Construction Estimating Errors? Watch Out for the Domino Effect
August 09, 2022
With so many variables to gather, track and calculate when assembling a construction estimate, there are plenty of opportunities for unintended errors to slip in during this time-consuming, involved process. It could be unfortunate miscalculations, or overlooked critical items like indirect costs, or maybe relying on inaccurate or outdated source data for the estimate.
Yet despite the potential for such mistakes, the expectation is to commit to that construction estimate once it’s submitted. Regardless of the specific types of errors and the reasons they occur, the risk that remains can set off a domino effect, also referred to as a knock-on effect, of broader problems. And it could wind up becoming costly to your construction company in several ways. Let’s take a look at the more common effects.
Construction estimating mistakes put profitability at risk
It’s not uncommon to mis-estimate costs. With profit margins already often uncomfortably slim, the challenge then becomes ensuring they don’t become thinner. Unfortunately, underestimating does just that. And ultimately, it puts profitability in a dangerously vulnerable position.
A practical way to address this challenge? Refer to actual costs from past projects with similar components or overall scope. Or, short of this, turn to industry benchmarks as a guide, adjusting for localized going rates and for inflation. This may be a bit more involved when using traditional construction estimating methods, which themselves are error-prone.
To overcome these limitations, take advantage of new technologies with estimating capabilities to better manage the process and eliminate some of the more avoidable mistakes. They’re designed to handle the level of detail inherent in capital projects and with the accuracy — a key factor in a project’s profitability — that owners have come to expect.
Paying for errors out of pocket can lead to cash flow problems
Cash flow problems can be hard to recover from. Even if you’re willing to bear the financial responsibility of seemingly minor estimating miscalculations or omissions in the short term, this cuts into the margin of error you have left to cover more consequential items further into the project life cycle, in particular those without clear responsibility outlined in the contract.
Just as crucial if not more so from a long-term perspective, it cuts into your business solvency and opportunity for growth. For example, it can put operational plans at risk such as having the means to get your name out there as a contender for future projects, providing safety and/or skills training for employees, and procuring tools and equipment, for example. Ironically, it also puts a dent in your ability to adopt construction estimating technology that could have prevented a negative or shrinking cash flow problem.
Completion date delays can trigger liquidated damages claims
Unrealistic timelines established in the construction estimate are sure to put the completion date into jeopardy. It can signal a lack of appropriate contingency plans, the possibility of optimism bias and the degree to which performance metrics and their fluctuations were monitored. Whatever the cause, the likely result is the same: the owner bringing about a claim for liquidated damages.
Determined by both the firm and the owner, a liquidated damages clause within the contract sets an agreed-upon amount for the construction company to compensate the owner for incurred costs and loss of anticipated revenue should the completion date be missed. Even though it’s not legally allowed to be a punitive penalty, such a claim can put a construction firm solidly in the red. Again, construction estimating software can help inform those early conversations around liquidated damages with its ability to use project data to determine more feasible schedules.
Possible negative impacts on project portfolios
Without gaining insights from what the data in past similar projects reveals, prior mistakes are sure to repeat themselves, resulting in continually throwing project outcomes off course. That means the impact of construction estimating mistakes may not always be felt just with the project at hand; depending on the severity, it can have an effect on your current and future project portfolio. Harsh financial ramifications from one project are likely to have an effect on a construction company’s ability to successfully maintain other projects in their portfolio, particularly with resource allocation. Plus, potential clients doing their due diligence will understandably take a history of way off-base project outcomes as an indication that their project may meet the same fate, therefore stunting any growth of a portfolio in terms of number and type of projects.
Consequences that can affect reputation and competitiveness
Cost overruns, estimate inaccuracies and excessive change orders to compensate for errors can all put a ding in a construction company’s estimate credibility. Reputation damage is harder to quantify from a strict financial perspective, and can be harder to recover from because it can be just as harmful to survivability as cost-based ramifications. If we follow these falling dominos to their logical conclusion, it doesn’t bode well for the company’s competitiveness, impacting opportunities to bid on future projects.
Can construction estimating software help preserve reputations and improve competitiveness? It’s just one factor, but yes. This is because mistakes often occur as a result of using manual estimating techniques or generic business spreadsheet programs. Neither of these considers the nuances unique to the construction industry, and this can have a direct impact on the accuracy that is so critical in estimating. It’s imperative for contractors to use the tools available to them when building estimates. Good estimating software can help your construction company achieve higher estimate accuracy and better manage costs. Just as important, you can avoid many of the costly project- and business-impacting mistakes.
Sometimes it helps to see how it works to appreciate all it can do. You can schedule such a demo of InEight construction estimating management to see how its flexibility enables you to streamline top-down and bottom-up estimates for any type of capital project.