The process of securing and executing a successful and profitable contract starts in the preconstruction phase by preparing a bid that accurately reflects the estimated costs to complete the project.
Understand Costs
Underestimating costs to complete on a project can not only yield significant financial ramifications, including reduced profit margins for a company and excess cash outflows, but it can also provide a strain on the availability of resources, as additional hours are likely to be expended. Conversely, overestimating costs to complete may result in a bid that’s too high and won’t be awarded to the contractor.
Evaluate Past Contracts
Rarely are any two contracts the same. However, drawing on prior experiences can be a useful practice in preparing your bid. Analyzing previous projects will help contractors better understand where they’ve had success in meeting or going below their estimated costs, or on the other hand, where they’ve overrun their estimated costs. Were the overruns on a previous contract an execution problem, or were the estimates unrealistic? Were there unforeseen obstacles on the project that caused the cost overruns? Evaluation of multiple similar-scope contracts could reveal whether there are recurring patterns, which will enable contractors to improve their estimation process and more accurately prepare a bid that meets desired profitability, while not bidding themselves out of the project.
Understand Risks
Additionally, this evaluation process may help contractors identify where the risk in the contract lies. Understanding the risk in a contract allows contractors to have some foresight and develop proactive strategies to help mitigate the risk. This is also important from a budgetary standpoint to determine where any contingency built into the estimate is likely to be utilized.
Consider Previous Experience
Another important factor to consider is the customer/owner relationship. Having previous experience working with the customer will provide a contractor context as to what the working relationship looks like, particularly with respect to the change order process.
The execution of a contract includes significant variability, as there are a lot of moving parts and changes throughout its life. The actual costs incurred will almost never line up with original estimates, but that doesn’t minimize the importance of developing a detailed and reasonably accurate estimate. Drawing on outcomes and experiences from previous contracts can be a cornerstone in effectively developing estimates on future contracts.
To learn how Schneider Downs can help your construction company, contact a member of our Construction Industry Group.
About Schneider Downs Construction Services
Led by a diverse group of shareholders and managers, Schneider Downs provides strategic and practical solutions for our construction clients in all facets of their business. Our dedicated team of more than 350 professionals have a wide background of tax, accounting, technological and business experience in the region, specifically in Pittsburgh and Columbus.
To learn more, visit our Construction Industry Group page.
