Estimating from first principles is all about having accurate knowledge of the direct costs of your resources – that is your Plant, Labour, Materials and your Subcontractor prices. Building up your items with knowledge of price and practical experience is crucial.
This method of estimating is regarded as “best practice” and can be used to price all types of projects no matter what the size of the job, what industry you are in or the stage of the project (strategic, concept, hard dollar bid etc).
There are many benefits to estimating from first principles, some of which I have tried to outline below.
1. CLEAR UNDERSTANDING OF THE JOB
When you’re estimating in a competitive environment – you want to win the job so you need a clear understanding of your direct costs. You need to assess the project and work out the exact amount of materials for every item and you then allocate plant and labour, often through the use of production rate data, and then of course subcontractors. Because the estimate that you’ve done is particular to the project it is far more accurate than standard rate data.
2. ACCURATE COST OF MATERIALS
Now, any standard item cost information will not be based on the cost of materials in the region you are working in, it is simply based on costs in certain areas and then a factor applied to them. Conversely, when we are estimating from first principles, we can work out the exact cost of materials in the area. Of course this applies to Plant too as a hire company or subcontractor may be able to offer you a better rate in the area and you can choose to use that rate so that you can win the bid.
3. OVERHEADS AND PROFIT
Of course when you have nailed down your direct costs you will have the confidence to adjust your overhead and profit amounts so as to make your bid as competitive as possible. By that I mean that if you have certainty in your material costs, for that project, and you really want to win it, you will have the confidence to reduce your profit margin as required.
4. WINNING A JOB AT THE RIGHT PRICE
Now I have been talking about certainty of estimating so as to be competitive but, as we all know, anyone can win a job simply by cutting their price, especially jobs that are more difficult. The beauty of first principles estimating, in this case, is to be able to allow the right amount of money for the project. There is nothing wrong with winning a challenging project, as long as you have the money in your bid to perform the job satisfactorily. To summarise this point, first principles estimating allows you to bid those difficult projects where indeed there may be less competition.
5. MAKING MONEY
When you have done a first principles estimate for a bid and you win the project you are in a great position to make money. The estimate that you have done can produce a budget which will enable you to do many things. One is to be able to order your materials as you will know exactly what is needed for the projects. Another is that you will be able to track your progress against this budget so as to ensure that you are on track to be making money.
More information on first principles estimating…
Would you like more information on first principles estimating and estimating in general? Here are some links to further information on our web site plus some reference books online that you may find of interest:
- READ OUR WHITE PAPER ON FIRST PRINCIPLES ESTIMATING written by our Marketing and Product Manager, Nigel Watts
- Principles of Estimating by Trevor M.Holroyd
- Construction Cost Management – Learning from case studies by Keith Potts