted the business executive that the root cause of the dire financial results had been identified. In response, I suggested several straightforward prescriptions:

Develop a Job Estimate Standard Operating Procedure immediately.
Retrain all Estimators on proper estimating procedures captured in the SOP immediately.
Ensure all labor, materials, and delivery costs are revised as “current” on the first day of each month.
Verify that no proposal can be submitted to a prospective client without the Estimator and Field Manager’s signed approval.
Stipulate that any proposal not accepted by a customer within 15 days, must be recalibrated to account for ongoing increased costs.
Conduct a post-mortem on ALL jobs, by comparing EVERY estimated line-item cost for every maintenance, enhancements, construction, irrigation, and tree work job, to the actual costs measured at the end of the first 30 days of adoption or job completion.
Per the standard post-mortem review, the Estimator would receive a non-discretionary bonus for all jobs that revealed less than a 2% variance between the proposed estimated costs of the job and the actual first-month adoption costs (i.e., maintenance jobs) or actual costs at the time of job completion.
The identified variance between estimated costs and actual costs for every job during that month would be presented at the monthly financial review meeting with the Estimating team and Field Operations team in attendance.
Any pattern of poorly estimated costs, for any line item, for every job, relative to actual results would require explanation.
The metric of Estimating Accuracy is to be included as part of every Estimator’s performance review.