Estimation of Engineering Project Overheads

MISMANAGED OVERHEAD IS THE SILENT PROFIT KILLER IN CONSTRUCTION In construction, poorly managed overhead can quietly erode your profits. Many think hiring more people solves problems, but often, it’s the systems and processes that need fixing. Adding more staff can actually inflate your overhead, hurting your bottom line more than you realize. Let’s break it down with a simple real example: A million-dollar project where you aim for a 20% profit. That’s $200,000 in profit and $800,000 in costs. If you start with your costs and add a 10% markup for profit and 10% for overhead, you end up with $160,000, not $200,000. Your bid now totals $960,000. Subtract your $800,000 costs from the $960,000 bid. You get $160,000. Divide that by $960,000, and your margin drops to roughly 17%. So, you’re not making 20% anymore; you’re making 17%. In construction, understanding the difference between margin and markup is crucial. This is especially true with retainage. If they hold back 10% of your $960,000 contract, you’re left with only $64,000 in free cash flow, not the $200,000 you planned for. To achieve your desired profit, calculate correctly. KNOW YOUR NUMBERS. For a 20% margin, your costs must be 80% of your bid. If you want a 15% margin, your costs should be 85% of your bid. Many companies mistakenly think they’re making 20% by adding 10% for profit and overhead. 𝗧𝗵𝗲𝘆’𝗿𝗲 𝗻𝗼𝘁 𝗮𝗰𝗰𝗼𝘂𝗻𝘁𝗶𝗻𝗴 𝗰𝗼𝗿𝗿𝗲𝗰𝘁𝗹𝘆. In the construction industry, everything is calculated from the contract value DOWN. Missteps in these calculations can cost you significantly, as shown in our example where you lose over 3% or $40,000. To accurately factor in your overhead, add that to your job costs – for example if your overhead is 10% and your job costs $900,000, add 10% to that – now $990,000 are your total costs for the job. Then, add your margin to that number in order to get a real profit number. Worried about winning bids with these calculations? It’s about efficiency and cost management. If the market operates at a 17% margin, you must be realistic about your ability to work within that margin. Sometimes, you need to bid on more projects to cover your costs, sometimes you need to analyze your costs – the project costs and your internal costs – overhead being one of them. Regularly evaluate your costs. Do this annually or semi-annually to stay competitive. Improve your systems and processes instead of just hiring more people. Effective systems and processes often reduce overhead more than adding staff. 𝗛𝗶𝗿𝗶𝗻𝗴 𝘄𝗶𝘁𝗵𝗼𝘂𝘁 𝗮𝗱𝗱𝗿𝗲𝘀𝘀𝗶𝗻𝗴 𝘁𝗵𝗲 𝗿𝗼𝗼𝘁 𝗽𝗿𝗼𝗯𝗹𝗲𝗺𝘀 𝗰𝗮𝗻 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝗼𝘃𝗲𝗿𝗵𝗲𝗮𝗱 𝗮𝗻𝗱 𝗵𝘂𝗿𝘁 𝗽𝗿𝗼𝗳𝗶𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆. 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝘁𝗵𝗲𝘀𝗲 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗽𝗿𝗶𝗻𝗰𝗶𝗽𝗹𝗲𝘀 𝗶𝘀 𝗲𝘀𝘀𝗲𝗻𝘁𝗶𝗮𝗹 𝗳𝗼𝗿 𝗺𝗮𝗻𝗮𝗴𝗶𝗻𝗴 𝗮 𝘀𝘂𝗰𝗰𝗲𝘀𝘀𝗳𝘂𝗹 𝗰𝗼𝗻𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗼𝗻 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀. Scrutinize your costs and refine your processes to stay profitable and competitive.

