The estimate as a business process

CON-200 taught the estimator's craft: reading drawings, measuring quantities and pricing labor, equipment and materials one item at a time. This course takes the next step. A contractor does not win work by measuring quantities accurately; it wins work by assembling complete, competitive and defensible bids, again and again, while keeping enough margin to stay in business. That makes estimating a business process as much as a technical skill. It consumes money, competes for the time of scarce people, and feeds the company's strategy, risk profile and cash flow.

This first lesson looks at estimating from the point of view of the firm. It asks which projects a contractor should pursue, what it costs to prepare a bid, how a bid moves through an estimating department, how firms measure their estimating performance and how the estimate connects to the rest of the business once a job is won. Later lessons build each part of a complete bid: labor and equipment pricing for self-performed work (Lessons 3 and 4), mechanical and electrical estimating (Lessons 5 and 6), subcontractor pricing (Lesson 7), general conditions and markups (Lesson 8), taxes, escalation and contingency (Lesson 9), bid day and the law of tendering (Lesson 10), bid strategy (Lesson 11) and conceptual estimating with a capstone bid (Lesson 12).

Estimates serve different purposes

CON-200 introduced estimate classes and the idea that accuracy improves as design develops. In practice, a contractor's estimating department prepares several kinds of estimates, each with a different purpose, level of effort and audience. A budget estimate for a developer deciding whether a site is feasible might take a day. A guaranteed maximum price for a construction management at risk contract might take several weeks and be negotiated line by line. A hard bid for a public tender might take three weeks of intense work by a team of estimators, ending in a few chaotic hours on bid day.

The level of effort should match the purpose. Spending three weeks on an order-of-magnitude number wastes money; spending a day on a hard bid invites disaster. A mature estimating department sets a standard for each kind of estimate: what documents must be reviewed, which trades must be quoted, what checks are required and who must approve the number before it leaves the building.

The cost of estimating

Estimating is expensive. A hard bid on a mid-sized commercial building may involve a senior estimator, one or two junior estimators, a project manager reviewing constructability and schedule, a superintendent walking the site, and administrative staff soliciting and logging dozens of trade quotes. Add printing, software licenses, travel and the opportunity cost of other bids not pursued, and a single bid can easily cost tens of thousands of dollars. Most of those bids are lost.

Firms often express the cost of estimating as a percentage of the value of the work bid, or as a cost per contract won. If a general contractor spends 0.3 % of bid value preparing each bid and wins one bid in five, the estimating cost per dollar of work won is five times higher: 1.5 %. That cost has to be recovered from the overhead and profit on the jobs that are won (Lesson 8). It is one reason why chasing every bid that comes along is a losing strategy.

Choosing what to bid

The bid or no-bid decision (often called go or no-go) is one of the most important decisions an estimating department makes. A contractor that bids every opportunity spreads its estimators thin, prepares rushed estimates and wins the jobs where it made the biggest mistakes (a pattern called the winner's curse, discussed in Lesson 11). A contractor that bids selectively can prepare better estimates, price risk more carefully and choose jobs that fit its strengths.

Common factors in the decision include the following.

• Fit with strategy and capability: project type, size, location and delivery method the firm knows how to build.
• Capacity: whether the firm has project managers, superintendents and estimators available, and whether winning would overload them.
• Bonding and financial capacity: whether the surety will support the bond, and whether the cash flow is manageable (CON-320 and CON-350).
• Owner and consultant: reputation for fair dealing, payment record, quality of documents and how changes are handled.
• Competition: how many bidders, who they are and how hungry they are.
• Risk: contract terms, unusual conditions, liquidated damages, design completeness, site conditions and schedule.
• Profit potential and strategic value: expected margin, repeat work, entry into a new market or relationship.

Many firms formalize the decision with a scoring sheet. Each factor is given a weight that reflects its importance to the firm, the project is scored on each factor, and the weighted total is compared with a threshold. A scoring sheet does not replace judgment, but it forces the team to discuss each factor and leaves a record that can be reviewed later when the firm asks why it bid a project it lost badly or regretted winning.

