Estimating Metrics

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If your business begins with sales and marketing, it can end with poor — or a lack of — estimating.

August 01, 2003

 

Matt Plaskoff

mpc@plaskoff.com

 

If your business begins with sales and marketing, it can end with poor — or a lack of — estimating. Without a steady flow of estimates with which Sales can sell, it doesn't matter how many leads you get or how good your sales team is, you won't be able to sell jobs without estimates. In addition, the accuracy of your estimates can make or break your business.

This makes measuring estimating success one of your most important and critical functions.

The estimator's responsibility is to "find the truth" about what things cost and to provide competitive, accurate information to Sales so that Sales will have the best chance of selling at reasonable margins.

If the cost of goods is too high, overall estimates will be inflated, and less work will flow. If the cost is too low, a great deal of unprofitable work will flow.

One key indicator that can help you determine whether your pricing structure is on course is your "bid-to-get" ratio. The bid-to-get ratio measures how many jobs are sold versus how many are bid (or estimated).

Questions you need to ask include: What should the ratio be? If it's low, is that good or bad? How can I use the bid-to-get ratio to set benchmarks for required estimating volume?

Tracking Bid-to-Get

At Plaskoff Construction, we know that with proper sales qualification (or disqualification as the case may be), prospects (or bid candidates) will buy about one-third of the time.

If the bid-to-get ratio rises to 40%, for example, we might be qualifying very well and speaking only with very strong candidates, or we might be underestimating and might need to check our pricing structure. In other words, if we are getting more work than expected, we might want to raise our prices as long as the lead and prospect flow is strong enough to meet our goals.

If our bid-to-get ratio is dropping and we can attribute the lost projects to price, we might need to look at our costs or our qualification process. So tracking bid-to-get ratio is an important tool in determining how successfully we are estimating, qualifying and selling.

Industry standards can give you guidelines to follow, but the best way is to review your historical data. Set your benchmark and manage to that.

Tracking Estimating Volume

Once you have your bid-to-get ratio figured out and you think your numbers are providing you with the proper success ratio, the questions become: Are you turning out enough volume based on your expected bid-to-get ratio to fuel sales? And what can the estimating flow today tell you about your workload tomorrow?

To answer these questions, you need to track estimating volume. If Estimating can't keep up with Sales' needs in terms of volume, the bottleneck to your success is clear.

So how do we develop estimating volume benchmarks? We know our average job size historically and optimally needs to be about $200,000. We know our sales goal for the year is to sell $8 million in dollar volume, so it stands to reason that we need 40 jobs.

How do we get those 40 jobs? How many proposals do we need to present (prospects or estimates)? Again, history is important. Looking at past performance can provide the data you need to answer these questions. Averaging about five years of performance is an excellent way to benchmark these numbers. Of course, if your business is relatively new, you might want to use industry standards until you develop historical data.

 

Measure for Success
Average Estimates Produced Plan
$2,000,000
Average Estimates Produced Actual
$2,036,176
# Hard Estimates/Mo. Produced Plan
10
# Hard Estimates/Mo. Produced Actual
8
Estimate Gross Profit Deviation Plan
2-3%
Estimate Gross Profit Deviation Actual
2.4%
Average Job Size Plan
$200,000
Average Job Size Actual
$209,100
Prospects to Sale (Bid-to-Get) Plan
33.00%
Prospects to Sale (Bid-to-Get) Actual
34.05%
Measuring the volume, accuracy and success rates of your estimates indicates whether your pricing structure is on course.

Prospects Versus Projects

We know at Plaskoff Construction, based on averaging five years of back data, that at the appropriate price, about one-third of our proposals become projects. Therefore, we need to present to three times as many prospects as the projects we need. We need to present to 120 prospects per year to get our 40 jobs averaging $200,000 and totaling $8 million. This means we need to complete at least 120 estimates, or 10 per month.

If our bid-to-get ratio goes up, we can do less estimating, but we need to be sure it is not going up because of poor pricing and estimating blunders.

If the bid-to-get ratio drops, we put a burden on the Estimating department to turn out more estimates.

Sales also can play a role in fluctuations in bid-to-get ratio. You'll need to the judge of that.

Measuring Dollar Volume

Another way to measure estimating output is in dollar volume. We measure our dollar volume as well as our quantity of proposals. If we plan to sell $8 million worth of construction, we know we need to bid three times that, or $24 million. This means our estimator needs to complete about $2 million worth of estimates a month.

Some estimates are larger, some are smaller, but if we complete $2 million a month and continue to have consistent sales success, chances are we will close a certain percentage of that volume.

We know that if we have a big month of estimating that the several months following could be big job-start months. If we complete only $500,000 in estimates, there is no way we can meet our goals.

So I suggest tracking not only numbers of estimates but also dollar volume, and this can tell you a great deal about your future and the performance of your estimating team.

The Bottom Line

Finally, the bottom line is: "How accurate are the estimates?"

We track this as a percentage deviation in gross profit. We expect to be within 2% of what we expected in our project's gross profit. Perfection is unrealistic, but 2-3% deviation is reasonable.

By using a spreadsheet for the margin at which the job was sold and autopsying the final job costs (adjusting for deviations caused by others), we can track estimating accuracy.

Study the numbers, ask yourself why you might be missing or exceeding your targets, and then adjust.

If you are short on estimating volume one month, you might want to determine whether it's because of a lack of available work to estimate or if your estimator is simply not turning out estimates in a timely fashion.

If you find it's the former, meet with Sales and Marketing and request that more opportunities be provided. If you find that your Estimating department is backed up, get a temporary assistant to help get the workload under control.

Consistently failing to meet your estimating goals not only frustrates your sales staff but also can paralyze your company.

Remember, if you're not turning out estimates, you're not turning out business.

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