For larger projects where a bid is required, it is generally accepted that cost accounting provides the proper methodology to be used to estimate a job. It is the method recommended by the U.S. government for its bids. In this system, one compiles a cost of goods and services necessary to complete the project. It is generally best to solicit at least three bids from vendors and select the “best” for costing out the job. Obviously, in the case of generic goods, the best bidder would be the one offering the lowest price. In the case of services, you shouldn’t necessarily use the lowest bidder, but also have to consider the reliability, staff, and track record of the bidder.
Having compiled the Cost of Goods for the project, one would then estimate the in-house efforts by task for each specialty required, totaling up the manhours and hourly cost for each task to complete the project.
Depending on the level of detail, the system would then apply an administrative allowance (General & Administrative, G&A) for both the Cost of Goods purchased and the in-house manpower costs. Finally, all these cost estimates would be summed and multiplied by a profit margin for the final bid estimate. And this is where it becomes fun. Now, you must consider what other bidders will submit and decide how much you want the job.
This is an overly simplified description of the bid process but indicates the essential steps that are required. We have worked on many bid proposals and managed many large jobs. In our experience many people do not manage a job properly once it is won.
They rarely look back at the original bid sheets and simply manage the job to completion before even looking at its profitability.
All too often at the completion of the job, they are unwilling to review the job costs to evaluate its profitability and simply move onto the next job, trusting that if their yearend statement shows a profit, they must be doing everything correctly. This is not an advisable approach.
While none of us wants to see our errors in judgement, we all make them, and it is best to monitor the job progress as it is being completed. We have developed worksheets to not only estimate the job to bid, but also to check costs (& profitability) as the job progresses. We dislike surprises and the advantage of this approach is that it forces you to take corrective action while you still can. Our system requires a weekly review of the actual job costs along with a percentage of completion which is compared to original estimates. This permits the manager to make “mid-course” corrections to correct overruns before the project becomes a loser.
For example, let us say that the original estimate used a cost of $50,000 for a specific task and in performing the task $70,000 was actually spent. Knowing that this represents a $20,000 loss perhaps we can focus on other tasks yet to be performed and consider how to accomplish what is required in a less costly manner. This will force you to be more critical and creative and perform other tasks at a reduced cost. This is not to imply shortcuts that provide lesser value than the bid be considered, but that you will focus on providing the original task more creatively perhaps, than originally planned. We have accomplished cost savings by reviewing the requirements with a vendor and discussing how the task could be performed for a lower cost.