How Not to Start Up Commercial Estimating

Management authority H. Kent Craig on the pros and cons of setting up a commercial estimating department for your contracting company

It's often said you eventually set up a commercial estimating department for your company the same way you become a prostitute. First you do it for money to supplement your main source of income since it seems like you're doing the rest of it for free anyway. Then you notice all your friends are also doing it and you're afraid you'll be left behind. And, finally, seeing all those huge checks your pals eventually bring in, you figure, “what the heck?” Why shouldn't that be me? So you take the leap and add a real commercial estimating department to your firm, even though commercial work has never really been your forte.

You're always nosing around for the next best deal that will bring minimum risk and maximum potential cash flow to your company's coffers. But with service, replacement and retrofit work remaining high margin even in the worst of times, the risk for most commercial jobs simply hasn't been worth it to you. Until now.

The more times become uncertain, the potential for large checks each month that commercial work offers becomes more attractive. The tighter the residential markets become, what's left to try, other than the double handful of commercial jobs each week that might be available in your market area? And when that service market that has always been there begins to show signs of drying up, what's left other than either closing your doors or pushing into commercial?

Just because you want to try the commercial market and are reasonably confident that you'll be successful because you know your trade doesn't mean that you should. If you're not willing to or can't spend the money to do it correctly, then please save yourself a lot of grief and figure another way to save your company.

Contrary to popular misconception, commercial work is very, sometimes very-very different from residential, retrofit, remodeling or any other kind of work.

The rules for the schedules of work and values and for getting paid by those schedules are alien to what's normally done on the single or multi-family residential side. The rules for safety, for contract documentation and compliance are different. Then there's that hated word “retainage,” which translates into, “We're going to squeeze you until we're bored lording your own money over your head.” It's very different from the get in, do the work, get paid, get out of Dodge mentality of residential.

But if my words of warning won't dissuade you, let me tell you what not to do in setting up your commercial estimating department.

First, you will need to hire either a dedicated estimator with a track record (preferable) or someone who can estimate the jobs and then project manage them. Do not hire someone who has not been a full-time estimator before. This person can not be a working foreman or field superintendent for those same jobs.

Do not promote your senior mechanic who can read plans and do material take-offs and is too crippled to actually work in the field any longer, so you're going to help him into a cushy office job. Not unless you want to lose your shirt on the first job of any size that you turn him loose estimating. Do not hire your niece or nephew right out of engineering school. Do not hire a former supply house manager. Do not hire anyone who has not worked as a senior-level estimator before. Not unless you want to flush your company down its own toilet before you realize what's happened.

Yes, this person will cost you money, perhaps as much or more in base salary than you're currently paying yourself. That's your problem if you're paying yourself that little. If they're willing to come to work for less money than you're paying yourself or your senior field guy with overtime, then watch out. There's a good reason why they're willing to work cheap.

Second, especially if you're going to be bidding on contracts where the equipment and materials might costs more than your combined credit limits with all your suppliers, then preemptively talk to your supply houses about raising your credit limits to accommodate this new push of yours. If they won't raise your credit limits, then perhaps you need to rethink why they won't and reconsider the whole thing.

Sure, most GC's will do joint checks and such for major pieces of equipment that they can immediately take possession of on the jobsite. Sure you can factor the equipment along with a good portion of your profit out to factoring companies. Neither is the smartest move you'll ever make.

Third, unless you've worked as a commercial estimator yourself in another life, you've got to be realistic on how much actual work your new guy will be able to bid in a typical week. Of that, you need to be realistic about what percentage of work they'll be able to win in the open market bidding to GC's. An estimator can bid, at most, two small jobs a day and one or two really big jobs per week, otherwise they'll start pulling numbers out of thin air.

No point in even getting started if you think that you can cover the overhead for the entire company from commercial work. Or that they can crank out more bids than is realistic. The bids won't be competitive.

Fourth, most estimators in this day and age will want and need a computerized estimating system such as Quickpen or Estimation or similar. Welcome to the 21st century. These systems might cost between $10,000 and $20,000. There are a few old dinosaurs like myself who still can do manual estimates on printed forms, but we're a dying breed. Most estimators will scream bloody murder if they don't have a digitizer-based estimating “station,” and you'll be disappointed in their overall output if they don't have one. They won't be nearly as fast as you or they need to be to churn work out the door to be profitable.

Fifth and last, don't be upset when a bid they've worked on and off for a month on is canceled, delayed or otherwise changed without warning.

Don't be upset when competitors keep winning work on which you're close. At least that's what the GC's you're bidding to tell you, and they've been known to tell a bald-faced lie to subcontractors because it's in their self-interest. The work will come once GC's and owners become more familiar with you and you get a couple of smaller jobs successfully under your belt.

Don't be upset with your estimator when he balks at working over 60 hours a week just because you need them to because your cashflow situation begins to look desperate. Estimating is an art, not a science, and since it's all brain power, that brain that you hired to risk your company's future on has to be sharp and alert at all times.

The time to set up a commercial estimating division within your company is when the economy is flush and there's plenty of work to be chased, not when the economy's tanking and everyone is scrambling over any kind of work that can be had. The money you'll have to spend to set things up is considerable. It's not for the faint of heart, even in good times let alone not-so-good ones.

That said, it still can be done successfully, even during a recession. Hire right, furnish the department adequately and don't be afraid to trust your instincts and go where the market leads you, not where you want to lead the market.

Kent Craig is a second-generation mechanical contractor with unlimited Master's licenses in boilers, air conditioning, heating, and plumbing. You may contact him at [email protected].

Read more articles by H. Kent Craig