Budgeting in EPC (Engineering, Procurement, and Construction) Projects: *Budgeting Process:* 1. Define project scope and objectives 2. Identify cost elements (labor, materials, equipment, services) 3. Estimate costs using historical data, industry benchmarks, or expert judgment 4. Develop a detailed budget breakdown (WBS - Work Breakdown Structure) 5. Establish budget contingencies for risks and uncertainties 6. Review and approve budget with stakeholders *Budget Components:* 1. Engineering costs (design, drafting, engineering services) 2. Procurement costs (equipment, materials, services) 3. Construction costs (labor, equipment, materials) 4. Project management costs (PMO, coordination, oversight) 5. Quality control and assurance costs 6. Safety and environmental costs 7. Commissioning and startup costs 8. Contingency funds (unexpected expenses) *Budgeting Methods:* 1. Bottom-up estimating (detailed estimates for each activity) 2. Top-down estimating (high-level estimates based on similar projects) 3. Parametric estimating (using historical data and statistical models) 4. Analogous estimating (comparing to similar projects) 5. Expert judgment (using experienced professionals' opinions) *Budgeting Tools:* 1. Spreadsheets (e.g., Microsoft Excel) 2. Project management software (e.g., Primavera, MS Project) 3. Cost estimation software (e.g., CostOS, Esticom) 4. Earned Value Management (EVM) systems *Budget Monitoring and Control:* 1. Regular budget reviews and updates 2. Variance analysis (identifying deviations from budget) 3. Cost reporting and tracking 4. Change management (approving and documenting changes) 5. Forecasting and re-estimation *Challenges in Budgeting:* 1. Uncertainty and risks 2. Complexity and scope changes 3. Inaccurate estimating 4. Inflation and currency fluctuations 5. Stakeholder expectations and communication *Best Practices:* 1. Develop a comprehensive budget plan 2. Use multiple estimating methods 3. Establish clear budget responsibilities 4. Monitor and control costs regularly 5. Communicate budget changes and variances to stakeholders By following these guidelines and best practices, EPC project teams can develop accurate and comprehensive budgets, ensuring successful project delivery.

Let’s talk about estimating and how to prevent profit loss.... Several years back I, along with the estimating team, estimated a $1.2 BILLION dollar project. This was in addition to many billions before hand, but this project topped them all. It consisted of several million yards of dirt that needed to be pushed several times, tens of thousands of yards of concrete, including a concrete esplanade that cantilevered over the Hudson River in Manhattan, multiple bridges, utility work, drainage, retaining walls, and dozens of subcontractors varying from electrical, steel erection, landscaping, masonry, asphalt and much more. Not to mention hundreds of vendor quotes! This was the ultimate estimating experience for me, and we all learned a TON of new tricks!!   Now working with small to medium size contractors, I’m always hearing similar complaints. Such as:   1) Why are my profits running away from me towards the back end of projects 2) I don’t fully understand my overhead or indirect costs 3) Historical data is off   While direct costs like labor and materials are more obvious, indirect costs involve expenses such as permits, insurance, overhead, additional non-productive equipment, and labor. Neglecting to fully understand and account for these indirect costs can have significant consequences, leading to financial difficulties, project delays, and even failure. It's critical to recognize the importance of the estimating department's role in thoroughly understanding all costs associated with a construction project.   Over the past 20 years, I’ve talked with many contractors who self-perform work and one of their top complaints and questions is why profits run away from them as they approach the back end of their projects. Aside from project management flaws, below are some costs contractors miss in their estimates   1) Non-productive labor wasn’t accounted for properly. Flaggers, subcontractor support, delivery support, etc.. 2) Equipment wasn’t forecasted properly. What's being rented, leased, purchased, etc.. 3) Escalations aren’t correct. You need to know your schedule and read the quote and have a full understanding of escalations and lead times. 4) Budgets for punch list, weather, labor escalations, small tools, etc weren’t accounted for. Depending on your Niche, company size, GC vs Subcontractor the above will vary.  It's a start and I suggest you look into it. #proaccel #construction #estimating #projectcontrols