For beginners: how to determine a selling price ?

This is one for estimators at the beginning of their carreer and for those who are struggling with the calculations of their estimation software. Or, when you put it the other way around, how should your estimation software calculate ?

For the clients and architects who want to peep inside the kitchen of a general contractor: a warm welcome as well :o)

Here we go.

STEP 1

In a classic tender you have a list of articles where you have to put a price on.
Read carrefully the specifications and estimate the according costs for labor, material, equipment and subcontractors, article per article.
When finished the software will totalise this. These are the DIRECT COSTS.

STEP 2

As stated in my previous articles on this blog (and elsewhere), there are things you need in order to realise the building but which are not specifically mentioned in the tender.
Not estimating them will certainly result in a furious boss !
Some contractors estimate these costs in a seperate Excel file, some do this in the estimation software. It doesn't matter where you estimate it, as long as the job is done. 

The total sum of these costs are the INDIRECT COSTS.

Usually your boss wants to know how big these costs are related to the direct costs, preferably expressed in a percentage. How much this should be, really depends on what is specifically asked for in the tender: it can go from less than 1% when the architect wants to get a feeling with how a project is actually realised and mount up to 15% when it doesn't interest him at all.

STEP 1 and STEP 2 together is the PROJECT RELATED COST for the contractor.

In a formula:
                        project related cost = direct costs + indirect costs


STEP 3

A contractor has an office, an accountant and all other kinds of costs. 
And these costs remain whether he has a full order book or not. 
These are the GENERAL COSTS (in Dutch: algemene kosten or AK). Usually, these costs are taken into account bij adding a percentage on top of the production cost. 

In a formula:
                        total cost = project related cost x (1 + % general costs)

Some considerations:

• Each contractor has a slightly different view on what is project related and what not.
  E.g. some contractors have a standard all risk insurance which is part of the general cost percentage; others look at the insurance project by project and add its cost to the project related cost.
• Another thing: how big is the contractor you work for ? Does your company has his own engineering department ? In that case the general cost will be higher than the small contractor who only executes what is written down in the tender.

So, for you, as a beginning estimator, it is important to know what your boss exactly means by "general costs". Usually, the percentage is somewhere between 4% tot 8% of the project related cost.

STEP 1, 2 and 3 together is the TOTAL COST for the contractor.


STEP 4

A contractor wants / needs to make a profit. And your boss is not always so sure of the quality of your work. He will therefore add a percentage on the selling price for profit & risk. 

In a formula: 
                         selling price = total cost / (1 - percentage for profit & risk)

When you want to know how many euros or dollars this "dream" percentage for profit & risk is, the formula becomes:

                        profit & risk = selling price - total cost


STEP 5

Now we know what the total selling price will be, but how do we divide it over the articles of the tender ? Again, there are several considerations

• Sometimes, clients indicate a fixed sum for certain articles.
  E.g. kitchens in apartment blocks. The final, individual owner of the apartment gets a fixed sum to buy the kitchen of his dreams (what happens when he wants to buy a more expensive or less expensive kitchen, I'll tell you in one of my next contributions to this blog). In these cases you're selling price is known and needs to be fixed .
  In the direct cost of that particular article you put 80% to 90% of the fixed sum depending on the general cost percentage you agree on with your client ànd the discount you expect to get from the subcontractor who actually will build the kitchen.
  
  When you make your estimation in Excel, add a column where you can add e.g. an asterix (*) to mark these prices.
    
• Sometimes, the client already consulted subcontractors for e.g. windows.
  In other words, your client knows the price of the external joinery.
  
  Two remarks:
  
  1. When the client intends to work with a general contractor, he knows that the coördination of all the subcontractors come with a cost. In my experience clients are willing to pay from 3% up to 15% for it.
  
  2. As a general contractor you will get a better price of the subcontractor than your client because he is a one time client and you are a regular one.
  
  1. and 2. together means that you can put a selling price for these kind of items between 90% up to 110% of the direct cost of that particular article.
  
  Again, when you make your estimation in Excel, add e.g. an asterix (*) in the additional column to mark these prices.

Thus, the first thing you do after you have determined the total selling price, is to deal with the kind of articles mentioned above.

The total of these FIXED SELLING PRICES can be called SP1 (in Dutch VP1, verkoopprijs 1). 
The RELATED DIRECT COSTS need to be totalised as well and can be called DC1
(in Dutch KP1, kostprijs 1).

Secondly, you have to deal with the remaining articles.

