When to Hire an In-House Estimator
A common question I get from remodelers and custom home builders is, "At what point should I be considering hiring an in-house estimator?"
Construction estimating is one of the most important tasks for any home building or renovation company because it directly affects your ability to be profitable. A poorly written and inaccurate estimate leaves you susceptible to multiple cost changes, job site issues, and frustrated clients - all of which can affect your profit margins.
Yet many contractors still view estimates as a time-consuming task they don't want to do.
But before you even get to the point of deciding whether you should continue to perform estimates yourself, or hire an estimator to manage that process, you need to shift your mindset about the task as a whole.
Accurate Estimates Equal a Profitable Business
One of the biggest complaints I hear from contractors in the residential construction industry about writing estimates is that they take too long to complete. But truthfully, if it's being done properly, it's taking exactly the right amount of time.
We often talk about the contractor whose version of cost estimation entails writing the price of a remodeling project on the back of a napkin and how, in that situation, the client "gets what they pay for" because they're relying on someone who hasn't accurately priced out each aspect of the build.
But on the other hand I hear from many contractors about their frustration regarding the time commitment it takes to properly create accurate construction estimates. This often leads to rushing through it - much like the "back of the napkin" approach which is a recipe for diluted profit margins.
The important thing to remember is that you make your money when you estimate a job, and not in the execution. Much like how in real estate you make your money when buying because you can't change the location. So taking the right approach to your estimating process is critical to your success.
It's About the Outcome, Not the Task
The challenge is not to tie the estimating portion of a project to the amount you're charging for it but to look at how it will impact the overall success of your project - and what you can do upstream to set yourself up for success at the end.
Spend the Necessary Time Working on the Estimate
Rushing through any task leaves you at risk of making mistakes, and estimating is no different. Working too quickly and hastily on a preliminary estimate can cause you to miss construction costs, which, in turn, affects your profitability. Taking the time to flesh out as many details and design decisions as you can upfront helps ensure a smoother execution and provides a more accurate upfront price.
Do Full Takeoffs
One of the first steps in the estimating process is to quantify the materials needed to complete the project. Taking the time to accurately break down the project into repeatable measurements you can apply to material cost calculations and furnish to your trade partners to accelerate their estimating helps ensure you're providing clients with a more accurate cost estimate and protecting your profit margin.
Get Accurate Trade Bids
Most residential construction projects require specialized trade work - and those trade partners are the best people to advise you on the direct costs of that work. Providing trade partners with detailed plans, a clear Scope of Work (SOW), and takeoffs helps them give you more accurate costs.
Refine Your In-House Labor Hours
One of the biggest challenges remodelers and custom home builders have is properly estimating their labor costs. That's because builders tend to estimate in best-case scenarios, forgetting about the reality of how construction happens onsite.
So, while it feels bothersome and stressful when you're in the thick of it, estimating a job slowly and properly makes the rest of the project run more smoothly - saving you time, money, and headaches down the road.
How In-House Estimators Can Take More Off Your Plate
Not all of your time as a residential contractor is spent estimating projects, so you might be wondering what benefit there is to an in-house estimator and what they can actually do for you.
The answer, it turns out, is a lot.
Instead of focusing your efforts on doing the bulk of the work creating the estimate, your estimator can take on that role, leaving you responsible for just reviewing it and adjusting it as necessary. That means offloading about 80% of the cost estimating work to someone else and only leaving 20% for you - freeing up your day to focus on other aspects of your business.
Systematizing the Heavy-Lifting
When you're estimating projects, the general flow involves:
Performing full project takeoffs
Estimating known components for materials and in-house labor tasks
Creating allowances for items that aren't specified
Creating Requests for Proposals (RFPs) for trade bids and following the bidding process
For you, as a business owner, this is a daunting task that takes attention away from other parts of your construction company. However, an in-house estimator can make this their sole focus. Your role as the business owner is to "bid" the job, which means reviewing the construction estimate alongside the plans for accuracy.
Double-checking takeoffs
Reviewing internal labor hours for accuracy
Reviewing trade bids
Confirming risk elements for client/architect discussion
Polishing for language and presentation
In the end, having an in-house estimator in your construction company accelerates the process for you and gives you more granularity and overall cost certainty, reducing risk and ensuring profitability. It's a win-win situation.
In-House Estimators Pay for Themselves
On average, most remodeling or custom home building jobs allocate about 1%-3% of their total cost to pre-construction, which includes the project estimate. This, of course, can vary depending on the size and complexity of the project, but it's a good starting point.
When determining whether to incur the additional labor burden of a full-time estimator, make sure not just to consider the cost recovery earned from charging for pre-construction.
