Ballparks, Estimates, Quotes and Bids -- The Fudge Factor

A newcomer to business gets advice on managing uncertainty in the cost of a job. March 14, 2005

I am newly self-employed and am more experienced as a woodworker than a businessman. I generally give my clients a specific quote to do a job. More often than not, things take a little longer than anticipated and I end up not making out as well on a job as I had hoped to. Is it reasonable to give my client an estimate (where I might aim a little high) and assure them that the final price would be within +/-20% of this estimate? I would track my hours on the job and apply my hourly shop rate (including overhead and profit margin) plus materials to arrive at the final job cost.

Forum Responses
(Business Forum)
I always add a little padding, usually just a few hundred on a typical install. Keeps my mind healthy when things are not going right.

Welcome to the world of professional cabinetmaking, where you end up being responsible for everything. How can you ask your customer for a 20% swing in the price? Can you imagine the conversation? "Your kitchen will run between, I guess, $16,000 and $24,000. When would you like to start? I need that deposit now." I don't think any customer will stand for a ballpark price like that.

Until your estimating skills get better, you will have to come up with a fixed price and you will have to learn how to not exceed it if you want to make any money. I think estimating job costs is one of those things that separates the professionals from the rest. You really need to know what a job costs before you take it.

You asked, "Is it reasonable to give my client an estimate (where I might aim a little high) and assure them that the final price would be within +/-20% of this estimate?" No. Your rationale is flawed. If you aim high to begin with, this would be your +20%, right? If they accept your high estimate, you should be good to go. However, when you're competing for the job, you have to be very careful or you'll possibly lose the job.

I think most of us struggle with this issue. My personal advice: Always pad the bid a little high to account for the unexpected. Your competition is likely doing the same thing. Usually better to lose a job you probably won't make money on.

From the original questioner:

I thought that the conversation about the +/- estimate would be an awkward one and couldn't figure out how to initiate it either. I will keep reading this forum for more good advice.

One of my favorite questions to fellow woodworkers, contractors and others goes like this: What is the difference between a bid, an estimate, a quote, a price, a number, and a ballpark? I have gotten lots of answers, but nothing consistent. Most agree the ballpark is the only really flexible number, since many think an estimate is fixed. Most of us know that any job really needs to be thoroughly specified before anything other than a ballpark can be offered. The ballpark is good for determining financial horsepower, and whether it will be worth your time to proceed.

I only provide two numbers to a client. The first is an estimate, and is based on blueprints, sketches or drawings, and the conditions of the estimate clearly state that the estimate is only as accurate as the information provided. An estimate will also have budget figures many times for things like decorative hardware, so again, is not a true reflection of the actual job cost to the client. The primary purpose of an estimate is to see if we are a company that they can or want to work with.

The second number I provide to a client is a proposal; this number is based on actual field measurements, and all selections having been made, and becomes part of a legal agreement between the client and my company. If all the information on the estimate was 100% accurate, then this proposal number will be identical to the estimate (which is seldom the case).

All that to say, no, it is not reasonable to provide an estimate, bid, quote or anything else that includes a range of final client costs. It is just as dangerous for you as it is for them (they could dispute your final cost, and your range will not stand up when introduced to the American legal system). Both an estimate and a proposal should clearly show what you will and will not be providing, and to make money in the long run, you have to know your costs.

Designing, engineering and building cabinetry is fun for most cabinetmakers; estimating cabinetry is not fun for most cabinetmakers, but it is where profitability is either predetermined or not.

No matter what you call it, just be sure to put the final details on paper in the form of an agreement, which also states your policy regarding change orders.

We usually tell customers that we will discuss many different ideas and figures during the estimating stage of their project, but the final and most important figure is the one that ends up on the agreement, along with the accompanying details. Should you decide to add a detail which did not make it into the agreement or need to add/change/delete anything, a change order will be executed to cover any changes (we'll then show them a copy of one, along with deposit requirements depending on what stage of the project the change order is executed).

Cover all your bases as best as you can. It comes off more professional if you spend more time on the details, and provides you with more protection.

Spend as much time as possible on the estimating process, and use it as a sales tool to set yourself apart from your competition, who might not be as diligent.

Also, if you are new to business and A/R & A/P, in the beginning, if possible, I would avoid lines of credit from distributors, and pay for everything cash. Set up a separate materials account and get a Visa debit card for it. Buy all of your materials upfront with the deposit, and track everything on paper. May sound obvious, but I can tell you a lot of guys rob Peter to pay for Paul's job (we also went through it to a certain extent years ago), and it is a tough cycle to get out of if you are not proficient in estimating, as the problem is compounded.

As far as "I end up not making out as well on a job as I had hoped to" - we all have this challenge to one degree or another, and part of improving your craft is to increase your proficiency/efficiency in this area, and it never goes away.

The first few bids are tough. What you need to do is figure all the costs associated with building the whatever: all the hardware, the materials, the finish, the glue... everything.

When you build the whatever, keep accurate records. How much time did you spend in the sales pitch, design, travel, cutlist, material purchase, cutting, sanding, fitting, gluing, finishing, delivery, install, etc?

I have a spreadsheet-designed form that I use to track time started. I don't track individual time, just when I started on the project and what time I finished.

At the end of the project, review all time spent and compare what you charged, what you estimated, and what you actually made.

When you do this, I bet you see each project takes more time than you estimate it will.

Now for the answer to your question. Once you do this for a while (say six months or so), you begin to get a real good idea of what it costs to produce in your shop. Nothing beats knowledge and experience.

In addition to having my own small finishing shop, I'm a management and marketing consultant to cabinetmaking shops. Over the years we found an approach that we believe works for both clients and shops.

Basically, we break each job down into 3 phases: design, manufacturing, and finishing/installation. We also give upfront estimates for each phase, along with a total for the entire job. We view an estimate as just that... an estimate. We rarely make changes on the design phase estimate, since much of any extra can usually be made up in the manufacturing phase by increased efficiency/fewer mistakes.

At the end of each phase, we get the client to sign off, and a check for that phase. We also review with client the upcoming phases, and any changes made since the initial estimate. We then give a quote for that phase before any work begins on that phase. Similar steps are taken at the end of each phase.

We've found that clients feel more a part of the process, and better understand price changes (if any). It also reinforces their control over the final price. Clients/shops also find this approach fairer than adding (for argument's sake) 10% to the overall job. It's usually only 1 or 2 phases that have any price changes.

For what it's worth, on average, costs, actual versus estimate for each phase are:
Design: about 3% higher (it may be more, but much can be made up in manufacturing)
Manufacturing: about 6-8% higher (difference is a function of materials/wood used)
Finishing/Installation: about 12% higher (no surprise)