The total sum of the REMAINING SELLING PRICES  can be called SP2. 
The total of the RELATED DIRECT COSTS can be called DC2.

The MULTIPLIER (in Dutch "overslag") of the direct costs in order to determine the individual selling prices of the remaining articles can be obtained by dividing the total of the remaining selling prices by the remaining direct costs.

In formulas: 
                         SP2 = selling price - SP1
                         DC2 = direct costs - DC1
                         multiplier = SP2 / DC2

As you can tell from above, the multiplier can have a wide range. When do you need to start worrying ? When the multiplier drops below 1,05 or exceeds 1,35. In those cases you better go and look for mistakes in your estimation :o)

Good news: for the time being, your job as an estimator is done.

STEP 6

It would be nice if the initial bid automatically results in a final contract. Perhaps this is the case in Utopia but certainly not in our daily construction world. Several times you will need to adjust you bid because of new quantities, new items, etc.

Before you make you're first adjustment, freeze all individual selling prices ! If you don't the formulas will start running their own life and you'll end up with different selling prices for articles where nothing changed. And trying to explain this to the client is an annoying thing to do and therefore is to be avoided at all times !
This also means that, in this phase of the selling process, you really need to keep your head cool.

There are several possibilities:

• Only the quantity changes.
  In this case, you only need to adjust the related the direct cost but be aware.
  E.g. a pump to pour concrete will have no different cost if you pour that day a couple of m³ more or less. In other words, the selling price remains the same but the percentage of profit & risk might drop or increase.
  You could keep the same multiplier but all this small changes in individual selling prices of the tender will unnecessary complicate the sales process.
   
• A new but similar article is added.
  In this case you need to apply the same multiplier as the one used with the existing simular articles. The selling price needs to be logical for the client !
   
• A really new article is added.
  Here you have a choice in which multiplier you will use: the same as in the first bid or a different one. To make the choice you have to consider whether this new article has an influence on the indirect costs. It is also an opportunity to correct the dropping percentage of profit & risk due to only changing quantities or to correct a mistake you find in your estimation after handing over the bid to the client

What is important for your boss ? That is simple: how much money is left for profit & risk when the contract is signed ! And he will certainly compare this to the initial "dream" percentage which was set out in the first edition. So it is really important to keep a record of the changes you made throughout the sale process.

Not all that simple, but it surely is the most fun part of estimating !

Kind regards and keep warm this weekend !

Peggy

Explaining BouwData - part 7

Before moving on, it is important to be sure that we all speak the same language. Especially for the interpretation of the NEN 2634 this is important. So here a little lexicon made by the university of Delft:

• COMPLEX (same word can be used as well in Dutch as in English)
  This is a collection of buildings who are somehow related to one another
    
• BOUWWERK or building in English
  This is the complete collection of functional and/or physical objects needed to give a solution to the need of housing (this can be a real house or a factory, hospital, school, etc. but not a road or bridge or solution for traffic)
  
  In the NEN 2634 the division of costs on this level is defined in table 6
  An exemple: 2 bouwkundige werken or, in English, constructional works
    
• ELEMENTENCLUSTER or a cluster of elements in English
  This is a group of elements with related characteristics
  
  In the NEN 2634 the division of costs on this level is defined in table 7
  An exemple: 2A fundering or, in English, foundation
    
• ELEMENT (same word can be used as well in Dutch as in English)
  This is a functional object with a specific purpose belonging to a building without being related to a specific physical solution.
  An element has a one-to-one relation to a building part
  
  In the NEN 2634 the division of costs on this level is defined in table 8An exemple: 2A.13 lagen op grond or, in English, layers on soil, explained as a layer designed to carry 3 t/m² and with a flatness of 5mm over a 2m length
    
• BOUWDEEL or building part in English
  This is a physical object with a specific performance just because of the materials used and the way it is constructed.
  A building part has a one-to-one relation to an element
  
  The layer on soil described as an element can also be described as a building part and it sounds like this: a layer on soil made out of 20cm concrete C25/30 with 25kg/m³ steel fibers on a PE foil of 0,2mm and layers of 5cm sand and 30cm of chippings
    
• COMPONENT (same word can be used as well in Dutch as in English)
  These are the physical objects with a specific performance where building parts are made of.
  