What makes you profitable overall is selling jobs that are accurately estimated, so employing an estimator whose sole job is to manage the estimating process pays for themselves because they:
Remove the business owner from the bulk of the work, allowing them to sell more jobs.
Help secure projects that will earn gross profit and contribute to the overhead and net profit of the business.
Enhance the company's profitability overall as they iterate and learn from each experience and the company's job costing performance.
This leads us to the next question that I often get asked:
Is an Estimator an Overhead Expense
Personally, I view estimators as a Cost of Goods rather than an overhead expense because you are charging for pre-construction services, which is mainly for this person's time and some of yours. The time billed against this income is the cost of performing the work.
Pro tip: if you're charging for pre-construction services, that's an income account that should show up on your profit and loss statement, and I recommend that you ask your bookkeeper to track it separately. This way, all money associated with pre-construction gets posted to that account, and you can see what you are booking for pre-construction and how much you're making on it.
If you aren't charging pre-construction, it's time to start. Click here to learn more about getting started.
The Benefits of Using an Estimator
There are many reasons to consider taking on an in-house estimator for your residential construction business, such as:
Project Volume and Scale
If your company is handling a significant number of pre-construction projects with varying levels of complexity, an in-house estimator can streamline the estimation process. Having an in-house estimator also provides scalability, allowing you to handle increased project demands without relying solely on external estimating services.
Consistency, Accuracy, Reduced Risk
An in-house estimator ensures consistency and accuracy in cost estimates, reducing the risk of underpricing or overpricing projects. While there is an initial investment in hiring an estimator, the long-term value of doing it shows up as consistent gross profit on secured projects, and reduces cost overruns and margin dilution from estimating errors.
Specialization and Industry Knowledge
Hiring an experienced estimator with specific knowledge of residential construction allows for a more nuanced understanding of materials, labor costs, and local market conditions. However, be sure to consider the person's experience to ensure it aligns with your business. An estimator with a commercial or multi-unit residential construction background might not have the right understanding for a business that focuses on single-family dwellings.
Time Efficiency
Having a dedicated estimator can allow project managers and site superintendents to focus on their core responsibilities, and provide support to them when pricing additional work and change orders through the construction process.
Competitive Edge
An in-house estimator can help your company respond more quickly to bid opportunities, potentially giving you a competitive advantage in securing new projects. You can also customize your estimates based on your company's unique approach and standards, enhancing the client experience, and inspiring confidence and trust in your abilities.
Relationship Building
An in-house estimator can build relationships with suppliers and trade partners, negotiate better pricing and terms, and positively impact overall project costs.
Third-Party Cost Estimators
If you aren't quite ready to hire an estimator right now, an alternative is to consider hiring a third-party professional estimator who can do on-screen takeoffs and provide you with the raw data you need to craft estimates in a much shorter timeline.
One of the great benefits of third-party construction estimating services is that they are quite adept at providing information using your estimating, SOW, or pre-construction templates and can share your data that way, streamlining the estimating process for you.
The one caution to note with third-party construction estimators is that they can't be relied upon to provide benchmark costing because they use a standardized approach to pricing that doesn't account for the nuances in your particular business and region.
The nuances of how you price single-family dwelling residential construction are unique to you, so their benchmarks don't apply and will just muddy the waters, but the takeoffs they provide are invaluable to accelerating your estimating process.
The Bottom Line on Hiring an Estimator
Providing accurate and timely estimates is a cornerstone of running a successful residential construction business.
However, it is a tedious and time-consuming process that frustrates business owners who don't feel they have the necessary time to devote to it and end up resenting that task. This can lead to rushing through it just to "get it done."
But using that method puts you at risk of making errors in judgment and jeopardizes your project's profitability. And suddenly, you're ending up like the cheaper guy who wrote a ballpark number on the back of a napkin.
Proper estimating requires a shift in mindset about the process. Instead of being frustrated with the amount of time estimating takes, look at it through the lens of the more effort and time you put into it upfront, the fewer chances there are of experiencing frustration due to lost profits when executing the project.
That could mean looking at your overall financial picture to determine if you can sustain a full-time in-house estimator that can take the majority of the work off your hands or work with a third-party service to alleviate the heavy lifting of the takeoffs. The goal is to ensure that your estimate is a fair representation of the SOW of the project so that you aren't burning cash downstream due to underpricing.
I created the BUILD AND PROFIT SYSTEM to help remodelers and general contractors fully understand the estimating process and master their financials so that they can truly know when they've reached the right time to add more talent to their teams.
Click the button below to JOIN the BUILD AND PROFIT SYSTEM, which can help you determine if you're ready to take that next step in hiring an in-house estimator.
