So You Gut Shot an Estimate . . . 1

[RLM2000]

I have been wondering what other firms/project managers do in this situation:

You have a private client, you give an estimate based on some preliminary drawings or ideas, and the estimate ends up being off target (low and to the left).

Most of our estimates are time and materials, and there is no specific language in most contracts tying us to a percentage of the estimate.

In all situations we try and let our clients know early that we will be going over budget, and in all situations try our hardest to make the best fee estimate we can. Sometimes we just gut shoot it and the recourse is almost always painful.

How do you guys deal with these issues. Do you take hair cuts based on bad bid information and classify the loss as "education"? Do you fight with your clients to get the fee budget increased?

Of course there are almost always extraeneous conditions with every job. i.e. You are realizing that the budget is spent about the time the client is telling you to work overtime to get the project on the street.

 

[FACS]

We are now using a contingency cost.

Since we repair used machinery, it's common to run into problems that were not accounted for.

We make a list of time and material, and add a contingency limit.

When the project is over, we go through the billing, and add extra costs against the contingency.

This way there are no budget surprises.

Charlie

http://www.facsco.com

 

[kchayfie]

Depends on the contract. Some of our jobs are "this is what you're gonna pay" and then we have to get the job done and all savings are ours. Some are "it'll cost about xxx but you pay what it costs" and then if it goes over the client coughs up. And some are pain/gain where the client gets a cut if we do it cheaper than we said we could but they pay a share of the overrun if we got it wrong.

I prefer option number 1 - there's a lot less bitching and wheedling with the client somehow we get to overestimate more effectively to cover the losses on jobs that went wrong than when the client wants to know where every last penny went.

 

[MintJulep]

If you are foolish enough to execute a fixed-price contract for an unknown scope of work you deserve to lose money.

Sorry if this sounds harsh, but really.

 

[swertel]

Mint -
Agreed.

When my customers ask for an estimate, I give them a copy of my rate sheet. Of course, they usually come back with the request as to how many hours this will take (so they can calculate the final $$$) and that's when I state a verbal estimate of hours, but not of dollars.

If my client requires a fixed-price condition, I give my best estimate, add my padding, and then pray that I can meet it. But I always leave myself an out. I insist that the statement of work be clearly defined and agreed to in the contract, and that I get to rebid based on any changes outside of the original scope. Inevitably there is a change or request outside the originally defined scope and I get the opportunity to place a realistic bid now that I am familiar with more details of the project. Ethics plays a big role, but once started on a project, the client rarely feels like switching and they put up with whatever bid I come back with - after trying to negotiate me down, of course.

--Scott

For some pleasure reading, try FAQ731-376

 

[Ashereng]

It is tough. The client wants a fixed price, but doesn't want to fix the product.

If the contract is lump sum, then as Mint said, you get what you get.

If you can, go cost plus, or rate. The client can monitor the progress, and make adjustments as they go. Of course, this requires work on the client side, and sometimes, they don't want to do that, or can't.

It is a tough situation, but, that's why we get the big $$$. ;-)

"Do not worry about your problems with mathematics, I assure you mine are far greater."
Albert Einstein
Have you read FAQ731-376 to make the best use of Eng-Tips Forums?

 

[wes616]

Here is one for you; it seems our sales dept does not seek engineering advisement when bidding programs, so I am currently working on a program that was (by overheard estimations) as much as 40% overbudget (in engnineering) before 1 man hour of work was innitiated on the project.



Wes C.
------------------------------
Light travels faster than sound. That's why some people appear bright until you hear them speak.

 

[IRstuff]

One MAJOR problem that most companies face is the lack of backannotation of bids vs. actual costs. If you are diligent about this, you can build up a database of actual costs to do certain things. Then, the only issue is whether the scope is adequately scoped.

Sadly, we rarely do things the right way. Every time we id a major program, we'll remember what we forgot to bid last time, but will forget to bid other things. This is then compounded by management cuts to get to the "winning" price.

TTFN

 

[zdas04]

Every now and then someone chokes at my hourly rate so I offer to do their project for a fixed price. My proceedure is to (1) carefully estimate the hours needed on the job with a very firmly fixed scope; (2) double the number of hours; (3) multiply times my standard rate; and (4) add a 15% contingency on the lump sum. I've never failed to get a fixed-price bid, maybe I'm not charging enough?

On long T&M jobs I always give an estimate with the disclaimer "if at anytime during the execution of the project it becomes clear that the engineering costs will exceed the estimate by more than 10% I'll get approval for the overrun prior to proceeding". I've only had to do this once (a rubber-scope project) and the client really appreciated the e-mail that said "I'm at 95% and it looks like I'll end up at 130%" and he authorized the extra.

When I was on the other side of the table the thing that I hated above all others was thinking that a project was on budget until an invoice gave me an unpleasant surprize. Like so many things in engineering the key to success is communicaiton.