# Weighted go/no-go score for two opportunities (scores 1 = poor to 5 = excellent)
weights = {"Strategic fit": 0.20, "Capacity": 0.15, "Bonding and cash": 0.10,
           "Owner and consultant": 0.15, "Competition": 0.10, "Risk": 0.20, "Profit potential": 0.10}
projects = {
    "Clinic addition": [5, 4, 4, 4, 3, 3, 4],
    "Industrial plant": [2, 2, 3, 3, 4, 2, 5],
}
THRESHOLD = 3.4
for name, scores in projects.items():
    total = sum(w * s for w, s in zip(weights.values(), scores))
    decision = "GO" if total >= THRESHOLD else "NO-GO"
    print(f"{name:17s} weighted score {total:.2f}  -> {decision}")

Clinic addition   weighted score 3.90  -> GO
Industrial plant  weighted score 2.75  -> NO-GO

The clinic addition fits Northline's strengths and passes the threshold, even though competition is stiff. The industrial plant offers attractive margins but scores poorly on fit, capacity and risk. A firm that bids it anyway because the profit potential looks good is likely to underestimate the unfamiliar risks, which is exactly how many contractors get into trouble.

How a bid moves through an estimating department

Although every firm organizes its work differently, most competitive bids follow a similar sequence. Understanding the sequence helps an estimator plan the work backward from the bid closing date and spot where time will be short.

The bid plan is the most overlooked step. It is a short document, often a single page or spreadsheet, that records who is doing what, which trades will be self-performed and which subcontracted, how the estimate will be broken down, the key dates (site visit, last day for questions, bid closing), the bonding requirements and the known risks. It takes an hour to write and saves days of confusion. Lesson 2 shows how the bid plan connects to the structure of the estimate itself.

Measuring estimating performance

An estimating department can measure its own performance, and the measures it chooses shape its behavior. The most common are the hit rate (bids won divided by bids submitted, by number and by value), the spread between the firm's bid and the low bid on lost jobs, and the accuracy of won estimates compared with final costs.

• Hit rate: a very high hit rate can mean the firm is leaving money on the table; a very low one means bids are not competitive or the firm is bidding the wrong work.
• Bid spread: how far the firm's price was from the winning price when it lost, as a percentage. Consistently being 1 to 2 % high suggests the firm is close and might adjust markups; being 10 % high suggests a problem with scope, method or competitiveness.
• Estimate-to-actual variance on won jobs: the most important measure of estimating quality, because it shows whether the estimate predicted the cost. It requires the estimate and the cost reports to use the same cost codes (CON-310).
• Cost and effort per bid: hours and dollars spent by estimate type and size.

Owners and public agencies publish bid results for public tenders, and many contractors keep a database of every bid they submit and every result they learn. Over time this database reveals which competitors bid which kinds of work, how their prices compare and how the number of bidders affects the low bid. Lesson 11 uses this kind of data to model bid strategy.

From estimate to project

When a bid is won, the estimate does not disappear. It becomes the starting point for the project budget, the schedule of values for progress billing, the buyout of subcontracts and purchase orders (CON-330), and the baseline for cost control (CON-310). A handover meeting between estimating and the project team transfers the estimate, the assumptions behind it, the trade quotes and their scope qualifications, the allowances and the risks priced or left out. A poor handover means the project team discovers the estimate's assumptions only when costs come in.

Feedback flows the other way too. Final cost reports, productivity data from timesheets and lessons learned should flow back into the firm's historical cost database so that the next estimate starts from actual experience. A contractor that never compares estimated and actual productivity will repeat the same pricing errors for years.

Ethics and professional conduct in estimating

Estimators handle confidential information and make decisions with real financial consequences for subcontractors, owners and their own firms. Several ethical issues come up repeatedly. Bid shopping is the practice of using one subcontractor's price to pressure another into lowering theirs, before or after award; it erodes trust and is restricted by some bid depository rules (Lesson 10). Bid peddling is the subcontractor's version: offering a lower price after the bid to displace a competitor. Collusion or bid rigging, in which competitors agree on who will win or what prices to submit, is a criminal offense.

In the United States, bid rigging is a felony under the Sherman Act, prosecuted by the Department of Justice Antitrust Division, with penalties for individuals that include up to 10 years in prison. The Procurement Collusion Strike Force, created in 2019, focuses specifically on public procurement.

Other duties are simpler but just as important: keeping competitors' and subcontractors' prices confidential, not misrepresenting capacity or experience in prequalification submissions, disclosing conflicts of interest and declining to bid when the firm cannot honestly do the work.