Copyright to Kim Tremblay, © 2012.
This article is a repeat of an article of the same name first published on December 13, 2011
Reprinted with permission. Published here May 2012

Editor's Note | Introduction | Mistake 1 - Not Getting the Information You Need Up Front
Mistake 2 - Estimating at the Wrong Level | Mistake 3 - Hanging on to Old Technology and Systems
Mistake 4 - Not Using Current Rates and Costs |
Mistake 5 - Failing to Get Supplier/Contractor Quotes | Mistake 6 - Not Dealing with Project Risk
Mistake 7 - Failing to Review Before, During and After | Conclusion

Mistake 4 - Not Using Current Rates and Costs

Most project managers rely on external information when they estimate their construction project costs - databases to gather costs on materials, salary or grade bands to provide labor rates, asset management records for equipment charges. We gather and compile this information when we need it but then what we tend to do is just reuse the information from project to project.

How do you know that the rates you are using to estimate your project are still current? Unless you've got a payroll department that continually updates you with labor rates, an asset management function that lets you know that equipment has been discharged and replaced with newer, more expensive units and a procurement group providing you with current materials rates, your estimates are always representing what you knew to be true the last time you estimated a project. On a large enough scale, this can result in an easy 5 - 10% cost overrun that just doesn't need to happen.

How to avoid this mistake -
Update your resource cost information regularly

So, whether we have separate support groups working with us or not, how do we make sure that the rates we are using to estimate our construction projects are the most current?

Let's take a look at materials first. Don't rely on just your construction estimating database to figure out your current rates. Databases are a great tool to provide costs on thousands of items that you need to estimate a task. But these costs represent an average - not necessarily what YOU are going to pay in your project.

Perhaps you or your procurement group has negotiated a favorable rate for materials - that's what you need to know to estimate accurately. Schedule time regularly to go through your supplier invoices to compare your supplier prices to your database. Update your estimating database with your current supplier rates. What matters are the prices that your suppliers are charging you, not what the average material price is according to the database.

Many project managers use a salary grade or band to cost and bill out their labor resources. Using a salary grade ensures that all of the labor costs - salary, benefits and overhead - are included when you estimate your labor requirements. Understanding the true cost of your labor also allows you to establish billing rates to achieve a desired profit margin. Whether you use salary grades, or the actual employee's payroll information, the key here is to make sure that the cost information that you are using is current.

The easiest way to do this is to establish this as part of your process - on a regular basis (monthly, quarterly, annually). Regularly get a current salary grade or labor cost report from your HR or payroll group, and keep it with your project documents (see Mistake #1). If your labor cost includes contractors and/or subcontractors, regularly compare their labor charges to what you are using to estimate.

For equipment, ask your asset management or accounting department to provide you with an asset schedule and current rates for equipment usage. The schedule should include the cost of the equipment and the expected life, with a per-hour or per day usage charge. As with labor, get a current equipment schedule regularly. Make sure that the equipment costs you are estimating are current - if equipment has been written off or is fully used, you need to know that. And if new equipment has been acquired and you intend to use it on your project, you need to know the costs for that, too. Or maybe you rent your equipment - as with suppliers and contractors, you want to review those lease invoices regularly to understand what costs you should be estimating.

Or even better - as covered in Mistake #3 - get into a construction project estimating and cost control software that provides real-time supplier, material, labor, contractor and equipment information in a matter of minutes, not hours or days. You can then quickly and easily update your current rates (not to mention use that information to negotiate preferred rates and terms - see Mistake #5). The cost accuracy of your estimates will be greatly improved.

Mistake 3 - Hanging on to Old Technology and Systems  Mistake 3 - Hanging on to Old Technology and Systems

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