Estimating in Construction – Part II (Financial Outcomes Evaluation)
Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!
Estimates are a controlling tool to guide the construction management team towards improved profitability. Estimates by themselves do not generate profits; actual performance creates profitability for the contractor. Estimates act as the technical manual for the project. Once the project is completed, the contractor must compare the actual results against the estimate’s values. In effect, the financial outcomes are evaluated against the originally estimated hard costs. The information gleamed from this evaluation educates the construction management team with what works and any failures. Then end goal, identify poor performance. It is then up to the management team as to how to properly address this issue eliminating this type of mistake in future work. The long-term results are improved profits, higher quality performance, improved customer satisfaction and most importantly, the esprit de corps that comes with team success.
Financial outcomes against the estimated outcomes are the end result the contractor uses to identify jobs or projects with less than expected performance. Understanding this end result is essential with appreciating the purpose of generating good estimates. This particular lesson teaches and illustrates how the actual financial performance is compared against the anticipated performance as drafted with the estimate(s). The final outcome evaluation starts out with a modified version of the construction company’s income statement (profit and loss statement, a.k.a the P&L). This modified version is then converted to a columned project P&L. This customized income statement is known a a project profitability report from the financial set of reports in construction. With this information, each project’s profitability is then compared against the estimated profitability to determine job performance.
Part III in this series takes this holistic information and breaks it down further to either functional or group costs to identify actual issues. For the purpose of this lesson,
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