Don’t blame the estimator

Robert owned a residential design/build landscape company in Michigan. His estimator, Charles, had been with him for more than 15 years and he used our estimating software to price jobs. Charles was an expert estimator and he job-costed every job. He also tracked all of his bids on the Bid Board – an MS Excel worksheet where he entered every project and its status. He could legitimately claim that it had been years since the company had a project that went over budget on man-hours. However, at the end of each year, Robert always complained that he didn’t see the net profit margin Charles, he and I had put in the budget.

Sales for Robert’s company were projected to be right at $2 million per year with a minimum of a 10 percent net profit margin (NPM), or $200,000. General and administrative (G&A) overhead cost for the year was roughly $500,000. It was the $200,000 NPM goal that the company could not attain. It usually fell short of this goal by $70,000 to $100,000.

The company had the capacity (the crews) to do $2 million in sales. Charles could prove with his job-costing reports that projects were priced correctly with enough man-hours to complete the jobs. He could also show that jobs were completed with a 35 to 40 percent gross profit margin (GPM). What was the problem and where was the missing $70,000 to $100,000?

Falling short.

Charles could price the design/build projects accurately and the crews could produce them as budgeted. However, the problem was always volume. Robert and his sales force consistently did not meet the $2-million sales goal. Robert would sell roughly $1.2 million of work per year. However, the other salesman could not sell and produce the other $800,000. He would consistently miss his goal by $200,000 to $300,000.

The missing $200,000 to $300,000 in sales translated into a missing GPM of approximately $70,000 to $105,000. To achieve this range, you multiply the average GPM (we’ll use 35 percent) by the missing sales.

$200,000 x .35 = $70,000

$300,000 x .35 = $105,000

Because the company always reached its break-even point (BEP) for the year, the missing GPM was actually missing NPM.

Company BEP = (G&A overhead costs ÷ average GPM)

BEP = ($500,000 ÷ .35) = $1,428,571

The problem was neither estimating nor field production. It was a sales volume problem. The owner was hitting his sales goals. However, the second salesman either needed to sell more jobs or be replaced with someone who could sell $800,000 per year. A third option would be to hire a third salesman.

Leave a trail.

The Bid Board is a simple Excel worksheet that measures a company’s progress toward reaching its annual sales goal.

First, you enter your sales goal for the year and the projected man-hours required to accomplish the sales goal. Then you enter every project bid or designed throughout the year to include its price and man-hours. The sales status for each bid (in design, bid, pending, won, lost, billed) is updated on a daily basis. At any moment, owners, sales personnel, estimators, etc., know exactly where the company stands in relation to its annual budget. They also know the status of every bid.

It’s this daily information feedback that’s so critical for measuring the sales dynamic of the organization. If this information is out of sight, it’s out of mind. If it’s constantly in front of the right people, it will motivate them (if they are the right people). The Bid Board also acts as a report card for sales personnel. If you use something like the Bid Board, with its daily feedback, it will optimize your ability to accomplish your annual sales goal.

It wasn’t until Robert hired a sales person who could sell more than $1 million in projects that he identified his problem. Prior to this, he constantly misidentified the problem and he blamed the wrong person – his estimator. As a result, he couldn’t fix what he couldn’t identify. Remember: a problem well-defined is a problem half-solved.