  The NEN 2634 stops at the level of element but when you look beyond the summary of table 1 of SfB you find everywhere on the internet, you see something usefull.
  Especially when you look into the BB/SfB-plus which prof. Frank De Troyer from the University of Leuven published in 2008.
  An exemple: 2A.13.0 - demolition, excavation for layers on soil
    
• ACTIVITEIT or activity in English
  This is a process of putting into work materials using labor and equipment
  
  Here, we enter back into the field of the material code and, as I wrote in one of my previous blogs, STABU is here much more usefull than the table 2 and 3 of SfB.
  One can say that the activities are the molecules of an estimation
    
• MIDDEL or means in English
  This is a general information carrier for building materials, labor or equipment
  One can say that the means are the atoms of an estimation

Sounds interesting, doesn't it ? Certainly when you put it into a nice PPT slide:

I thought so as well when I started to put it into daily practice. 
It didn't take long to figger out that this was all too theoretical.
Let me give you an exemple: 2D.31 exterior wall openings. 
The idea is to have cost knowledge on a very rudimentary level when designing: a cost per square meter opening. This implicates that, when you want to put detailed estimations into a database, that you put the costs for big megadoors, ordinary windows and doors and automatic entrance doors all together in a big blender to generate the cost indicator of the exterior wall openings for that particular project.
So, I did. 
But I ended up spending a lot of time writing down what the result really meant and when I needed to use the database I always felt very insecure.

On top of that, when I looked at table 6, I felt I didn't have the means to make proper distinctions between the different mass studies I had in front of me.

I had to figger out something else.
And the answer was quite easy: move everything one phase up !
So, my nice PPT slide now looks like this:

I'm using it now for a couple of years and it never has let me down !

Kind regards,
Peggy
www.bouwdata.net 

Explaining BouwData - part 6

First there was the sun with outdoor activities and then there were a lot of classic tenders to make a bid on. So, in the past month, my workplace resembled a lot my fancy old office filled with boxes full of paper. Luckily the paperwork was replaced by digital files. But there was another difference: although the projects where very different and for multiple clients, I always felt part of a team. So, to all of these clients: a warm thank you for achieving where my previous bosses failed !

But back to the future and BouwData now. 

The backbone of the different sets of agreements is the object code, a code with focus on function and life cycle cost. It can be used from the early consideration to invest in real estate to the phase of real cost engineering where knowledge about labor, material, equipment and subcontracting is necessary. It is from the object code that you can relate to the material code - the language of the contractor - and to the development code - the language of the developer.

It will take me some "parts" to explain its full depth, though.

The starting point was, as with the material code, the search for the standards to be used. And again the Netherlands proofed to be way ahead of Belgium.

On the highest, most general level, you have the same standard in Belgium and Holland: the NBN B06-003 / NEN 2631. This standard started his life in the Netherlands in 1979 and Belgium followed in 1983, 5 years later. Its focus is on investment costs and sums up, quite precisely, the kind of cost you need to consider :

1. the acquisition of the ground you want to build on and the costs you have to make it ready for the contractor to plug in the socket and start building. Yes, this includes getting rid of trees, bushes and all kind of dirt, making sure that the groundwater has dropped sufficiently  if necesarry and that electricity and water is available on site.
   Why ? Well, these costs can have an influence on you're choice of spot you want to realise your project on, more or less regardless of the design
2. the cost of the building itself including all equipment which is fixed to the building and not related to the production process which will occur when the building is in use.
   Important to notice: in this fairly old standard they already stated that there are different levels and ways to look at these costs: from the point of view from the developer (e.g. if you want to build a hospital, costs are in the earliest phase related to the number of beds), over the point of view from the designer (elements of the model), what you need when tendering to the point of view from the constructor (the sequence of coming to the building site).
3. the cost of equipment related to the use of the building
4. additional costs such as fees for designers, assurance, financing, moving into the building, etc.

Quite I good start and still accurate today but it is lacking detail.

In 2002, they realised this in the Netherlands as well. So they made the NEN 2634 which related the previous standard on investment costs to the international table 1 concerning elements of a new design of the SfB, the international classification system for construction. In this standard they define more precisely all phases of the design and building process and state how costs should be defined in every single one of them.

The object code is also the set of agreements to discuss Life Cycle Cost. 
The previous standards where made in a time where the world of design & construction had nothing to do with the world of facility management. In those days, nobody had ever heard of LCC. So I searched for standards in that world and yes, they also had felt the need of organising their costs. And again, the Netherlands proofed to be ahead of Belgium. They installed the NEN 2632 in 1980 and Belgium followed by taken it entirely over in 1983, calling it the NBN B06-004.

So, looking at all these standards I had sufficient background to relate it to my 15 years of estimating experience.

How ? Read the next part ! And I promise not to wait another month this time :o)

Kind regards.
Peggy
www.bouwdata.net