Bid Management Case Study – Project Estimating
In this video we’re going to talk about project estimating. How to estimate the cost of your project and then how that relates to the bid price you submit to the client.
Now it’s important you tailor your estimating process to suit each individual bid, you should sit down before you estimate anything and ask yourself some simple questions and then execute an estimating process that suits.
You need to ask yourself:
Have we done this type of work before, if you have you should heavily rely on the actual costs and metrics achieved in those projects.
If you haven’t you will need to clearly understand the risks of each of your estimates.
Consider how much time do you have and what is the level of accuracy required.
This will determine whether you have time to undertake a bottom up estimate and seek pricing from suppliers and vendors, otherwise when you have little time or you are just chasing a ball park number, you could undertake a top down estimate and rely on your metrics and historical data.
Finally, ask how well the scope of work is defined.
This again will determine the level of confidence you will eventually have in the estimate, whether you need to do further scope definition, whether that be preliminary engineering and quotations from vendors, all of which will translate into the level or risk the estimate represents when you start to make pricing decisions.
I always, without fail develop a scope definition document at the start of every bid, when you’ve done a few they become second nature.
Producing and distributing a scope definition to your estimators, engineers, supply chain, commercial and operations people gives them a frame of reference upon which to start their work.
Without it, you’ll find they will base their estimates on a previous project or their own assumptions which could be way off the mark.
The scope definition is the document that gets everyone onto the same page, it should include all of the points listed here and it should be updated whenever new information becomes available as the bid progresses.
Once you’ve developed your scope definition, you then need to define your work breakdown structure against which you will estimate the scope of work.
It must be product based, that is, it reflects the way the work will be executed and delivered, not a functional representation of your organization which a lot of people do, this is wrong.
It should include the complete scope of work, sounds obvious, but many people do not do this and it leads to estimating, scheduling and integration mistakes.
Finally, don’t just plonk the numbers into your estimating tool or spreadsheet, document how you arrived at each estimate, you can refer to another video I have here in You Tube that walks you through both the WBS & the Basis of Estimate processes.
For reasons that will become apparent shortly, and this is part of your Basis of Estimate process, you should define the source of your estimates using some kind of labeling like I’ve shown here.
Each of these definitions relates to a source of costing, for example Historical means, you’ve done this work before, you have an actual cost, so once you escalate the cost based on some type of index, your pretty confident in the estimate.
On the other hand a Budget number might be a number given to you by a vendor which he will not guarantee due to lack of information for example, so you need to treat is a variable and make appropriate risk allowances.
You will see in this actual example here, the terms are a bit different to those I used on the previous slide, but the principles the same.
88% of the costs for the procurement side of the estimate, so that excludes the labour component, is based on either firm and fixed quotes from vendors and solid historical data from previous projects.
So that just leaves 12% of the procurement spend for the project without any real solid basis of estimate, which is pretty good.
The upside to this is that you only really need to carry any contingency in your estimate for 12% of the procurement spend.
Some people will put a blanket lets say, 5% contingency on the procurement total, which if it was $20 Million adds $1 Million to your costs, when in fact you should only be applying 5% to 12% variable amount of the procurement spend, which is only $120,000, so you can see the difference there in cost and that will be an even bigger reduction in price after overhead and profit is applied and may be the difference between winning and losing.
You need, as I’ve alluded to have a robust risk management process, whether that be at the activity level where you could apply three point estimating and address the global risks separately, or in a similar fashion to that I outlined in the last slide.
Regardless, you need to be able to understand the risks to the cost estimate and you need to be able to articulate the level of confidence you have in the estimate when you go to review.
Now, pricing decisions are regularly out of the realm of most estimators and a lot of bid managers.
But I’ve learnt that if you cannot articulate a level of confidence in your estimates to those making pricing decisions, they will surely whack a big fat contingency on top of your estimate, and you’ll lose the bid, so be prepared and be thorough,
You should also, as soon as possible after the bid starts, be gauging what the market price or the customers budget is so that you are working toward that figure or this can be discussed at the final review and pricing meeting.
It is not the estimators or the bid managers job to discount the true costs of the scope of work.
If you want to reduce the price you should consider discussing reducing the scope with the client, or if this is not a possibility, price cuts should be left to the senior management, and only after they are fully appraised of the true project costs.
As for the case study. An almost identical ship was under construction in Spain as we bid this project.
There were a mixture of actual and estimated quantities available from our partner, so the greater concentration then was on the changed construction strategy of building and integrating the superstructure in Australia and the logistics of transporting and accommodating such a large ship in Australia.
We relied heavily on our historic data from other ship construction projects, but the unknown was how this would translate to the increased size of this vessel and this was addressed through our risk management and review and approval process.
So in the next and final video of this bid management case study we’ll look at Proposal Writing.