David

 

[IRstuff]

That's also a rather odd aspect of many subcontractors' behavior. We've often gotten a "surprise" where the sub has already overrun his entire budget prior to CDR, but with ZERO warning, despite contractual requirements to submit monthly cost and schedule reports.

TTFN

 

[aardvarkdw]

Wes,

I think that is a universal situation. Our Sales Dept just got done taking orders for a system we are designing. They are selling it for $60,000 , it should be sold (compared to other like systems on the market) for $100,000 and it cost us $40,000 to build. Not to mention the price reduction the customer wants after 75 units, and the fact that our R&D costs wern't factored in at all.

But I digress. I think if you bid a job and it looks like you are going to go over, if your contract says you will do the job without stipulation for that amount, you are out of luck. Take your losses and aim higher next time. But if your contract says that you have the right to revise your estimate, as long as you are keeping the customer informed and not dropping a bombshell on them at the last minute, tell them what it is going to cost and add it to the tab.

 

[IRstuff]

There's a limit to cost-plus contracts, e.g., the depth of the customer's pocketbook. Barring that, there's also a limit on repeat business if you make a habit of overrunning.

TTFN

 

[DLauEng]

We don't call it Estimate, we call it Engineer's Opinion.

DLauEng

 

[dozer]

To answer the original question, at my previous employer when we "gut shot" an estimate we just took it in the shorts. Nice word picture by the way, but I don't know if the non-hunters get what you mean.

We sold a custom designed product for a lump sum. I will have to hand it to them, when they blew an estimate or had cost overruns that wasn't the clients fault, they didn't beg and plead for more money. They just swallowed the bitter pill and vowed to do better next time. Of course next time would come and the salesman would push for a lower price so he would look that the hero to the client and we would do it all over again.

I've never really gotten much into the business side of engineering (or engineered products) but I do wonder exactly what it is the business majors learn in school. Every time I ask them something like, "Why can't we put an escalation clause in the contract?", they say, "Oh we can't do that or no one will ever buy anything from us." Funny, I don't think it would take me four years to learn you just give the client everything he wants. Whoops, did I digress?

 

[ctmtwilliams]

If you "gut shoot" an estimate, then shame on you for not crunching the numbers properly. You also made your estimate on preliminary drawings without contingency to changes made for final drawings. Some lessons are more costly to learn than others.

 

[Ron]

If it's a poor estimate on your part from inadequate info on the front end....your problem.

If there are changes in the scope from your original proposal, ask for more.

Zdas04 nailed it ......communicate

 

[ChrisConley]

We've stopped using the expression estimate for anything. The term 'estimate' has now taken on some legal meanings.

I now offer my opinion of the probable cost. It gets hard, but after a while my opionion of the probable mechanical cost just rolls of the tongue.

 

[DRC1]

The problem is not so much the cost to do the work, it is the scope of the work itself. Design can be like unraviling a ball of yarn - you have no idea how much is there untill you get to the end. Most owners figure you can figure the design will take x hours. When you give them a scope of work, we list specfically what is in the price, such as footig plan for a particular piece of equipment, what we need for the work - detailed drawings of the machinary w/ accurate weights, previous boring logs; what we have assumed, med dense sands and gravel native to the area; and what we exclude Contaminated soils, soft soils requiring extensive design effort to accomidate. Often we provide cost plus offer and explain to oner he is paying only for the risk he actaully incurs, lowering his actual cost. The inclusions and exclusions are not as bad as they sound. After a few letters, they become kind of standard. With them you have the high ground for changes.

 

[RLM2000]

All very good information. IRStuff you have the same feelings I do about this stuff.

DRC1 you are correct for the type of work that our office does. I always have a list of inclusions, but we have a policy on not listing exclusions.

How many of you have standard documentation you have your client sign to allow you to increase the budget? I usually just call them and send them a letter (that changes every time). If they say stop, or start to complain, I ask for a face to face to get the facts in front of them on the table. One time a client told me that he would not pay anymore and would not approve a fee overage (the issues were well beyond my control) so I packaged up all of his work and sent it to him unfinished and told him we would help his new engineer in any way that was legal and ethical pro-bono. He came back in and approved the overage a few weeks later. His permitting went very smoothly BTW and now is a repeat client.

 

[DRC1]

In theory most of our contracts say we are not supposed to respond to a change until we a)give the owner notice of a change, b)receive a directive from the owner, c)provide the owner a cost proposal and then d) recive an executed change order from the owner. Yeah right. Even one of the 4 happens maybe 10% of the time, yet you don't want to take on a significant change in scope without some blessing. What I have found works with some people who are "response shy" is to send a letter with as much advance notice as possible, stating what we see needs to be changed and why. we then state that unless we hear differently, We will be following a particular couse of action. If this course requires additional compensation, we tell tem with as best an estimate as we can. This way at least they know what is going to happen and if they don't want to do that, they can say so.